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https://www.investopedia.com/how-to-wire-money-5088001 | How to Wire 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"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Wire transfers offer a way to send money electronically from one person or entity to another. It’s possible to wire money between banks in the U.S. as well as international financial institutions and non-bank money transfer providers.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wiretransfer.asp">wire transfer</a> may be preferable for situations in which you need to move larger amounts of money or are on the receiving end of a large payment. You may pay a fee to send or receive a wire transfer, and the amount of time it takes for a money wire to process can vary.
</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>Wire transfers can be performed through banks or non-bank money transfer providers.</li><li>You can use wire transfers to send or receive money between people or organizations. </li><li>Fees may apply when sending or receiving domestic or international wire transfers. </li><li>Wire transfers can take anywhere from a few hours to a few days to process and complete. </li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-a-money-wire-transfer"></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 Money Wire Transfer? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> A wire transfer is an electronic transaction that you can initiate through your bank or a non-bank transfer provider, such as Western Union. When you wire money, you're authorizing the bank or transfer provider to move funds from your account to someone else’s using an electronic payment network.
</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"> No physical currency changes hands when wiring money to an individual or a business. A wire transfer can be a fast and convenient way to move money or receive it. Depending on the financial institution, wire transfers may be completed in a matter of hours, though it can sometimes take a few days for them to process.
</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"> Wire transfers are often used for situations in which large amounts of money need to be moved. For example, if you’re buying a home, your closing attorney may ask you to wire your down payment and closing cost funds to their account. If you’re selling a home, the proceeds of the sale may be released to you through a wire transfer. You can also use wire transfers to move smaller amounts of money if needed.
</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>A wire transfer is different from an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ach.asp" rel="noopener noreferrer">Automated Clearing House (ACH) transfer</a>, which you can use to move money between accounts at different banks that have been linked or to pay bills. </p></div></div></div>
<span class="heading-toc" id="toc-how-to-wire-money"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> How to Wire Money </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The process for wiring money is fairly straightforward. The most important things to consider when transferring money by wire are:
</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>Limits on how much money you can transfer, if any</li><li>Transaction limits on the number of transfers you can send per day</li><li>Wire transfer processing times</li><li>Wire transfer fees</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0411/7-low-cost-ways-to-transfer-money.aspx">Banks and non-bank money wire providers can charge fees</a> to send and receive wire transfers. Typically, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankwire.asp">international wire transfer</a> fees are higher than domestic wire transfers. Additionally, banks may limit the number of wire transfers you can make in a certain time frame or the amount of money you can send per transfer.
</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"> Here are the four main steps of a wire transfer.
</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"> 1. Choose a Wire Transfer Provider </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The first step in how to wire money is deciding which service you want to use for this process. Your bank might be an obvious choice if you already have a checking account, savings account, or other accounts at a specific financial institution. Depending on the bank’s policies for wire transfers, you may be able to initiate a transfer online, or you could do so in person by visiting a branch.
</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 option is to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/081715/sending-money-moneygram-vs-western-union.asp">use a non-bank transfer provider, such as Western Union or MoneyGram</a>. These companies allow you to send money via wire transfer to a bank account, but the person you’re sending money to may also have the option of picking it up as cash or having it sent to a mobile payment app.
</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-tip" 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>With a non-bank wire transfer provider, you may be able to wire money using your debit card, bank account, or credit card. </p></div></div></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"> 2. Provide the Transfer Details </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> When transferring money, there is certain information the bank or transfer provider will need to complete the transaction. These include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0">
<li>A copy of your government-issued ID</li>
<li>Your funding source (i.e., debit card, credit card, or bank account—or cash if you’re transferring money in person at a non-bank provider)</li>
<li>Transfer recipient’s name and address</li>
<li>Transfer recipient’s bank name and address (if transferring money to a bank account)</li>
<li>Bank account number and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/routing_transit_number.asp">routing number</a> for the recipient (again, if transferring money to a bank account)</li>
<li>Recipient’s mobile number if you’re wiring money to a mobile wallet app</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> If you’re wiring money to another bank, you may also need to provide a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swift.asp">Society for Worldwide Interbank Financial Telecommunication (SWIFT) code</a>. This is a unique code number that’s assigned to banks, and it may be required to complete bank-to-bank domestic and/or international wire transfers.<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_38-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Take time to double-check wire transfer information carefully before sending the money to make sure it’s going to the right place. </p></div></div></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"> 3. Review Terms and Conditions and Pay the Wire Transfer Fee </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> As mentioned previously, you’ll most likely pay a fee to wire money, regardless of whether you’re doing it through a bank or a non-bank provider.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> When transferring money from a bank account, the fee is automatically deducted from your balance, along with the funds that are being transferred. If you’re using a non-bank transfer service, this fee may be charged to your bank account, debit card, or credit card, depending on how you pay.
</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"> If you’re unsure of what a wire transfer will cost, ask for a schedule of fees up front. You may want to compare fees between your bank and a non-bank transfer provider to see which one costs less. You should also review any other fine print regarding the transfer before signing off on it to make sure you fully understand the agreement.
</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"> 4. Wait for the Transfer to Process </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> When you’ve submitted a wire transfer, you may have to wait a few hours or days for it to process and send the funds to the recipient. The timing can depend on where you’re sending the money and in what amount.
</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"> It’s a good idea to get a confirmation number from your bank or the company with which you’re transferring money. That way if you have a problem, you have a way to reference the transaction later.
</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-can-a-wire-transfer-be-canceled"></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"> Can a Wire Transfer Be Canceled? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Generally, when you initiate a wire transfer, the process of moving the money from your account to the recipient’s begins immediately. That’s assuming the transfer takes place during normal business hours.
</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"> If the transfer is still showing in the bank’s processing system as “scheduled,” however, it may be possible to cancel the transaction. You may be able to do this through your online banking access or by calling a branch.
</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"> With international wire transfers, you might have a slightly longer time frame for canceling. For instance, you could have up to 30 minutes after initiating the transfer to ask your bank to cancel it. However, this policy can vary from bank to bank, so it’s important to check with your financial institution to see how cancellations are handled.
</p></div> | Wire transfers offer a way to send money electronically from one person or entity to another. It’s possible to wire money between banks in the U.S. as well as international financial institutions and non-bank money transfer providers.
A [wire transfer](https://www.investopedia.com/terms/w/wiretransfer.asp) may be preferable for situations in which you need to move larger amounts of money or are on the receiving end of a large payment. You may pay a fee to send or receive a wire transfer, and the amount of time it takes for a money wire to process can vary.
### Key Takeaways
* Wire transfers can be performed through banks or non-bank money transfer providers.
* You can use wire transfers to send or receive money between people or organizations.
* Fees may apply when sending or receiving domestic or international wire transfers.
* Wire transfers can take anywhere from a few hours to a few days to process and complete.
## What Is a Money Wire Transfer?
A wire transfer is an electronic transaction that you can initiate through your bank or a non-bank transfer provider, such as Western Union. When you wire money, you're authorizing the bank or transfer provider to move funds from your account to someone else’s using an electronic payment network.
No physical currency changes hands when wiring money to an individual or a business. A wire transfer can be a fast and convenient way to move money or receive it. Depending on the financial institution, wire transfers may be completed in a matter of hours, though it can sometimes take a few days for them to process.
Wire transfers are often used for situations in which large amounts of money need to be moved. For example, if you’re buying a home, your closing attorney may ask you to wire your down payment and closing cost funds to their account. If you’re selling a home, the proceeds of the sale may be released to you through a wire transfer. You can also use wire transfers to move smaller amounts of money if needed.
###
A wire transfer is different from an [Automated Clearing House (ACH) transfer](https://www.investopedia.com/terms/a/ach.asp), which you can use to move money between accounts at different banks that have been linked or to pay bills.
## How to Wire Money
The process for wiring money is fairly straightforward. The most important things to consider when transferring money by wire are:
* Limits on how much money you can transfer, if any
* Transaction limits on the number of transfers you can send per day
* Wire transfer processing times
* Wire transfer fees
[Banks and non-bank money wire providers can charge fees](https://www.investopedia.com/financial-edge/0411/7-low-cost-ways-to-transfer-money.aspx) to send and receive wire transfers. Typically, [international wire transfer](https://www.investopedia.com/terms/b/bankwire.asp) fees are higher than domestic wire transfers. Additionally, banks may limit the number of wire transfers you can make in a certain time frame or the amount of money you can send per transfer.
Here are the four main steps of a wire transfer.
### 1. Choose a Wire Transfer Provider
The first step in how to wire money is deciding which service you want to use for this process. Your bank might be an obvious choice if you already have a checking account, savings account, or other accounts at a specific financial institution. Depending on the bank’s policies for wire transfers, you may be able to initiate a transfer online, or you could do so in person by visiting a branch.
The other option is to [use a non-bank transfer provider, such as Western Union or MoneyGram](https://www.investopedia.com/articles/personal-finance/081715/sending-money-moneygram-vs-western-union.asp). These companies allow you to send money via wire transfer to a bank account, but the person you’re sending money to may also have the option of picking it up as cash or having it sent to a mobile payment app.
###
With a non-bank wire transfer provider, you may be able to wire money using your debit card, bank account, or credit card.
### 2. Provide the Transfer Details
When transferring money, there is certain information the bank or transfer provider will need to complete the transaction. These include:
* A copy of your government-issued ID
* Your funding source (i.e., debit card, credit card, or bank account—or cash if you’re transferring money in person at a non-bank provider)
* Transfer recipient’s name and address
* Transfer recipient’s bank name and address (if transferring money to a bank account)
* Bank account number and [routing number](https://www.investopedia.com/terms/r/routing_transit_number.asp) for the recipient (again, if transferring money to a bank account)
* Recipient’s mobile number if you’re wiring money to a mobile wallet app
If you’re wiring money to another bank, you may also need to provide a [Society for Worldwide Interbank Financial Telecommunication (SWIFT) code](https://www.investopedia.com/terms/s/swift.asp). This is a unique code number that’s assigned to banks, and it may be required to complete bank-to-bank domestic and/or international wire transfers.
###
Take time to double-check wire transfer information carefully before sending the money to make sure it’s going to the right place.
### 3. Review Terms and Conditions and Pay the Wire Transfer Fee
As mentioned previously, you’ll most likely pay a fee to wire money, regardless of whether you’re doing it through a bank or a non-bank provider.
When transferring money from a bank account, the fee is automatically deducted from your balance, along with the funds that are being transferred. If you’re using a non-bank transfer service, this fee may be charged to your bank account, debit card, or credit card, depending on how you pay.
If you’re unsure of what a wire transfer will cost, ask for a schedule of fees up front. You may want to compare fees between your bank and a non-bank transfer provider to see which one costs less. You should also review any other fine print regarding the transfer before signing off on it to make sure you fully understand the agreement.
### 4. Wait for the Transfer to Process
When you’ve submitted a wire transfer, you may have to wait a few hours or days for it to process and send the funds to the recipient. The timing can depend on where you’re sending the money and in what amount.
It’s a good idea to get a confirmation number from your bank or the company with which you’re transferring money. That way if you have a problem, you have a way to reference the transaction later.
## Can a Wire Transfer Be Canceled?
Generally, when you initiate a wire transfer, the process of moving the money from your account to the recipient’s begins immediately. That’s assuming the transfer takes place during normal business hours.
If the transfer is still showing in the bank’s processing system as “scheduled,” however, it may be possible to cancel the transaction. You may be able to do this through your online banking access or by calling a branch.
With international wire transfers, you might have a slightly longer time frame for canceling. For instance, you could have up to 30 minutes after initiating the transfer to ask your bank to cancel it. However, this policy can vary from bank to bank, so it’s important to check with your financial institution to see how cancellations are handled.
| Wire transfers offer a way to send money electronically from one person or entity to another. It’s possible to wire money between banks in the U.S. as well as international financial institutions and non-bank money transfer providers.
A wire transfer may be preferable for situations in which you need to move larger amounts of money or are on the receiving end of a large payment. You may pay a fee to send or receive a wire transfer, and the amount of time it takes for a money wire to process can vary.
Key Takeaways
Wire transfers can be performed through banks or non-bank money transfer providers.You can use wire transfers to send or receive money between people or organizations. Fees may apply when sending or receiving domestic or international wire transfers. Wire transfers can take anywhere from a few hours to a few days to process and complete.
What Is a Money Wire Transfer?
A wire transfer is an electronic transaction that you can initiate through your bank or a non-bank transfer provider, such as Western Union. When you wire money, you're authorizing the bank or transfer provider to move funds from your account to someone else’s using an electronic payment network.
No physical currency changes hands when wiring money to an individual or a business. A wire transfer can be a fast and convenient way to move money or receive it. Depending on the financial institution, wire transfers may be completed in a matter of hours, though it can sometimes take a few days for them to process.
Wire transfers are often used for situations in which large amounts of money need to be moved. For example, if you’re buying a home, your closing attorney may ask you to wire your down payment and closing cost funds to their account. If you’re selling a home, the proceeds of the sale may be released to you through a wire transfer. You can also use wire transfers to move smaller amounts of money if needed.
A wire transfer is different from an Automated Clearing House (ACH) transfer, which you can use to move money between accounts at different banks that have been linked or to pay bills.
How to Wire Money
The process for wiring money is fairly straightforward. The most important things to consider when transferring money by wire are:
Limits on how much money you can transfer, if anyTransaction limits on the number of transfers you can send per dayWire transfer processing timesWire transfer fees
Banks and non-bank money wire providers can charge fees to send and receive wire transfers. Typically, international wire transfer fees are higher than domestic wire transfers. Additionally, banks may limit the number of wire transfers you can make in a certain time frame or the amount of money you can send per transfer.
Here are the four main steps of a wire transfer.
1. Choose a Wire Transfer Provider
The first step in how to wire money is deciding which service you want to use for this process. Your bank might be an obvious choice if you already have a checking account, savings account, or other accounts at a specific financial institution. Depending on the bank’s policies for wire transfers, you may be able to initiate a transfer online, or you could do so in person by visiting a branch.
The other option is to use a non-bank transfer provider, such as Western Union or MoneyGram. These companies allow you to send money via wire transfer to a bank account, but the person you’re sending money to may also have the option of picking it up as cash or having it sent to a mobile payment app.
With a non-bank wire transfer provider, you may be able to wire money using your debit card, bank account, or credit card.
2. Provide the Transfer Details
When transferring money, there is certain information the bank or transfer provider will need to complete the transaction. These include:
A copy of your government-issued ID
Your funding source (i.e., debit card, credit card, or bank account—or cash if you’re transferring money in person at a non-bank provider)
Transfer recipient’s name and address
Transfer recipient’s bank name and address (if transferring money to a bank account)
Bank account number and routing number for the recipient (again, if transferring money to a bank account)
Recipient’s mobile number if you’re wiring money to a mobile wallet app
If you’re wiring money to another bank, you may also need to provide a Society for Worldwide Interbank Financial Telecommunication (SWIFT) code. This is a unique code number that’s assigned to banks, and it may be required to complete bank-to-bank domestic and/or international wire transfers.
Take time to double-check wire transfer information carefully before sending the money to make sure it’s going to the right place.
3. Review Terms and Conditions and Pay the Wire Transfer Fee
As mentioned previously, you’ll most likely pay a fee to wire money, regardless of whether you’re doing it through a bank or a non-bank provider.
When transferring money from a bank account, the fee is automatically deducted from your balance, along with the funds that are being transferred. If you’re using a non-bank transfer service, this fee may be charged to your bank account, debit card, or credit card, depending on how you pay.
If you’re unsure of what a wire transfer will cost, ask for a schedule of fees up front. You may want to compare fees between your bank and a non-bank transfer provider to see which one costs less. You should also review any other fine print regarding the transfer before signing off on it to make sure you fully understand the agreement.
4. Wait for the Transfer to Process
When you’ve submitted a wire transfer, you may have to wait a few hours or days for it to process and send the funds to the recipient. The timing can depend on where you’re sending the money and in what amount.
It’s a good idea to get a confirmation number from your bank or the company with which you’re transferring money. That way if you have a problem, you have a way to reference the transaction later.
Can a Wire Transfer Be Canceled?
Generally, when you initiate a wire transfer, the process of moving the money from your account to the recipient’s begins immediately. That’s assuming the transfer takes place during normal business hours.
If the transfer is still showing in the bank’s processing system as “scheduled,” however, it may be possible to cancel the transaction. You may be able to do this through your online banking access or by calling a branch.
With international wire transfers, you might have a slightly longer time frame for canceling. For instance, you could have up to 30 minutes after initiating the transfer to ask your bank to cancel it. However, this policy can vary from bank to bank, so it’s important to check with your financial institution to see how cancellations are handled.
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https://www.investopedia.com/what-is-google-mortgage-5072755 | What Is Google Mortgage? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Google and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp" rel="noopener noreferrer">Consumer Financial Protection Bureau (CFPB)</a> have joined forces to launch a new set of tools designed to help homebuyers learn about and shop for mortgages. The lineup includes a mortgage calculator, recent mortgage rates, key terms, and answers to commonly searched questions like "What is a mortgage?" and "What is PMI?"<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> To access the tools, search for "mortgage" on your smartphone—so far it's a phone-only feature—and scroll down past the ads. Here's a quick look at the information you'll find.
</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>Google has teamed up with the Consumer Financial Protection Bureau to launch a set of tools that makes it easier for homebuyers to learn about mortgages.</li><li>To access the tools, search "mortgage" in Google on your phone and scroll down past the ads.</li><li>The information comes from the Consumer Financial Protection Bureau and includes mortgage lingo, rates, and a calculator.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-a-mortgage"></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 Mortgage? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> According to Google Trends, one of the most searched mortgage-related questions in the past year was "What is a mortgage?"
</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 overview page in the new Google mortgage feature answers this and explains that a mortgage "is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed." The description is followed by a link to the CFPB, where consumers can find more information.
</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"> Below that, you'll find a list of key mortgage terms listed in alphabetical order—from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp" rel="noopener noreferrer">APR (annual percentage rate)</a> to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime_mortgage.asp" rel="noopener noreferrer">subprime mortgage</a>. Each term includes a brief definition plus a "search the web" button to find more information. To make it easier to find specific terms, you can filter by category:
</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>Popular terms</li><li>Interest rates</li><li>Planning</li><li>Loan types</li><li>Mortgage process</li><li>Home purchase process</li>
</ul>
<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-mortgage-rates"></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"> Mortgage Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The rates page has an interactive tool that shows the current average rates for a variety of popular loans, including:
</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>30-year fixed</li>
<li>15-year fixed</li>
<li>10/1 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arm.asp" rel="noopener noreferrer">adjustable-rate mortgage (ARM)</a></li>
<li>30-year fixed <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhaloan.asp" rel="noopener noreferrer">FHA</a></li>
<li>30-year fixed <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valoan.asp" rel="noopener noreferrer">VA</a></li>
<li>30-year fixed USDA</li>
<li>20-year fixed</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"> By default, the page shows three types of mortgage (30-year fixed, 15-year fixed, and 10/1 ARM). You have the option to compare more loan types by clicking the "+Add loan type to compare"<em> </em>link and selecting up to five plans. Here's what it looks like:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-portrait figure-high-res" id="mntl-sc-block_23-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:182.9%;">
<img alt="Google mortgage rates" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/YTSUhnutZo1SFZq7RSpvs8uGn6E=/822x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagerates-f553689ba5094f68815873da16b943ae.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/pmQYXSx3hMzZTQn6DJAk7r0zeDg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagerates-f553689ba5094f68815873da16b943ae.jpg" data-srcset="https://www.investopedia.com/thmb/rv5ed6m5Q39nyUOEQX_jGowsmZI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagerates-f553689ba5094f68815873da16b943ae.jpg 750w" data-tracking-container="true" height="1504" id="mntl-sc-block-image_1-0" width="822"/>
<noscript>
<img alt="Google mortgage rates" class="img--noscript universal-image__image" height="1504" sizes="750px" src="https://www.investopedia.com/thmb/pmQYXSx3hMzZTQn6DJAk7r0zeDg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagerates-f553689ba5094f68815873da16b943ae.jpg" srcset="https://www.investopedia.com/thmb/rv5ed6m5Q39nyUOEQX_jGowsmZI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagerates-f553689ba5094f68815873da16b943ae.jpg 750w" width="822"/>
</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">Image source: Google.</span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> To view rates, use the dropdown menus to select a loan amount (available in $100K increments), the down payment you plan to make, your state, and your credit score. If you scroll down, you'll see popular next steps such as "Calculate your monthly payments" and "Learn about credit," as well as more top news stories.
</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"> Using a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/05/030905.asp">mortgage calculator</a> is a good resource to budget these costs.
</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 mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_28-0"><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_29-0"></div>
<span class="heading-toc" id="toc-mortgage-calculator"></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"> Mortgage Calculator<strong> </strong> </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The calculator page helps you figure out what your monthly mortgage payment will be, taking into consideration the loan amount, loan term, interest rate, your state, and the credit score that you enter.
</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"> You have the option to include property taxes, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeowners-insurance.asp" rel="noopener noreferrer">homeowners insurance</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/insurance/" rel="noopener noreferrer">private mortgage insurance</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeowners-association-fee-hoa.asp" rel="noopener noreferrer">homeowners association (HOA) fees</a> (toggle the "Include taxes & fees" switch) to get a better picture of your total monthly house payment.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-portrait figure-high-res" id="mntl-sc-block_35-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:196.4%;">
<img alt="Google mortgage calculator" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/CFDnwyp7PLWaZMOOFpty3KiXyBo=/815x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagecalculator-cf6a93b29e0c4eeeba7c6442efc9821e.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/upWY7heKUMdmvJXymdWfUC0zRvM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagecalculator-cf6a93b29e0c4eeeba7c6442efc9821e.jpg" data-srcset="https://www.investopedia.com/thmb/ccTdzX83UjVa_H-RUIZCAU4GloY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagecalculator-cf6a93b29e0c4eeeba7c6442efc9821e.jpg 750w" data-tracking-container="true" height="1601" id="mntl-sc-block-image_2-0" width="815"/>
<noscript>
<img alt="Google mortgage calculator" class="img--noscript universal-image__image" height="1601" sizes="750px" src="https://www.investopedia.com/thmb/upWY7heKUMdmvJXymdWfUC0zRvM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagecalculator-cf6a93b29e0c4eeeba7c6442efc9821e.jpg" srcset="https://www.investopedia.com/thmb/ccTdzX83UjVa_H-RUIZCAU4GloY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Googlemortgagecalculator-cf6a93b29e0c4eeeba7c6442efc9821e.jpg 750w" width="815"/>
</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: Google.</span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The "Purchase budget" tab (next to the "Monthly payment" tab) gives you an idea of how much house you can afford, based on details you enter regarding your:
</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>Yearly household income (before taxes)</li><li>Monthly debts (credit cards, loans, etc.)</li><li>Down payment</li><li>Loan term</li><li>Interest rate</li><li>State</li><li>Credit score</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 purchase budget total estimates how much you can afford based on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dti.asp" rel="noopener noreferrer">debt-to-income (DTI) ratio</a> of 36%. Your mortgage payment and other monthly debt payments, such as student loans and credit cards, should not be greater than 36% of your household's pre-tax annual income.
</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-the-mortgage-process"></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"> The Mortgage Process </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The process page will be especially helpful to first-time homebuyers and those who need a refresher on how the mortgage process works. According to Google, "No matter what phase of the [mortgage] journey you're on, you can select a step to find a list of relevant documents and helpful tips from the CFPB. And to help you determine the next phase, you'll find a list of popular and recommended next steps to guide you on the way."<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_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The process page is divided into four sections, each of which includes a list of related topics, with links to the corresponding CFPB web page where you can learn more. The four categories are:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0">
<li><strong>Prepare to shop—</strong>This tab covers topics like how to check your credit, assess your spending, budget for new expenses, and create a loan application packet.</li>
<li><strong>Explore loan choices—</strong>Here, consumers can learn more about loan costs, the types of loans that are available, gathering paperwork, and finding the right home.</li>
<li><strong>How to compare loan offers—</strong>This tab includes tips to help you request multiple loan estimates, review loan estimates, fine-tune loan offers, and the like.</li>
<li><strong>Get ready to close—</strong>The final tab covers topics like scheduling a home inspection, shopping for homeowners insurance, reviewing documents, and buying <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/title_insurance.asp" rel="noopener noreferrer">title insurance</a>. </li>
</ol>
<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-other-sections"></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"> Other Sections </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> There are several other sections that link you to resources like news articles and related search results:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0">
<li><strong>Refinance—</strong>Links to today's top <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/refinancing-mortgage.asp" rel="noopener noreferrer">refinancing</a> news articles, as well as answers to popular questions like "When should you refinance your mortgage?" and "Why refinancing is a bad idea"</li>
<li><strong>News—</strong>Shows a list of mortgage-related stories from across the web</li>
<li><strong>Relief</strong>—Provides the top results from the CFPB, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/fannie-mae-loans/" rel="noopener noreferrer">Fannie Mae</a>, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhfa.asp" rel="noopener noreferrer">Federal Housing Finance Agency (FHFA)</a>, and financial news outlets like Investopedia</li>
<li><strong>Types—</strong>Links to content about the various types of mortgages, plus answers to popular questions like "What are the different types of mortgages?" and "What is the best mortgage type?"</li>
<li><strong>Videos—</strong>Lists mortgage-related videos from a variety of content producers</li>
<li><strong>History—</strong>Links to content from across the web related to the history of mortgages</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Buying a home is the largest single investment most people ever make—and most homebuyers need a mortgage to make it happen. A mortgage is a long-term commitment, so it makes sense to do your homework and learn about your options before choosing a loan (and a lender). Google's and the CFPB's new mortgage feature aims to make it easier to explore the options that are available to you.
</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"> Right now the feature is available only on smartphones. Stay tuned to see if it will eventually be accessible on a tablet or desktop.
</p>
<div class="comp nativemortgage native mm-ads-native" data-selector=".mntl-sc-block--mortgage-loan-calculator + .mntl-sc-block" id="nativemortgage_1-0" style="--native-ad-height: auto"><div class="comp mm-ads-native__adunit mm-ads-gpt-dynamic-adunit mm-ads-gpt-adunit scads-to-load gpt nativemortgage dynamic" id="mm-ads-native__adunit_1-0">
<div class="wrapper" data-pos="nativemortgage" data-priority="4" data-rtb="false" data-sizes='[[1, 3],"fluid"]' data-targeting="{}" data-type="nativemortgage" data-wait-for-third-party="false" id="nativemortgage"></div>
</div></div></div> | Google and the [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp) have joined forces to launch a new set of tools designed to help homebuyers learn about and shop for mortgages. The lineup includes a mortgage calculator, recent mortgage rates, key terms, and answers to commonly searched questions like "What is a mortgage?" and "What is PMI?"
To access the tools, search for "mortgage" on your smartphone—so far it's a phone-only feature—and scroll down past the ads. Here's a quick look at the information you'll find.
### Key Takeaways
* Google has teamed up with the Consumer Financial Protection Bureau to launch a set of tools that makes it easier for homebuyers to learn about mortgages.
* To access the tools, search "mortgage" in Google on your phone and scroll down past the ads.
* The information comes from the Consumer Financial Protection Bureau and includes mortgage lingo, rates, and a calculator.
## What Is a Mortgage?
According to Google Trends, one of the most searched mortgage-related questions in the past year was "What is a mortgage?"
The overview page in the new Google mortgage feature answers this and explains that a mortgage "is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed." The description is followed by a link to the CFPB, where consumers can find more information.
Below that, you'll find a list of key mortgage terms listed in alphabetical order—from [APR (annual percentage rate)](https://www.investopedia.com/terms/a/apr.asp) to [subprime mortgage](https://www.investopedia.com/terms/s/subprime_mortgage.asp). Each term includes a brief definition plus a "search the web" button to find more information. To make it easier to find specific terms, you can filter by category:
* Popular terms
* Interest rates
* Planning
* Loan types
* Mortgage process
* Home purchase process
## Mortgage Rates
The rates page has an interactive tool that shows the current average rates for a variety of popular loans, including:
* 30-year fixed
* 15-year fixed
* 10/1 [adjustable-rate mortgage (ARM)](https://www.investopedia.com/terms/a/arm.asp)
* 30-year fixed [FHA](https://www.investopedia.com/terms/f/fhaloan.asp)
* 30-year fixed [VA](https://www.investopedia.com/terms/v/valoan.asp)
* 30-year fixed USDA
* 20-year fixed
By default, the page shows three types of mortgage (30-year fixed, 15-year fixed, and 10/1 ARM). You have the option to compare more loan types by clicking the "+Add loan type to compare"link and selecting up to five plans. Here's what it looks like:
![Google mortgage rates]()
:max_bytes(150000):strip_icc()/Googlemortgagerates-f553689ba5094f68815873da16b943ae.jpg)
Image source: Google.
To view rates, use the dropdown menus to select a loan amount (available in $100K increments), the down payment you plan to make, your state, and your credit score. If you scroll down, you'll see popular next steps such as "Calculate your monthly payments" and "Learn about credit," as well as more top news stories.
Using a [mortgage calculator](https://www.investopedia.com/articles/pf/05/030905.asp) is a good resource to budget these costs.
## Mortgage Calculator
The calculator page helps you figure out what your monthly mortgage payment will be, taking into consideration the loan amount, loan term, interest rate, your state, and the credit score that you enter.
You have the option to include property taxes, [homeowners insurance](https://www.investopedia.com/terms/h/homeowners-insurance.asp), [private mortgage insurance](https://www.investopedia.com/mortgage/insurance/), and [homeowners association (HOA) fees](https://www.investopedia.com/terms/h/homeowners-association-fee-hoa.asp) (toggle the "Include taxes & fees" switch) to get a better picture of your total monthly house payment.
![Google mortgage calculator]()
:max_bytes(150000):strip_icc()/Googlemortgagecalculator-cf6a93b29e0c4eeeba7c6442efc9821e.jpg)
Image source: Google.
The "Purchase budget" tab (next to the "Monthly payment" tab) gives you an idea of how much house you can afford, based on details you enter regarding your:
* Yearly household income (before taxes)
* Monthly debts (credit cards, loans, etc.)
* Down payment
* Loan term
* Interest rate
* State
* Credit score
The purchase budget total estimates how much you can afford based on a [debt-to-income (DTI) ratio](https://www.investopedia.com/terms/d/dti.asp) of 36%. Your mortgage payment and other monthly debt payments, such as student loans and credit cards, should not be greater than 36% of your household's pre-tax annual income.
## The Mortgage Process
The process page will be especially helpful to first-time homebuyers and those who need a refresher on how the mortgage process works. According to Google, "No matter what phase of the [mortgage] journey you're on, you can select a step to find a list of relevant documents and helpful tips from the CFPB. And to help you determine the next phase, you'll find a list of popular and recommended next steps to guide you on the way."
The process page is divided into four sections, each of which includes a list of related topics, with links to the corresponding CFPB web page where you can learn more. The four categories are:
1. **Prepare to shop—**This tab covers topics like how to check your credit, assess your spending, budget for new expenses, and create a loan application packet.
2. **Explore loan choices—**Here, consumers can learn more about loan costs, the types of loans that are available, gathering paperwork, and finding the right home.
3. **How to compare loan offers—**This tab includes tips to help you request multiple loan estimates, review loan estimates, fine-tune loan offers, and the like.
4. **Get ready to close—**The final tab covers topics like scheduling a home inspection, shopping for homeowners insurance, reviewing documents, and buying [title insurance](https://www.investopedia.com/terms/t/title_insurance.asp).
## Other Sections
There are several other sections that link you to resources like news articles and related search results:
* **Refinance—**Links to today's top [refinancing](https://www.investopedia.com/ask/answers/09/refinancing-mortgage.asp) news articles, as well as answers to popular questions like "When should you refinance your mortgage?" and "Why refinancing is a bad idea"
* **News—**Shows a list of mortgage-related stories from across the web
* **Relief**—Provides the top results from the CFPB, [Fannie Mae](https://www.investopedia.com/mortgage/fannie-mae-loans/), the [Federal Housing Finance Agency (FHFA)](https://www.investopedia.com/terms/f/fhfa.asp), and financial news outlets like Investopedia
* **Types—**Links to content about the various types of mortgages, plus answers to popular questions like "What are the different types of mortgages?" and "What is the best mortgage type?"
* **Videos—**Lists mortgage-related videos from a variety of content producers
* **History—**Links to content from across the web related to the history of mortgages
## The Bottom Line
Buying a home is the largest single investment most people ever make—and most homebuyers need a mortgage to make it happen. A mortgage is a long-term commitment, so it makes sense to do your homework and learn about your options before choosing a loan (and a lender). Google's and the CFPB's new mortgage feature aims to make it easier to explore the options that are available to you.
Right now the feature is available only on smartphones. Stay tuned to see if it will eventually be accessible on a tablet or desktop.
| Google and the Consumer Financial Protection Bureau (CFPB) have joined forces to launch a new set of tools designed to help homebuyers learn about and shop for mortgages. The lineup includes a mortgage calculator, recent mortgage rates, key terms, and answers to commonly searched questions like "What is a mortgage?" and "What is PMI?"
To access the tools, search for "mortgage" on your smartphone—so far it's a phone-only feature—and scroll down past the ads. Here's a quick look at the information you'll find.
Key Takeaways
Google has teamed up with the Consumer Financial Protection Bureau to launch a set of tools that makes it easier for homebuyers to learn about mortgages.To access the tools, search "mortgage" in Google on your phone and scroll down past the ads.The information comes from the Consumer Financial Protection Bureau and includes mortgage lingo, rates, and a calculator.
What Is a Mortgage?
According to Google Trends, one of the most searched mortgage-related questions in the past year was "What is a mortgage?"
The overview page in the new Google mortgage feature answers this and explains that a mortgage "is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed." The description is followed by a link to the CFPB, where consumers can find more information.
Below that, you'll find a list of key mortgage terms listed in alphabetical order—from APR (annual percentage rate) to subprime mortgage. Each term includes a brief definition plus a "search the web" button to find more information. To make it easier to find specific terms, you can filter by category:
Popular termsInterest ratesPlanningLoan typesMortgage processHome purchase process
Mortgage Rates
The rates page has an interactive tool that shows the current average rates for a variety of popular loans, including:
30-year fixed
15-year fixed
10/1 adjustable-rate mortgage (ARM)
30-year fixed FHA
30-year fixed VA
30-year fixed USDA
20-year fixed
By default, the page shows three types of mortgage (30-year fixed, 15-year fixed, and 10/1 ARM). You have the option to compare more loan types by clicking the "+Add loan type to compare" link and selecting up to five plans. Here's what it looks like:
Image source: Google.
To view rates, use the dropdown menus to select a loan amount (available in $100K increments), the down payment you plan to make, your state, and your credit score. If you scroll down, you'll see popular next steps such as "Calculate your monthly payments" and "Learn about credit," as well as more top news stories.
Using a mortgage calculator is a good resource to budget these costs.
Mortgage Calculator
The calculator page helps you figure out what your monthly mortgage payment will be, taking into consideration the loan amount, loan term, interest rate, your state, and the credit score that you enter.
You have the option to include property taxes, homeowners insurance, private mortgage insurance, and homeowners association (HOA) fees (toggle the "Include taxes & fees" switch) to get a better picture of your total monthly house payment.
Image source: Google.
The "Purchase budget" tab (next to the "Monthly payment" tab) gives you an idea of how much house you can afford, based on details you enter regarding your:
Yearly household income (before taxes)Monthly debts (credit cards, loans, etc.)Down paymentLoan termInterest rateStateCredit score
The purchase budget total estimates how much you can afford based on a debt-to-income (DTI) ratio of 36%. Your mortgage payment and other monthly debt payments, such as student loans and credit cards, should not be greater than 36% of your household's pre-tax annual income.
The Mortgage Process
The process page will be especially helpful to first-time homebuyers and those who need a refresher on how the mortgage process works. According to Google, "No matter what phase of the [mortgage] journey you're on, you can select a step to find a list of relevant documents and helpful tips from the CFPB. And to help you determine the next phase, you'll find a list of popular and recommended next steps to guide you on the way."
The process page is divided into four sections, each of which includes a list of related topics, with links to the corresponding CFPB web page where you can learn more. The four categories are:
Prepare to shop—This tab covers topics like how to check your credit, assess your spending, budget for new expenses, and create a loan application packet.
Explore loan choices—Here, consumers can learn more about loan costs, the types of loans that are available, gathering paperwork, and finding the right home.
How to compare loan offers—This tab includes tips to help you request multiple loan estimates, review loan estimates, fine-tune loan offers, and the like.
Get ready to close—The final tab covers topics like scheduling a home inspection, shopping for homeowners insurance, reviewing documents, and buying title insurance.
Other Sections
There are several other sections that link you to resources like news articles and related search results:
Refinance—Links to today's top refinancing news articles, as well as answers to popular questions like "When should you refinance your mortgage?" and "Why refinancing is a bad idea"
News—Shows a list of mortgage-related stories from across the web
Relief—Provides the top results from the CFPB, Fannie Mae, the Federal Housing Finance Agency (FHFA), and financial news outlets like Investopedia
Types—Links to content about the various types of mortgages, plus answers to popular questions like "What are the different types of mortgages?" and "What is the best mortgage type?"
Videos—Lists mortgage-related videos from a variety of content producers
History—Links to content from across the web related to the history of mortgages
The Bottom Line
Buying a home is the largest single investment most people ever make—and most homebuyers need a mortgage to make it happen. A mortgage is a long-term commitment, so it makes sense to do your homework and learn about your options before choosing a loan (and a lender). Google's and the CFPB's new mortgage feature aims to make it easier to explore the options that are available to you.
Right now the feature is available only on smartphones. Stay tuned to see if it will eventually be accessible on a tablet or desktop.
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https://www.investopedia.com/the-new-york-city-economic-tracker-february-26-2024-8651407 | The New York City Economic Tracker: February 26, 2024 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The New York City Economy Tracker is a joint project between Investopedia and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.ny1.com/nyc/all-boroughs">NY1</a>, using publicly available data to evaluate the economic health of the city across a variety of metrics.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> For the week of February 26, 2024, we’re looking at how New York City is one of the most expensive cities for renters, and how much New Yorkers spend on housing costs each month.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<span class="heading-toc" id="toc-housing-is-the-biggest-expense-for-most-new-yorkers"></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"> Housing Is the Biggest Expense for Most New Yorkers </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 tallying up expenses for New Yorkers, housing takes the top spot on the list. Housing was the largest expense for households in New York throughout 2021 and 2022, accounting for 37.6% of average annual expenses, according to data from the Bureau of Labor Statistics’ Consumer Expenditure Survey.<span class="ql-inline-citation" data-cite="1"></span> This was significantly higher than the 33.5% average share for all U.S. households.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<div class="comp mntl-sc-block finance-sc-block-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/gldI5/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Big Markups for Market Rental Units in Manhattan & Brooklyn"></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"> Rent is one of the biggest housing expenses and New Yorkers are paying a premium for it. Since renters make up over 67% of New York City’s housing units, the cost of rent has a significant impact on most residents in the city.<span class="ql-inline-citation" data-cite="2"></span> Median monthly rents paid in 2023 ranged from $1,280 in the Bronx to $2,148 in Manhattan, according to data from the NYC Housing and Vacancy Survey.<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"> However, these average rent figures are influenced by the mix of housing unit types that make up NYC’s rental market. In 2023, about 50% of the city’s almost 2.4 million rental housing units were either rent stabilized, rent controlled, or public housing. Almost all of the other half is made up of market rental units that are prone to bigger and more frequent changes in price, and easier to obtain leases for on an ad-hoc basis.
</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"> Most of the units found on popular rental platforms like StreetEasy, Zillow, and Douglas Elliman are market rentals and median monthly rent data from those platforms show that in 2023 rents ranged from $2,166 in Staten Island to $4,145 in Manhattan.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span> These extremely high market rents are a major driver of the fact that almost 49% of renter households in NYC are cost-burdened, where housing costs constitute more than 30% of household income.
</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-nyc-is-one-of-the-most-expensive-cities-for-renters"></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"> NYC Is One of the Most Expensive Cities for Renters </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Compared to other big cities in the U.S., New York City is one of the most expensive cities for renters. According to data from the Census Bureau’s American Community Survey, average monthly costs for renters in NYC were $1,688 in 2022.<span class="ql-inline-citation" data-cite="7"></span> The only major city with higher monthly housing costs than NYC is Los Angeles, where renters pay an average $1,788 for housing. Renters in Phoenix, Chicago, and Houston pay between 12% to 26% less than New Yorkers do for housing costs.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_19-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/cCEEW/2/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="NYC Has One of the Highest Housing Costs for Renters"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Rent is not the only housing expense for New Yorkers, and while other costs aren’t nearly as much, the cost of utilities can significantly add to the bottom line each month. Data from the Census Bureau’s American Housing Survey shows that the average monthly amount paid by NYC for renters insurance is $21, $60 for electricity, $25 for trash collection, $25 for gas, and $83 to heat your home with fuel oil.<span class="ql-inline-citation" data-cite="8"></span> The average water bill for New Yorkers is an additional $53 a month. While renters don’t typically pay for every utility expense for their housing, the average amount paid for all utilities by renters in NYC comes out to an additional $86 a month.
</p></div> | The New York City Economy Tracker is a joint project between Investopedia and [NY1](https://www.ny1.com/nyc/all-boroughs), using publicly available data to evaluate the economic health of the city across a variety of metrics.
For the week of February 26, 2024, we’re looking at how New York City is one of the most expensive cities for renters, and how much New Yorkers spend on housing costs each month.
## Housing Is the Biggest Expense for Most New Yorkers
If you’re tallying up expenses for New Yorkers, housing takes the top spot on the list. Housing was the largest expense for households in New York throughout 2021 and 2022, accounting for 37.6% of average annual expenses, according to data from the Bureau of Labor Statistics’ Consumer Expenditure Survey. This was significantly higher than the 33.5% average share for all U.S. households.
Rent is one of the biggest housing expenses and New Yorkers are paying a premium for it. Since renters make up over 67% of New York City’s housing units, the cost of rent has a significant impact on most residents in the city. Median monthly rents paid in 2023 ranged from $1,280 in the Bronx to $2,148 in Manhattan, according to data from the NYC Housing and Vacancy Survey.
However, these average rent figures are influenced by the mix of housing unit types that make up NYC’s rental market. In 2023, about 50% of the city’s almost 2.4 million rental housing units were either rent stabilized, rent controlled, or public housing. Almost all of the other half is made up of market rental units that are prone to bigger and more frequent changes in price, and easier to obtain leases for on an ad-hoc basis.
Most of the units found on popular rental platforms like StreetEasy, Zillow, and Douglas Elliman are market rentals and median monthly rent data from those platforms show that in 2023 rents ranged from $2,166 in Staten Island to $4,145 in Manhattan. These extremely high market rents are a major driver of the fact that almost 49% of renter households in NYC are cost-burdened, where housing costs constitute more than 30% of household income.
## NYC Is One of the Most Expensive Cities for Renters
Compared to other big cities in the U.S., New York City is one of the most expensive cities for renters. According to data from the Census Bureau’s American Community Survey, average monthly costs for renters in NYC were $1,688 in 2022. The only major city with higher monthly housing costs than NYC is Los Angeles, where renters pay an average $1,788 for housing. Renters in Phoenix, Chicago, and Houston pay between 12% to 26% less than New Yorkers do for housing costs.
Rent is not the only housing expense for New Yorkers, and while other costs aren’t nearly as much, the cost of utilities can significantly add to the bottom line each month. Data from the Census Bureau’s American Housing Survey shows that the average monthly amount paid by NYC for renters insurance is $21, $60 for electricity, $25 for trash collection, $25 for gas, and $83 to heat your home with fuel oil. The average water bill for New Yorkers is an additional $53 a month. While renters don’t typically pay for every utility expense for their housing, the average amount paid for all utilities by renters in NYC comes out to an additional $86 a month.
| The New York City Economy Tracker is a joint project between Investopedia and NY1, using publicly available data to evaluate the economic health of the city across a variety of metrics.
For the week of February 26, 2024, we’re looking at how New York City is one of the most expensive cities for renters, and how much New Yorkers spend on housing costs each month.
Housing Is the Biggest Expense for Most New Yorkers
If you’re tallying up expenses for New Yorkers, housing takes the top spot on the list. Housing was the largest expense for households in New York throughout 2021 and 2022, accounting for 37.6% of average annual expenses, according to data from the Bureau of Labor Statistics’ Consumer Expenditure Survey. This was significantly higher than the 33.5% average share for all U.S. households.
Rent is one of the biggest housing expenses and New Yorkers are paying a premium for it. Since renters make up over 67% of New York City’s housing units, the cost of rent has a significant impact on most residents in the city. Median monthly rents paid in 2023 ranged from $1,280 in the Bronx to $2,148 in Manhattan, according to data from the NYC Housing and Vacancy Survey.
However, these average rent figures are influenced by the mix of housing unit types that make up NYC’s rental market. In 2023, about 50% of the city’s almost 2.4 million rental housing units were either rent stabilized, rent controlled, or public housing. Almost all of the other half is made up of market rental units that are prone to bigger and more frequent changes in price, and easier to obtain leases for on an ad-hoc basis.
Most of the units found on popular rental platforms like StreetEasy, Zillow, and Douglas Elliman are market rentals and median monthly rent data from those platforms show that in 2023 rents ranged from $2,166 in Staten Island to $4,145 in Manhattan. These extremely high market rents are a major driver of the fact that almost 49% of renter households in NYC are cost-burdened, where housing costs constitute more than 30% of household income.
NYC Is One of the Most Expensive Cities for Renters
Compared to other big cities in the U.S., New York City is one of the most expensive cities for renters. According to data from the Census Bureau’s American Community Survey, average monthly costs for renters in NYC were $1,688 in 2022. The only major city with higher monthly housing costs than NYC is Los Angeles, where renters pay an average $1,788 for housing. Renters in Phoenix, Chicago, and Houston pay between 12% to 26% less than New Yorkers do for housing costs.
Rent is not the only housing expense for New Yorkers, and while other costs aren’t nearly as much, the cost of utilities can significantly add to the bottom line each month. Data from the Census Bureau’s American Housing Survey shows that the average monthly amount paid by NYC for renters insurance is $21, $60 for electricity, $25 for trash collection, $25 for gas, and $83 to heat your home with fuel oil. The average water bill for New Yorkers is an additional $53 a month. While renters don’t typically pay for every utility expense for their housing, the average amount paid for all utilities by renters in NYC comes out to an additional $86 a month.
| [
[
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https://www.investopedia.com/terms/b/brokered-cd.asp | Brokered CD Definition, Pros/Cons, Other Types | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-brokered-certificate-of-deposit-cd"></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 Brokered Certificate of Deposit (CD)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A brokered certificate of deposit (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp" rel="noopener noreferrer">CD</a>) is a CD that an investor purchases through a brokerage firm or from a sales representative other than a bank. Although the bank still initiates the CD, it outsources selling it to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/032015/10-broker-deals-pay-you-open-account.asp" rel="noopener noreferrer">firms offering incentives</a> to attract new investors. The broker invests a considerable sum with a bank, then sells off that investment in smaller pieces to a variety of investors as brokered CDs.
</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 brokered CD is a CD that an investor purchases through a brokerage firm or sales representative rather than directly from a bank.</li><li>A bank still initiates a brokered CD but outsources selling it to firms that are trying to find potential investors.</li><li>Brokered CDs typically yield more than regular CDs because they are in a more competitive market.</li><li>Brokered CDs generally offer much more flexibility than traditional bank CDs.</li><li>The flexibility of brokered CDs can make it easier for investors to make mistakes.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-brokered-cds"></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 Brokered CDs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Brokered CDs generally command a higher yield than bank CDs, as they are in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-you-trade-certificates-of-deposit-5270774">more competitive market</a>. The broker has invested a large sum with the bank, and that generates more interest than smaller amounts. As with all CDs, holders receive the full principal with interest at maturity.
</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 general, CDs are savings certificates. While many retail banks offer CDs, they are more complex than other financial services, such as checking and savings accounts. CDs will have a fixed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturitydate.asp">maturity date</a> and fixed interest rate. They can be issued in any denomination and may have minimum investment requirements. The holder of a CD cannot access the funds until the maturity date of the investment without paying a penalty. However, brokered CDs can usually be sold on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondarymarket.asp">secondary market</a>.
</p>
<div 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"> CDs are insured by the Federal Deposit Insurance Corporation (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">FDIC</a>) up to $250,000 per individual at each bank.<span class="ql-inline-citation" data-cite="4"></span> Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> On the plus side, a broker often has investments in multiple CDs from different banks. Wealthy investors can spread their money among brokered CDs from various banks, with a $250,000 FDIC insurance limit for each bank. This strategy is much easier than actually opening accounts at several banks and often more profitable than buying <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">U.S. Treasury bonds</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-advantages-of-a-brokered-cd"></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"> Advantages of a Brokered CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Brokered CDs generally offer much more flexibility than <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/are-cds-worth-it-5223941">traditional bank CDs</a>.<span class="ql-inline-citation" data-cite="5"></span> For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases.
</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 secondary market for brokered CDs also makes it much easier to get money out early. There is no actual penalty for selling on the secondary market, but there is sometimes a small sales fee.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If interest rates fall, you may even be able to make a profit when selling a brokered CD before it reaches maturity.
</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"> Brokered CDs also frequently have higher yields than standard bank CDs. Given the inherently low risk of most short-term CDs, that is a substantial advantage.
</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-disadvantages-of-a-brokered-cd"></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"> Disadvantages of a Brokered CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The flexibility of brokered CDs can make it easier for investors to make mistakes. In particular, buying a long-term brokered CD exposes investors to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestraterisk.asp" rel="noopener noreferrer">interest rate risk</a>. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> There is a different risk when interest rates fall. Many brokered CDs are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/callable-certificate-of-deposit.asp" rel="noopener noreferrer">callable CDs</a>, so the issuer will probably want to call it and refinance if interest rates go down.
</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-important" 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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Brokered CDs can be much riskier than traditional bank CDs if investors are not careful.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Some investors rely on the penalties attached to early CD withdrawals to keep them from spending the money on consumer goods. Brokered CDs cannot provide this discipline because they can be sold on the secondary market.
</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"> Interest earned on a brokered CD is not compounded, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/do-cds-pay-compound-interest-5248340">as it is with a bank CD</a>.<span class="ql-inline-citation" data-cite="5"></span> If you want compound interest from brokered CDs, you must reinvest your earnings in another account.
</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-brokered-cd-vs-bull-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"> Brokered CD vs. Bull CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> A brokered CD should not be confused with a bull CD. A bull CD’s interest rate correlates directly with the value of its underlying market index, which makes it a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092316/6-reasons-beware-marketlinked-cds.asp" rel="noopener noreferrer">market-linked CD</a>. Investors in many bull CDs are guaranteed a minimum rate of return, as well as a specified percentage of gains by a market index. The interest rate a holder of a bull CD receives increases as the value of the market index rises.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<span class="heading-toc" id="toc-brokered-cd-vs-bear-cd"></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"> Brokered CD vs. Bear CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> By contrast, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp" rel="noopener noreferrer">bear CD’s</a> interest rate moves in the opposite direction of the value of its underlying market index. In this scenario, the interest rate paid on the CD increases only if the underlying market index decreases. Investors will select bear CDs primarily for speculating and hedging.
</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"> Bear CDs can be desirable if an investor has a long position that is highly correlated to the underlying market index. Investing excess cash in a bear CD <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/bonds/08/cd-certificate-of-deposit-recession-bear-market.asp" rel="noopener noreferrer">can help to offset losses</a> elsewhere.
</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-brokered-cd-vs-yankee-cd"></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"> Brokered CD vs. Yankee CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Similar to a Yankee bond, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yankeecd.asp">Yankee CD</a> is issued by a branch or agency of a foreign bank in the United States to American investors. The selling, however, is not outsourced to a second party, as with a brokered CD. A Yankee CD is denominated in U.S. dollars. Many <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/foreign-currency-cds-5272179">foreign companies</a> choose to raise capital from U.S. investors by issuing Yankee CDs.
</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-are-brokered-cds-fdic-insured"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Brokered CDs FDIC Insured?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The answer is a little tricky: Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company. CDs are insured by the Federal Deposit Insurance Corporation up to $250,000 per individual at each bank.<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_47-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-are-brokered-cds-better-than-bank-cds"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Brokered CDs Better Than Bank CDs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>That depends on your financial needs. Brokered CDs often have higher yields than standard bank CDs<span class="ql-inline-citation" data-cite="5"></span>. Also, brokered CDs generally offer more flexibility than traditional bank CDs. For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases.</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-are-bank-cds-better-than-brokered-cds"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Are Bank CDs Better Than Brokered CDs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Buying a long-term brokered CD exposes investors to interest rate risk. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates. There is a different risk when interest rates fall. Many brokered CDs are callable CDs, so the issuer will probably want to call it and refinance if interest rates go down.</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"> Brokered CDs may be something to consider for your investing portfolio. They differ from regular CDs. A bank still initiates a brokered CD but outsources selling it to firms that are trying to find potential investors. Brokered CDs typically yield more than regular CDs because they are in a more competitive market. Brokered CDs generally offer much more flexibility than traditional bank CDs. The flexibility of brokered CDs can make it easier for investors to make mistakes, so read the fine print.
</p></div> | ## What Is a Brokered Certificate of Deposit (CD)?
A brokered certificate of deposit ([CD](https://www.investopedia.com/terms/c/certificateofdeposit.asp)) is a CD that an investor purchases through a brokerage firm or from a sales representative other than a bank. Although the bank still initiates the CD, it outsources selling it to [firms offering incentives](https://www.investopedia.com/articles/active-trading/032015/10-broker-deals-pay-you-open-account.asp) to attract new investors. The broker invests a considerable sum with a bank, then sells off that investment in smaller pieces to a variety of investors as brokered CDs.
### Key Takeaways
* A brokered CD is a CD that an investor purchases through a brokerage firm or sales representative rather than directly from a bank.
* A bank still initiates a brokered CD but outsources selling it to firms that are trying to find potential investors.
* Brokered CDs typically yield more than regular CDs because they are in a more competitive market.
* Brokered CDs generally offer much more flexibility than traditional bank CDs.
* The flexibility of brokered CDs can make it easier for investors to make mistakes.
## Understanding Brokered CDs
Brokered CDs generally command a higher yield than bank CDs, as they are in a [more competitive market](https://www.investopedia.com/can-you-trade-certificates-of-deposit-5270774). The broker has invested a large sum with the bank, and that generates more interest than smaller amounts. As with all CDs, holders receive the full principal with interest at maturity.
In general, CDs are savings certificates. While many retail banks offer CDs, they are more complex than other financial services, such as checking and savings accounts. CDs will have a fixed [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp) and fixed interest rate. They can be issued in any denomination and may have minimum investment requirements. The holder of a CD cannot access the funds until the maturity date of the investment without paying a penalty. However, brokered CDs can usually be sold on the [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp).
CDs are insured by the Federal Deposit Insurance Corporation ([FDIC](https://www.investopedia.com/terms/f/fdic.asp)) up to $250,000 per individual at each bank. Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company.
On the plus side, a broker often has investments in multiple CDs from different banks. Wealthy investors can spread their money among brokered CDs from various banks, with a $250,000 FDIC insurance limit for each bank. This strategy is much easier than actually opening accounts at several banks and often more profitable than buying [U.S. Treasury bonds](https://www.investopedia.com/terms/t/treasurybond.asp).
## Advantages of a Brokered CD
Brokered CDs generally offer much more flexibility than [traditional bank CDs](https://www.investopedia.com/are-cds-worth-it-5223941). For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases.
The secondary market for brokered CDs also makes it much easier to get money out early. There is no actual penalty for selling on the secondary market, but there is sometimes a small sales fee.
If interest rates fall, you may even be able to make a profit when selling a brokered CD before it reaches maturity.
Brokered CDs also frequently have higher yields than standard bank CDs. Given the inherently low risk of most short-term CDs, that is a substantial advantage.
## Disadvantages of a Brokered CD
The flexibility of brokered CDs can make it easier for investors to make mistakes. In particular, buying a long-term brokered CD exposes investors to [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp). A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates.
There is a different risk when interest rates fall. Many brokered CDs are [callable CDs](https://www.investopedia.com/terms/c/callable-certificate-of-deposit.asp), so the issuer will probably want to call it and refinance if interest rates go down.
###
Brokered CDs can be much riskier than traditional bank CDs if investors are not careful.
Some investors rely on the penalties attached to early CD withdrawals to keep them from spending the money on consumer goods. Brokered CDs cannot provide this discipline because they can be sold on the secondary market.
Interest earned on a brokered CD is not compounded, [as it is with a bank CD](https://www.investopedia.com/do-cds-pay-compound-interest-5248340). If you want compound interest from brokered CDs, you must reinvest your earnings in another account.
## Brokered CD vs. Bull CD
A brokered CD should not be confused with a bull CD. A bull CD’s interest rate correlates directly with the value of its underlying market index, which makes it a [market-linked CD](https://www.investopedia.com/articles/investing/092316/6-reasons-beware-marketlinked-cds.asp). Investors in many bull CDs are guaranteed a minimum rate of return, as well as a specified percentage of gains by a market index. The interest rate a holder of a bull CD receives increases as the value of the market index rises.
## Brokered CD vs. Bear CD
By contrast, a [bear CD’s](https://www.investopedia.com/terms/c/certificateofdeposit.asp) interest rate moves in the opposite direction of the value of its underlying market index. In this scenario, the interest rate paid on the CD increases only if the underlying market index decreases. Investors will select bear CDs primarily for speculating and hedging.
Bear CDs can be desirable if an investor has a long position that is highly correlated to the underlying market index. Investing excess cash in a bear CD [can help to offset losses](https://www.investopedia.com/articles/bonds/08/cd-certificate-of-deposit-recession-bear-market.asp) elsewhere.
## Brokered CD vs. Yankee CD
Similar to a Yankee bond, a [Yankee CD](https://www.investopedia.com/terms/y/yankeecd.asp) is issued by a branch or agency of a foreign bank in the United States to American investors. The selling, however, is not outsourced to a second party, as with a brokered CD. A Yankee CD is denominated in U.S. dollars. Many [foreign companies](https://www.investopedia.com/foreign-currency-cds-5272179) choose to raise capital from U.S. investors by issuing Yankee CDs.
## Are Brokered CDs FDIC Insured?
The answer is a little tricky: Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company. CDs are insured by the Federal Deposit Insurance Corporation up to $250,000 per individual at each bank.
## Are Brokered CDs Better Than Bank CDs?
That depends on your financial needs. Brokered CDs often have higher yields than standard bank CDs. Also, brokered CDs generally offer more flexibility than traditional bank CDs. For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases.
## How Are Bank CDs Better Than Brokered CDs?
Buying a long-term brokered CD exposes investors to interest rate risk. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates. There is a different risk when interest rates fall. Many brokered CDs are callable CDs, so the issuer will probably want to call it and refinance if interest rates go down.
## The Bottom Line
Brokered CDs may be something to consider for your investing portfolio. They differ from regular CDs. A bank still initiates a brokered CD but outsources selling it to firms that are trying to find potential investors. Brokered CDs typically yield more than regular CDs because they are in a more competitive market. Brokered CDs generally offer much more flexibility than traditional bank CDs. The flexibility of brokered CDs can make it easier for investors to make mistakes, so read the fine print.
| What Is a Brokered Certificate of Deposit (CD)?
A brokered certificate of deposit (CD) is a CD that an investor purchases through a brokerage firm or from a sales representative other than a bank. Although the bank still initiates the CD, it outsources selling it to firms offering incentives to attract new investors. The broker invests a considerable sum with a bank, then sells off that investment in smaller pieces to a variety of investors as brokered CDs.
Key Takeaways
A brokered CD is a CD that an investor purchases through a brokerage firm or sales representative rather than directly from a bank.A bank still initiates a brokered CD but outsources selling it to firms that are trying to find potential investors.Brokered CDs typically yield more than regular CDs because they are in a more competitive market.Brokered CDs generally offer much more flexibility than traditional bank CDs.The flexibility of brokered CDs can make it easier for investors to make mistakes.
Understanding Brokered CDs
Brokered CDs generally command a higher yield than bank CDs, as they are in a more competitive market. The broker has invested a large sum with the bank, and that generates more interest than smaller amounts. As with all CDs, holders receive the full principal with interest at maturity.
In general, CDs are savings certificates. While many retail banks offer CDs, they are more complex than other financial services, such as checking and savings accounts. CDs will have a fixed maturity date and fixed interest rate. They can be issued in any denomination and may have minimum investment requirements. The holder of a CD cannot access the funds until the maturity date of the investment without paying a penalty. However, brokered CDs can usually be sold on the secondary market.
CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual at each bank. Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company.
On the plus side, a broker often has investments in multiple CDs from different banks. Wealthy investors can spread their money among brokered CDs from various banks, with a $250,000 FDIC insurance limit for each bank. This strategy is much easier than actually opening accounts at several banks and often more profitable than buying U.S. Treasury bonds.
Advantages of a Brokered CD
Brokered CDs generally offer much more flexibility than traditional bank CDs. For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases.
The secondary market for brokered CDs also makes it much easier to get money out early. There is no actual penalty for selling on the secondary market, but there is sometimes a small sales fee.
If interest rates fall, you may even be able to make a profit when selling a brokered CD before it reaches maturity.
Brokered CDs also frequently have higher yields than standard bank CDs. Given the inherently low risk of most short-term CDs, that is a substantial advantage.
Disadvantages of a Brokered CD
The flexibility of brokered CDs can make it easier for investors to make mistakes. In particular, buying a long-term brokered CD exposes investors to interest rate risk. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates.
There is a different risk when interest rates fall. Many brokered CDs are callable CDs, so the issuer will probably want to call it and refinance if interest rates go down.
Brokered CDs can be much riskier than traditional bank CDs if investors are not careful.
Some investors rely on the penalties attached to early CD withdrawals to keep them from spending the money on consumer goods. Brokered CDs cannot provide this discipline because they can be sold on the secondary market.
Interest earned on a brokered CD is not compounded, as it is with a bank CD. If you want compound interest from brokered CDs, you must reinvest your earnings in another account.
Brokered CD vs. Bull CD
A brokered CD should not be confused with a bull CD. A bull CD’s interest rate correlates directly with the value of its underlying market index, which makes it a market-linked CD. Investors in many bull CDs are guaranteed a minimum rate of return, as well as a specified percentage of gains by a market index. The interest rate a holder of a bull CD receives increases as the value of the market index rises.
Brokered CD vs. Bear CD
By contrast, a bear CD’s interest rate moves in the opposite direction of the value of its underlying market index. In this scenario, the interest rate paid on the CD increases only if the underlying market index decreases. Investors will select bear CDs primarily for speculating and hedging.
Bear CDs can be desirable if an investor has a long position that is highly correlated to the underlying market index. Investing excess cash in a bear CD can help to offset losses elsewhere.
Brokered CD vs. Yankee CD
Similar to a Yankee bond, a Yankee CD is issued by a branch or agency of a foreign bank in the United States to American investors. The selling, however, is not outsourced to a second party, as with a brokered CD. A Yankee CD is denominated in U.S. dollars. Many foreign companies choose to raise capital from U.S. investors by issuing Yankee CDs.
Are Brokered CDs FDIC Insured?
The answer is a little tricky: Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company. CDs are insured by the Federal Deposit Insurance Corporation up to $250,000 per individual at each bank.
Are Brokered CDs Better Than Bank CDs?
That depends on your financial needs. Brokered CDs often have higher yields than standard bank CDs. Also, brokered CDs generally offer more flexibility than traditional bank CDs. For example, brokered CDs can have much longer terms than bank CDs, up to 20 to 30 years in some cases.
How Are Bank CDs Better Than Brokered CDs?
Buying a long-term brokered CD exposes investors to interest rate risk. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates. There is a different risk when interest rates fall. Many brokered CDs are callable CDs, so the issuer will probably want to call it and refinance if interest rates go down.
The Bottom Line
Brokered CDs may be something to consider for your investing portfolio. They differ from regular CDs. A bank still initiates a brokered CD but outsources selling it to firms that are trying to find potential investors. Brokered CDs typically yield more than regular CDs because they are in a more competitive market. Brokered CDs generally offer much more flexibility than traditional bank CDs. The flexibility of brokered CDs can make it easier for investors to make mistakes, so read the fine print.
| [
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],
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"https://www.investopedia.com/foreign-currency-cds-5272179"
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https://www.investopedia.com/terms/a/accountbalance.asp | What Is an Account Balance? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-account-balance"></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 Account Balance? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An account balance is the amount of money in a financial repository, such as a savings or checking account. The account balance factors all debits and credits. An account balance is also evident on billing statements for credit cards, utilities, and loans.
</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 account balance represents the current value of a financial account, such as a checking, savings, or investment account.</li><li>Financial institutions provide account balances on paper statements and online.</li><li>For investments in brokerage accounts, an account balance can change daily as security prices rise and fall in the market.</li></ul></div></div></div>
<span class="heading-toc" id="toc-calculating-account-balances"></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"> Calculating Account Balances </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> An account balance reflects total assets minus total liabilities. In banking, the account balance is the money available in a checking or savings account. The account balance is the net amount available after all deposits and credits have been balanced with any charges or debits.
</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"> For investments in brokerage accounts, an account balance can change daily as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> prices rise and fall in the market. Other accounts have an account balance, such as a utility bill or a mortgage loan. The account balance for these accounts shows the amount owed.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_11-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_12-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A bank account balance can be inaccurate if a check has yet to clear the bank or a pending transaction has not yet gone through.</p></div></div></div>
<span class="heading-toc" id="toc-examples-of-account-balances"></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"> Examples of Account Balances </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> For 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>, various purchases may include $100, $50, and $25, and a returned item that costs $10. The account balance includes the purchases, which total $175, and the item returned for $10. The net of the debits and credits is $165, or $175 minus $10, which is the account balance.
</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/personal-finance/6-different-types-checking-accounts/">For a checking account</a>, if the starting balance is $500, and a check is received for $1,500, but an automatic payment is scheduled for $750, the account balance might show $2,000 immediately, but the account balance is $1,250.
</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-account-balance-vs-available-credit"></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"> Account Balance vs. Available Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> For credit cards, account balances represent the total amount of debt owed at the start of the statement date and include any debt rolled over from previous months with interest charges. Available credit is the term used alongside the account balance to indicate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102814/what-difference-between-available-credit-and-credit-limit.asp">how much of the credit line is left to spend</a>.
</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-can-individuals-check-a-bank-account-balance"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can Individuals Check a Bank Account Balance?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Account holders can check balances by signing in to their bank's app or website and looking at their latest transactions or by visiting the local branch and speaking with a representative.</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-what-kinds-of-accounts-have-account-balances"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Kinds of Accounts Have Account Balances?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Checking, savings, and brokerage accounts all have account balances. However, expenses like utility bills, mortgage loans, or credit cards also have account balances.</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-whats-available-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">What's Available Credit?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Available credit refers to the amount remaining on the credit line. The available credit can be determined by subtracting the account balance from the credit limit.</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"> An account balance represents the available funds in a financial account, such as a checking, savings, or investment account. An account balance in a brokerage account can change daily as security prices rise and fall in the market. A bank account balance can be inaccurate if pending transactions exist.
</p></div> | ## What Is an Account Balance?
An account balance is the amount of money in a financial repository, such as a savings or checking account. The account balance factors all debits and credits. An account balance is also evident on billing statements for credit cards, utilities, and loans.
### Key Takeaways
* An account balance represents the current value of a financial account, such as a checking, savings, or investment account.
* Financial institutions provide account balances on paper statements and online.
* For investments in brokerage accounts, an account balance can change daily as security prices rise and fall in the market.
## Calculating Account Balances
An account balance reflects total assets minus total liabilities. In banking, the account balance is the money available in a checking or savings account. The account balance is the net amount available after all deposits and credits have been balanced with any charges or debits.
For investments in brokerage accounts, an account balance can change daily as [security](https://www.investopedia.com/terms/s/security.asp) prices rise and fall in the market. Other accounts have an account balance, such as a utility bill or a mortgage loan. The account balance for these accounts shows the amount owed.
###
A bank account balance can be inaccurate if a check has yet to clear the bank or a pending transaction has not yet gone through.
## Examples of Account Balances
For a [credit card](https://www.investopedia.com/best-credit-cards-4801582), various purchases may include $100, $50, and $25, and a returned item that costs $10. The account balance includes the purchases, which total $175, and the item returned for $10. The net of the debits and credits is $165, or $175 minus $10, which is the account balance.
[For a checking account](https://www.investopedia.com/personal-finance/6-different-types-checking-accounts/), if the starting balance is $500, and a check is received for $1,500, but an automatic payment is scheduled for $750, the account balance might show $2,000 immediately, but the account balance is $1,250.
## Account Balance vs. Available Credit
For credit cards, account balances represent the total amount of debt owed at the start of the statement date and include any debt rolled over from previous months with interest charges. Available credit is the term used alongside the account balance to indicate [how much of the credit line is left to spend](https://www.investopedia.com/ask/answers/102814/what-difference-between-available-credit-and-credit-limit.asp).
## How Can Individuals Check a Bank Account Balance?
Account holders can check balances by signing in to their bank's app or website and looking at their latest transactions or by visiting the local branch and speaking with a representative.
## What Kinds of Accounts Have Account Balances?
Checking, savings, and brokerage accounts all have account balances. However, expenses like utility bills, mortgage loans, or credit cards also have account balances.
## What's Available Credit?
Available credit refers to the amount remaining on the credit line. The available credit can be determined by subtracting the account balance from the credit limit.
## The Bottom Line
An account balance represents the available funds in a financial account, such as a checking, savings, or investment account. An account balance in a brokerage account can change daily as security prices rise and fall in the market. A bank account balance can be inaccurate if pending transactions exist.
| What Is an Account Balance?
An account balance is the amount of money in a financial repository, such as a savings or checking account. The account balance factors all debits and credits. An account balance is also evident on billing statements for credit cards, utilities, and loans.
Key Takeaways
An account balance represents the current value of a financial account, such as a checking, savings, or investment account.Financial institutions provide account balances on paper statements and online.For investments in brokerage accounts, an account balance can change daily as security prices rise and fall in the market.
Calculating Account Balances
An account balance reflects total assets minus total liabilities. In banking, the account balance is the money available in a checking or savings account. The account balance is the net amount available after all deposits and credits have been balanced with any charges or debits.
For investments in brokerage accounts, an account balance can change daily as security prices rise and fall in the market. Other accounts have an account balance, such as a utility bill or a mortgage loan. The account balance for these accounts shows the amount owed.
A bank account balance can be inaccurate if a check has yet to clear the bank or a pending transaction has not yet gone through.
Examples of Account Balances
For a credit card, various purchases may include $100, $50, and $25, and a returned item that costs $10. The account balance includes the purchases, which total $175, and the item returned for $10. The net of the debits and credits is $165, or $175 minus $10, which is the account balance.
For a checking account, if the starting balance is $500, and a check is received for $1,500, but an automatic payment is scheduled for $750, the account balance might show $2,000 immediately, but the account balance is $1,250.
Account Balance vs. Available Credit
For credit cards, account balances represent the total amount of debt owed at the start of the statement date and include any debt rolled over from previous months with interest charges. Available credit is the term used alongside the account balance to indicate how much of the credit line is left to spend.
How Can Individuals Check a Bank Account Balance?
Account holders can check balances by signing in to their bank's app or website and looking at their latest transactions or by visiting the local branch and speaking with a representative.
What Kinds of Accounts Have Account Balances?
Checking, savings, and brokerage accounts all have account balances. However, expenses like utility bills, mortgage loans, or credit cards also have account balances.
What's Available Credit?
Available credit refers to the amount remaining on the credit line. The available credit can be determined by subtracting the account balance from the credit limit.
The Bottom Line
An account balance represents the available funds in a financial account, such as a checking, savings, or investment account. An account balance in a brokerage account can change daily as security prices rise and fall in the market. A bank account balance can be inaccurate if pending transactions exist.
| [
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] |
https://www.investopedia.com/venture-funding-spikes-in-q3-as-ipo-market-explodes-5082118 | Venture Funding Spikes in Q3 as IPO Market Explodes | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Venture funding hits $76.4 billion in Q3 2020, up 9% YOY</li><li>Late-stage investing soars after IPO markets open up</li><li>Acquisitions worth $40.4 billion of venture-backed firms in Q3</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Global venture funding reached $76.4 in the third quarter of 2020, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://news.crunchbase.com/news/q3-2020-global-venture-report/" rel="noopener noreferrer">Crunchbase</a>. This is up 1% from last quarter and up 9% year over year, proving investment has stayed resilient despite, or in some cases because of, the pandemic. For 2020 so far, areas like health care, apps, payments, education and gaming have seen increased investment versus last year.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-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_5-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:87.0%;">
<img alt="VC funding" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/dzxQC7SoPpr1kxPKfxzLwTNDJMs=/1024x0/filters:no_upscale():max_bytes(150000):strip_icc()/Global_Funding_Q32020-1024x891-e44b1b3c9e48463dbb65356ed41469b3.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/k_0eAfSA8IKFRCiAvxtmJ-bi2yg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Global_Funding_Q32020-1024x891-e44b1b3c9e48463dbb65356ed41469b3.jpg" data-srcset="https://www.investopedia.com/thmb/p0Dp8bpekZgQNqY8xw-Qe7mOX-Q=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Global_Funding_Q32020-1024x891-e44b1b3c9e48463dbb65356ed41469b3.jpg 750w" data-tracking-container="true" height="891" id="mntl-sc-block-image_1-0" width="1024"/>
<noscript>
<img alt="VC funding" class="img--noscript universal-image__image" height="891" sizes="750px" src="https://www.investopedia.com/thmb/k_0eAfSA8IKFRCiAvxtmJ-bi2yg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Global_Funding_Q32020-1024x891-e44b1b3c9e48463dbb65356ed41469b3.jpg" srcset="https://www.investopedia.com/thmb/p0Dp8bpekZgQNqY8xw-Qe7mOX-Q=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Global_Funding_Q32020-1024x891-e44b1b3c9e48463dbb65356ed41469b3.jpg 750w" width="1024"/>
</noscript>
</div> </div>
<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-text">Source: Crunchbase.</span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Some of the trends observed for Q3: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seedcapital.asp" rel="noopener noreferrer">Seed</a> and early-stage funding were down from last quarter and last year. Meanwhile, late-stage funding was up 24% year over year and up 26% quarter over quarter "as investors look toward a strong exit market as the IPO markets opened up in June." Private equity rounds in venture-backed companies (also known as technology growth rounds) was $6.3 billion, up 76% year over year but down 48% quarter over quarter.
</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"> Acquisitions of venture-backed companies soared in dollar-value from the second quarter and Q3 2019 to $40.4 billion. Nine firms were acquired for more than $1 billion, the highest count per quarter since early 2019. Apple(<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL" rel="noopener noreferrer">AAPL</a>) was the most active acquirer in the quarter, with three purchases including Canada-based contactless payment startup Mobeewave, San Francisco-based podcast streaming service Scout FM, and Spaces, a Santa Monica-headquartered company that develops VR, AR and MR for theme parks.
</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"> "Ant Group, Airbnb, Wish, Root Insurance, ChargePoint and Affirm have all recently filed to go public, while Opendoor and AppHarvest are planning debuts via SPACs," said Crunchbase. "And with a record 631 companies listed on our unicorn board, with 33 new unicorns joining in this third quarter, we are in for a busy final quarter of 2020."
</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> | ###
* Venture funding hits $76.4 billion in Q3 2020, up 9% YOY
* Late-stage investing soars after IPO markets open up
* Acquisitions worth $40.4 billion of venture-backed firms in Q3
Global venture funding reached $76.4 in the third quarter of 2020, according to [Crunchbase](https://news.crunchbase.com/news/q3-2020-global-venture-report/). This is up 1% from last quarter and up 9% year over year, proving investment has stayed resilient despite, or in some cases because of, the pandemic. For 2020 so far, areas like health care, apps, payments, education and gaming have seen increased investment versus last year.
![VC funding]()
:max_bytes(150000):strip_icc()/Global_Funding_Q32020-1024x891-e44b1b3c9e48463dbb65356ed41469b3.jpg)
Source: Crunchbase.
Some of the trends observed for Q3: [Seed](https://www.investopedia.com/terms/s/seedcapital.asp) and early-stage funding were down from last quarter and last year. Meanwhile, late-stage funding was up 24% year over year and up 26% quarter over quarter "as investors look toward a strong exit market as the IPO markets opened up in June." Private equity rounds in venture-backed companies (also known as technology growth rounds) was $6.3 billion, up 76% year over year but down 48% quarter over quarter.
Acquisitions of venture-backed companies soared in dollar-value from the second quarter and Q3 2019 to $40.4 billion. Nine firms were acquired for more than $1 billion, the highest count per quarter since early 2019. Apple([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) was the most active acquirer in the quarter, with three purchases including Canada-based contactless payment startup Mobeewave, San Francisco-based podcast streaming service Scout FM, and Spaces, a Santa Monica-headquartered company that develops VR, AR and MR for theme parks.
"Ant Group, Airbnb, Wish, Root Insurance, ChargePoint and Affirm have all recently filed to go public, while Opendoor and AppHarvest are planning debuts via SPACs," said Crunchbase. "And with a record 631 companies listed on our unicorn board, with 33 new unicorns joining in this third quarter, we are in for a busy final quarter of 2020."
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) |
Venture funding hits $76.4 billion in Q3 2020, up 9% YOYLate-stage investing soars after IPO markets open upAcquisitions worth $40.4 billion of venture-backed firms in Q3
Global venture funding reached $76.4 in the third quarter of 2020, according to Crunchbase. This is up 1% from last quarter and up 9% year over year, proving investment has stayed resilient despite, or in some cases because of, the pandemic. For 2020 so far, areas like health care, apps, payments, education and gaming have seen increased investment versus last year.
Source: Crunchbase.
Some of the trends observed for Q3: Seed and early-stage funding were down from last quarter and last year. Meanwhile, late-stage funding was up 24% year over year and up 26% quarter over quarter "as investors look toward a strong exit market as the IPO markets opened up in June." Private equity rounds in venture-backed companies (also known as technology growth rounds) was $6.3 billion, up 76% year over year but down 48% quarter over quarter.
Acquisitions of venture-backed companies soared in dollar-value from the second quarter and Q3 2019 to $40.4 billion. Nine firms were acquired for more than $1 billion, the highest count per quarter since early 2019. Apple(AAPL) was the most active acquirer in the quarter, with three purchases including Canada-based contactless payment startup Mobeewave, San Francisco-based podcast streaming service Scout FM, and Spaces, a Santa Monica-headquartered company that develops VR, AR and MR for theme parks.
"Ant Group, Airbnb, Wish, Root Insurance, ChargePoint and Affirm have all recently filed to go public, while Opendoor and AppHarvest are planning debuts via SPACs," said Crunchbase. "And with a record 631 companies listed on our unicorn board, with 33 new unicorns joining in this third quarter, we are in for a busy final quarter of 2020."
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/terms/i/interledger-protocol.asp | Interledger Protocol: What it Means, How it Works | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-interledger-protocol"></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 Interledger Protocol? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Interledger protocol is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp" rel="noopener noreferrer">blockchain</a> protocol used for payments across different payment networks. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/open-source.asp" rel="noopener noreferrer">open-source</a> protocol connects ledgers from two or more different banks, thereby removing intermediaries and central authorities from the system. It promises to reduce costs and the time required to process cross-border transactions.
</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"> Interledger is utilized by Ripple Labs to connect bank systems across borders where the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/ripple-cryptocurrency.asp" rel="noopener noreferrer">Ripple</a> (XRP) token functions as a standardized settlement layer between global banks, making Ripple somewhat akin to a digital <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hawala.asp" rel="noopener noreferrer">hawala</a> service.
</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>Interledger is an open-source protocol suite for sending payments across different ledgers.</li><li>Based on blockchain technology, the goal is to remove intermediaries to create a secure, decentralized, and cross-border interbank payments network.</li><li>Interledger is not tied to a single company, blockchain, or currency, although it is featured prominently with the Ripple cryptocurrency.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-interledger-protocol"></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 Interledger Protocol </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The current process for cross-border transfers between banks involves navigation of multiple payment protocols used by digital ledgers to process transactions. The protocols communicate using connectors, but the tools and standards used in such systems are fragmented.
</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"> For example, the current set of connectors do not have standardized modes for communication. The introduction of intermediary banks to facilitate transactions between entities that do not have a direct relationship with each other further complicates the process. This is because it multiplies the number of hops to complete a transaction, thereby making it more expensive and time-consuming. It also magnifies security risks because payments have to travel through multiple systems to reach the final recipient.
</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 Interledger Protocol uses the concept of cryptographic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/escrow.asp" rel="noopener noreferrer">escrow</a> to enable the passage of funds through connectors or nodes in the network. The Interledger protocol whitepaper defines cryptographic escrow as the financial equivalent of a two-phase commit protocol.<span class="ql-inline-citation" data-cite="1"></span> The latter protocol consists of two steps:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <li>The first step consists of defining a set of conditions for a transaction to move forward or abort.</li><li>The second step defines the processing of the transaction once conditions are met. </li>
</ol>
<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"> Cryptographic escrow for ledgers is the conditional locking of funds between two parties. The funds are released only after certain conditions, including time-based ones for the transaction to take place, are met. Otherwise, the transaction is voided. At the end of a successful payment transaction, the sender receives a cryptographic receipt from the recipient. Alternately, the escrowed funds are returned to respective parties.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<span class="heading-toc" id="toc-atomic-vs-universal-mode"></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"> Atomic vs. Universal Mode </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The Interledger protocol can be implemented in two modes: atomic mode and universal mode. In atomic mode, notaries are incorporated into the system. They are an ad-hoc group that is used to verify and validate transactions. Typically, atomic modes take place between trusted connector nodes between banks or financial service companies that might relate to each other.<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 universal mode does not require notaries and can work between untrusted connectors. It uses Ripple’s internal cryptocurrency, XRP, to facilitate transfers. The transfer is accompanied by time constraints. If it does not take place within a certain timeframe, then the transaction is annulled.<span class="ql-inline-citation" data-cite="2"></span>
</p></div> | ## What Is the Interledger Protocol?
Interledger protocol is a [blockchain](https://www.investopedia.com/terms/b/blockchain.asp) protocol used for payments across different payment networks. The [open-source](https://www.investopedia.com/terms/o/open-source.asp) protocol connects ledgers from two or more different banks, thereby removing intermediaries and central authorities from the system. It promises to reduce costs and the time required to process cross-border transactions.
Interledger is utilized by Ripple Labs to connect bank systems across borders where the [Ripple](https://www.investopedia.com/terms/r/ripple-cryptocurrency.asp) (XRP) token functions as a standardized settlement layer between global banks, making Ripple somewhat akin to a digital [hawala](https://www.investopedia.com/terms/h/hawala.asp) service.
### Key Takeaways
* Interledger is an open-source protocol suite for sending payments across different ledgers.
* Based on blockchain technology, the goal is to remove intermediaries to create a secure, decentralized, and cross-border interbank payments network.
* Interledger is not tied to a single company, blockchain, or currency, although it is featured prominently with the Ripple cryptocurrency.
## Understanding the Interledger Protocol
The current process for cross-border transfers between banks involves navigation of multiple payment protocols used by digital ledgers to process transactions. The protocols communicate using connectors, but the tools and standards used in such systems are fragmented.
For example, the current set of connectors do not have standardized modes for communication. The introduction of intermediary banks to facilitate transactions between entities that do not have a direct relationship with each other further complicates the process. This is because it multiplies the number of hops to complete a transaction, thereby making it more expensive and time-consuming. It also magnifies security risks because payments have to travel through multiple systems to reach the final recipient.
The Interledger Protocol uses the concept of cryptographic [escrow](https://www.investopedia.com/terms/e/escrow.asp) to enable the passage of funds through connectors or nodes in the network. The Interledger protocol whitepaper defines cryptographic escrow as the financial equivalent of a two-phase commit protocol. The latter protocol consists of two steps:
1. The first step consists of defining a set of conditions for a transaction to move forward or abort.
2. The second step defines the processing of the transaction once conditions are met.
Cryptographic escrow for ledgers is the conditional locking of funds between two parties. The funds are released only after certain conditions, including time-based ones for the transaction to take place, are met. Otherwise, the transaction is voided. At the end of a successful payment transaction, the sender receives a cryptographic receipt from the recipient. Alternately, the escrowed funds are returned to respective parties.
## Atomic vs. Universal Mode
The Interledger protocol can be implemented in two modes: atomic mode and universal mode. In atomic mode, notaries are incorporated into the system. They are an ad-hoc group that is used to verify and validate transactions. Typically, atomic modes take place between trusted connector nodes between banks or financial service companies that might relate to each other.
The universal mode does not require notaries and can work between untrusted connectors. It uses Ripple’s internal cryptocurrency, XRP, to facilitate transfers. The transfer is accompanied by time constraints. If it does not take place within a certain timeframe, then the transaction is annulled.
| What Is the Interledger Protocol?
Interledger protocol is a blockchain protocol used for payments across different payment networks. The open-source protocol connects ledgers from two or more different banks, thereby removing intermediaries and central authorities from the system. It promises to reduce costs and the time required to process cross-border transactions.
Interledger is utilized by Ripple Labs to connect bank systems across borders where the Ripple (XRP) token functions as a standardized settlement layer between global banks, making Ripple somewhat akin to a digital hawala service.
Key Takeaways
Interledger is an open-source protocol suite for sending payments across different ledgers.Based on blockchain technology, the goal is to remove intermediaries to create a secure, decentralized, and cross-border interbank payments network.Interledger is not tied to a single company, blockchain, or currency, although it is featured prominently with the Ripple cryptocurrency.
Understanding the Interledger Protocol
The current process for cross-border transfers between banks involves navigation of multiple payment protocols used by digital ledgers to process transactions. The protocols communicate using connectors, but the tools and standards used in such systems are fragmented.
For example, the current set of connectors do not have standardized modes for communication. The introduction of intermediary banks to facilitate transactions between entities that do not have a direct relationship with each other further complicates the process. This is because it multiplies the number of hops to complete a transaction, thereby making it more expensive and time-consuming. It also magnifies security risks because payments have to travel through multiple systems to reach the final recipient.
The Interledger Protocol uses the concept of cryptographic escrow to enable the passage of funds through connectors or nodes in the network. The Interledger protocol whitepaper defines cryptographic escrow as the financial equivalent of a two-phase commit protocol. The latter protocol consists of two steps:
The first step consists of defining a set of conditions for a transaction to move forward or abort.The second step defines the processing of the transaction once conditions are met.
Cryptographic escrow for ledgers is the conditional locking of funds between two parties. The funds are released only after certain conditions, including time-based ones for the transaction to take place, are met. Otherwise, the transaction is voided. At the end of a successful payment transaction, the sender receives a cryptographic receipt from the recipient. Alternately, the escrowed funds are returned to respective parties.
Atomic vs. Universal Mode
The Interledger protocol can be implemented in two modes: atomic mode and universal mode. In atomic mode, notaries are incorporated into the system. They are an ad-hoc group that is used to verify and validate transactions. Typically, atomic modes take place between trusted connector nodes between banks or financial service companies that might relate to each other.
The universal mode does not require notaries and can work between untrusted connectors. It uses Ripple’s internal cryptocurrency, XRP, to facilitate transfers. The transfer is accompanied by time constraints. If it does not take place within a certain timeframe, then the transaction is annulled.
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],
[
"Ripple",
"https://www.investopedia.com/terms/r/ripple-cryptocurrency.asp"
],
[
"hawala",
"https://www.investopedia.com/terms/h/hawala.asp"
],
[
"escrow",
"https://www.investopedia.com/terms/e/escrow.asp"
]
] |
https://www.investopedia.com/30-year-mortgage-rates-fall-to-5-week-low-8647904 | 30-Year Mortgage Rates Fall to 5-Week Low | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Rates on 30-year mortgages continue dipping to a lower range, dropping Monday to a 7.05% average. That's the cheapest level for 30-year loans since early April. Many other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">mortgage types</a> also saw rates inch down Monday.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Editor's Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.</p></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media">
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<img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 14, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/_Mp91Gdy-e3_j5-Nz5P7ivQku9Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-14-02400efd67cc4bcc80a9c60cc001f2d2.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/_Mp91Gdy-e3_j5-Nz5P7ivQku9Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-14-02400efd67cc4bcc80a9c60cc001f2d2.png" data-srcset="https://www.investopedia.com/thmb/0BH9oXQQGI_fs2H00THQkp7xrDc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-14-02400efd67cc4bcc80a9c60cc001f2d2.png 750w" data-tracking-container="true" height="1888" id="mntl-sc-block-image_1-0" width="2480"/>
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<img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 14, 2024" class="img--noscript universal-image__image" height="1888" sizes="750px" src="https://www.investopedia.com/thmb/_Mp91Gdy-e3_j5-Nz5P7ivQku9Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-14-02400efd67cc4bcc80a9c60cc001f2d2.png" srcset="https://www.investopedia.com/thmb/0BH9oXQQGI_fs2H00THQkp7xrDc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-14-02400efd67cc4bcc80a9c60cc001f2d2.png 750w" width="2480"/>
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</figure>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_6-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
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<colgroup span="1" style=""></colgroup>
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<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Rate Averages for Top 5 Mortgage Types</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>New Purchase</b></td>
<td><b>Refinance</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.05%</td>
<td>7.40%</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.91%</td>
<td>6.60%</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.21%</td>
<td>6.36%</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.11%</td>
<td>8.34%</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.13%</td>
<td>7.10%</td>
</tr>
<tr>
<td><sup><sub><em><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.zillow.com/" rel="noopener noreferrer sponsored nofollow">Provided via the Zillow Mortgage API</a></em></sub></sup></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
<figcaption>National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.</figcaption>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Since rates vary widely across lenders, it's always smart to shop around for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">your best mortgage option</a> and compare rates regularly no matter the type of home loan you seek.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_10-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div>
</span></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_13-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Since surging to a five-month high of 7.37% in late April, rates on 30-year new purchase loans have been coming down over the last two weeks. The 30-year average subtracted another 3 basis points Monday to rest at 7.05%, making that the cheapest mark for 30-year rates in five weeks.
</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"> Rates on 30-year mortgages still remain elevated vs. early February, when the flagship average dipped as low as 6.36%. But rates are considerably cheaper than when the 30-year average hit a historic 23-year high of 8.01% in October.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_20-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/17x9O/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_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> New purchase 15-year mortgage rates also edged slightly lower Monday, declining 4 basis points. The 15-year average is now 6.21%—just a handful of basis points above its recent low of 6.15%. Today's 15-year rates are also considerably more affordable than last fall's 7.08% average—a peak since 2000.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Monday's jumbo 30-year rates similarly shed 4 basis points, reducing the average to 7.13%. That compares to a recent five-month peak of 7.30%. Though daily historical jumbo rates are not published before 2009, it's estimated the 8.14% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Rate movement across most new purchase loan types was either flat or modestly down. One exception was 10-year fixed-rate mortgages, whose average fell 11 basis points Monday.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_28-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
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<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Mortgage Rate Averages - New Purchase Loans</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>New Purchase Average</b></td>
<td><b>Daily Change</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.05%</td>
<td>-0.03</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.91%</td>
<td>-0.01</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>6.44%</td>
<td>No Change</td>
</tr>
<tr>
<td>20-Year Fixed</td>
<td>6.73%</td>
<td>-0.06</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.21%</td>
<td>-0.04</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>7.31%</td>
<td>+0.03</td>
</tr>
<tr>
<td>10-Year Fixed</td>
<td>6.05%</td>
<td>-0.11</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>8.03%</td>
<td>+0.01</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.11%</td>
<td>+0.01</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.13%</td>
<td>-0.04</td>
</tr>
<tr>
<td>Jumbo 15-Year Fixed</td>
<td>7.11%</td>
<td>-0.02</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>7.87%</td>
<td>-0.05</td>
</tr>
<tr>
<td>Jumbo 5/6 ARM</td>
<td>7.97%</td>
<td>+0.04</td>
</tr>
<tr>
<td><sup><sub><em><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.zillow.com/" rel="noopener noreferrer sponsored nofollow">Provided via the Zillow Mortgage API</a></em></sub></sup></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_30-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Dgk9Y/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading fell 13 basis points to 7.09%, marking its first decline since late March.<span class="ql-inline-citation" data-cite="4"></span> Back in October, however, Freddie Mac's average reached a historic 23-year peak of 7.79%. It later dropped significantly, registering a low point of 6.60% in mid-January.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Freddie Mac’s average differs from what we report for 30-year rates because Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates. In contrast, our Investopedia 30-year average is a daily reading, offering a more precise and timely indicator of rate movement. In addition, the criteria for included loans (e.g., amount of down payment, credit score, inclusion of discount points) varies between Freddie Mac's methodology and our own.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<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"> Today's Mortgage Rate Averages: Refinancing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Refinancing averages showed a bit more movement Monday than new purchase rates. The 30-year refi average dropped 8 basis points, tightening the spread between 30-year new purchase and refi rates to 35 basis points. The 15-year refi average dipped just 4 basis points, but the jumbo 30-year refi average fell 11 points.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_40-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Mortgage Rate Averages - Refinance Loans</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>Refinance Average</b></td>
<td><b>Daily Change</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.40%</td>
<td>-0.08</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.60%</td>
<td>No Change</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>6.33%</td>
<td>-0.02</td>
</tr>
<tr>
<td>20-Year Fixed</td>
<td>6.98%</td>
<td>-0.06</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.36%</td>
<td>-0.04</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>6.33%</td>
<td>No Change</td>
</tr>
<tr>
<td>10-Year Fixed</td>
<td>6.12%</td>
<td>+0.16</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>8.31%</td>
<td>+0.01</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.34%</td>
<td>+0.01</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.10%</td>
<td>-0.11</td>
</tr>
<tr>
<td>Jumbo 15-Year Fixed</td>
<td>7.15%</td>
<td>No Change</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>7.98%</td>
<td>-0.04</td>
</tr>
<tr>
<td>Jumbo 5/6 ARM</td>
<td>8.06%</td>
<td>+0.09</td>
</tr>
<tr>
<td><sup><sub><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.zillow.com/" rel="noopener noreferrer sponsored nofollow">Provided via the Zillow Mortgage API</a></sub></sup></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be based on a hypothetical borrower with an ultra-high credit score or for a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it can vary from the averages you see here.</p></div></div></div>
<div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_46-0"><div class="comp mortgage-loan-calculator mntl-block" data-defer="load" id="mortgage-loan-calculator_1-0"></div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<span class="heading-toc" id="toc-mortgage-rates-by-state"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-heading__text"> Mortgage Rates by State </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The states with the cheapest 30-year new purchase rates Monday were New York, Alaska, North Carolina, Texas, Louisiana, and California, while the states with the highest average rates were West Virginia, Washington, D.C., Hawaii, Iowa, Kansas, Nevada, and New Mexico.
</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/lvMCT/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Mortgage Rates by State"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0">
<li>The level and direction of the bond market, especially 10-year Treasury yields</li>
<li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li>
<li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> The Fed has been maintaining the federal funds rate at its current level since July, with a sixth consecutive rate hold announced May 1.<span class="ql-inline-citation" data-cite="5"></span> Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and sustainably, it has said it's hesitant to start cutting rates.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> The Fed will hold five more meetings this year, with the next one scheduled to conclude June 12.<span class="ql-inline-citation" data-cite="7"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div>
<span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_74-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value (LTV) ratio</a> of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
</p></div> | Rates on 30-year mortgages continue dipping to a lower range, dropping Monday to a 7.05% average. That's the cheapest level for 30-year loans since early April. Many other [mortgage types](https://www.investopedia.com/mortgage-rates-5094943) also saw rates inch down Monday.
### Editor's Note
As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.
![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 14, 2024]()
:max_bytes(150000):strip_icc()/5-14-02400efd67cc4bcc80a9c60cc001f2d2.png)
| National Rate Averages for Top 5 Mortgage Types | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase** | **Refinance** |
| 30-Year Fixed | 7.05% | 7.40% |
| FHA 30-Year Fixed | 6.91% | 6.60% |
| 15-Year Fixed | 6.21% | 6.36% |
| 5/6 ARM | 8.11% | 8.34% |
| Jumbo 30-Year Fixed | 7.13% | 7.10% |
| *[Provided via the Zillow Mortgage API](https://www.zillow.com/)* | | |
National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.
Since 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
Since surging to a five-month high of 7.37% in late April, rates on 30-year new purchase loans have been coming down over the last two weeks. The 30-year average subtracted another 3 basis points Monday to rest at 7.05%, making that the cheapest mark for 30-year rates in five weeks.
Rates on 30-year mortgages still remain elevated vs. early February, when the flagship average dipped as low as 6.36%. But rates are considerably cheaper than when the 30-year average hit a historic 23-year high of 8.01% in October.
New purchase 15-year mortgage rates also edged slightly lower Monday, declining 4 basis points. The 15-year average is now 6.21%—just a handful of basis points above its recent low of 6.15%. Today's 15-year rates are also considerably more affordable than last fall's 7.08% average—a peak since 2000.
Monday's jumbo 30-year rates similarly shed 4 basis points, reducing the average to 7.13%. That compares to a recent five-month peak of 7.30%. Though daily historical jumbo rates are not published before 2009, it's estimated the 8.14% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years.
Rate movement across most new purchase loan types was either flat or modestly down. One exception was 10-year fixed-rate mortgages, whose average fell 11 basis points Monday.
| National Mortgage Rate Averages - New Purchase Loans | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase Average** | **Daily Change** |
| 30-Year Fixed | 7.05% | -0.03 |
| FHA 30-Year Fixed | 6.91% | -0.01 |
| VA 30-Year Fixed | 6.44% | No Change |
| 20-Year Fixed | 6.73% | -0.06 |
| 15-Year Fixed | 6.21% | -0.04 |
| FHA 15-Year Fixed | 7.31% | +0.03 |
| 10-Year Fixed | 6.05% | -0.11 |
| 7/6 ARM | 8.03% | +0.01 |
| 5/6 ARM | 8.11% | +0.01 |
| Jumbo 30-Year Fixed | 7.13% | -0.04 |
| Jumbo 15-Year Fixed | 7.11% | -0.02 |
| Jumbo 7/6 ARM | 7.87% | -0.05 |
| Jumbo 5/6 ARM | 7.97% | +0.04 |
| *[Provided via the Zillow Mortgage API](https://www.zillow.com/)* | | |
## The Weekly Freddie Mac Average
Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading fell 13 basis points to 7.09%, marking its first decline since late March. Back in October, however, Freddie Mac's average reached a historic 23-year peak of 7.79%. It later dropped significantly, registering a low point of 6.60% in mid-January.
Freddie Mac’s average differs from what we report for 30-year rates because Freddie Mac calculates a *weekly* average that blends five previous days of rates. In contrast, our Investopedia 30-year average is a daily reading, offering a more precise and timely indicator of rate movement. In addition, the criteria for included loans (e.g., amount of down payment, credit score, inclusion of discount points) varies between Freddie Mac's methodology and our own.
### Today's Mortgage Rate Averages: Refinancing
Refinancing averages showed a bit more movement Monday than new purchase rates. The 30-year refi average dropped 8 basis points, tightening the spread between 30-year new purchase and refi rates to 35 basis points. The 15-year refi average dipped just 4 basis points, but the jumbo 30-year refi average fell 11 points.
| National Mortgage Rate Averages - Refinance Loans | | |
| --- | --- | --- |
| **Loan Type** | **Refinance Average** | **Daily Change** |
| 30-Year Fixed | 7.40% | -0.08 |
| FHA 30-Year Fixed | 6.60% | No Change |
| VA 30-Year Fixed | 6.33% | -0.02 |
| 20-Year Fixed | 6.98% | -0.06 |
| 15-Year Fixed | 6.36% | -0.04 |
| FHA 15-Year Fixed | 6.33% | No Change |
| 10-Year Fixed | 6.12% | +0.16 |
| 7/6 ARM | 8.31% | +0.01 |
| 5/6 ARM | 8.34% | +0.01 |
| Jumbo 30-Year Fixed | 7.10% | -0.11 |
| Jumbo 15-Year Fixed | 7.15% | No Change |
| Jumbo 7/6 ARM | 7.98% | -0.04 |
| Jumbo 5/6 ARM | 8.06% | +0.09 |
| [Provided via the Zillow Mortgage API](https://www.zillow.com/) | | |
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 Monday were New York, Alaska, North Carolina, Texas, Louisiana, and California, while the states with the highest average rates were West Virginia, Washington, D.C., Hawaii, Iowa, Kansas, Nevada, and New Mexico.
## What Causes Mortgage Rates to Rise or Fall?
Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as:
* The level and direction of the bond market, especially 10-year Treasury yields
* The [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservebank.asp) current monetary policy, especially as it relates to bond buying and funding government-backed mortgages
* Competition between [mortgage lenders and across loan types](https://www.investopedia.com/best-mortgage-lenders-5076852)
Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor.
Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This [bond-buying policy](https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp) is a major influencer of mortgage rates.
But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.
Between that time and July 2023, the Fed aggressively raised the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions.
But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years.
The Fed has been maintaining the federal funds rate at its current level since July, with a sixth consecutive rate hold announced May 1. Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and sustainably, it has said it's hesitant to start cutting rates.
The Fed will hold five more meetings this year, with the next one scheduled to conclude June 12.
## How We Track Mortgage Rates
The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a [loan-to-value (LTV) ratio](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
| Rates on 30-year mortgages continue dipping to a lower range, dropping Monday to a 7.05% average. That's the cheapest level for 30-year loans since early April. Many other mortgage types also saw rates inch down Monday.
Editor's Note
As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.
National Rate Averages for Top 5 Mortgage Types
Loan Type
New Purchase
Refinance
30-Year Fixed
7.05%
7.40%
FHA 30-Year Fixed
6.91%
6.60%
15-Year Fixed
6.21%
6.36%
5/6 ARM
8.11%
8.34%
Jumbo 30-Year Fixed
7.13%
7.10%
Provided via the Zillow Mortgage API
National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.
Since 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
Since surging to a five-month high of 7.37% in late April, rates on 30-year new purchase loans have been coming down over the last two weeks. The 30-year average subtracted another 3 basis points Monday to rest at 7.05%, making that the cheapest mark for 30-year rates in five weeks.
Rates on 30-year mortgages still remain elevated vs. early February, when the flagship average dipped as low as 6.36%. But rates are considerably cheaper than when the 30-year average hit a historic 23-year high of 8.01% in October.
New purchase 15-year mortgage rates also edged slightly lower Monday, declining 4 basis points. The 15-year average is now 6.21%—just a handful of basis points above its recent low of 6.15%. Today's 15-year rates are also considerably more affordable than last fall's 7.08% average—a peak since 2000.
Monday's jumbo 30-year rates similarly shed 4 basis points, reducing the average to 7.13%. That compares to a recent five-month peak of 7.30%. Though daily historical jumbo rates are not published before 2009, it's estimated the 8.14% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years.
Rate movement across most new purchase loan types was either flat or modestly down. One exception was 10-year fixed-rate mortgages, whose average fell 11 basis points Monday.
National Mortgage Rate Averages - New Purchase Loans
Loan Type
New Purchase Average
Daily Change
30-Year Fixed
7.05%
-0.03
FHA 30-Year Fixed
6.91%
-0.01
VA 30-Year Fixed
6.44%
No Change
20-Year Fixed
6.73%
-0.06
15-Year Fixed
6.21%
-0.04
FHA 15-Year Fixed
7.31%
+0.03
10-Year Fixed
6.05%
-0.11
7/6 ARM
8.03%
+0.01
5/6 ARM
8.11%
+0.01
Jumbo 30-Year Fixed
7.13%
-0.04
Jumbo 15-Year Fixed
7.11%
-0.02
Jumbo 7/6 ARM
7.87%
-0.05
Jumbo 5/6 ARM
7.97%
+0.04
Provided via the Zillow Mortgage API
The Weekly Freddie Mac Average
Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading fell 13 basis points to 7.09%, marking its first decline since late March. Back in October, however, Freddie Mac's average reached a historic 23-year peak of 7.79%. It later dropped significantly, registering a low point of 6.60% in mid-January.
Freddie Mac’s average differs from what we report for 30-year rates because Freddie Mac calculates a weekly average that blends five previous days of rates. In contrast, our Investopedia 30-year average is a daily reading, offering a more precise and timely indicator of rate movement. In addition, the criteria for included loans (e.g., amount of down payment, credit score, inclusion of discount points) varies between Freddie Mac's methodology and our own.
Today's Mortgage Rate Averages: Refinancing
Refinancing averages showed a bit more movement Monday than new purchase rates. The 30-year refi average dropped 8 basis points, tightening the spread between 30-year new purchase and refi rates to 35 basis points. The 15-year refi average dipped just 4 basis points, but the jumbo 30-year refi average fell 11 points.
National Mortgage Rate Averages - Refinance Loans
Loan Type
Refinance Average
Daily Change
30-Year Fixed
7.40%
-0.08
FHA 30-Year Fixed
6.60%
No Change
VA 30-Year Fixed
6.33%
-0.02
20-Year Fixed
6.98%
-0.06
15-Year Fixed
6.36%
-0.04
FHA 15-Year Fixed
6.33%
No Change
10-Year Fixed
6.12%
+0.16
7/6 ARM
8.31%
+0.01
5/6 ARM
8.34%
+0.01
Jumbo 30-Year Fixed
7.10%
-0.11
Jumbo 15-Year Fixed
7.15%
No Change
Jumbo 7/6 ARM
7.98%
-0.04
Jumbo 5/6 ARM
8.06%
+0.09
Provided via the Zillow Mortgage API
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 Monday were New York, Alaska, North Carolina, Texas, Louisiana, and California, while the states with the highest average rates were West Virginia, Washington, D.C., Hawaii, Iowa, Kansas, Nevada, and New Mexico.
What Causes Mortgage Rates to Rise or Fall?
Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as:
The level and direction of the bond market, especially 10-year Treasury yields
The Federal Reserve's current monetary policy, especially as it relates to bond buying and funding government-backed mortgages
Competition between mortgage lenders and across loan types
Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor.
Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This bond-buying policy is a major influencer of mortgage rates.
But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.
Between that time and July 2023, the Fed aggressively raised the federal funds rate to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions.
But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years.
The Fed has been maintaining the federal funds rate at its current level since July, with a sixth consecutive rate hold announced May 1. Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and sustainably, it has said it's hesitant to start cutting rates.
The Fed will hold five more meetings this year, with the next one scheduled to conclude June 12.
How We Track Mortgage Rates
The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a loan-to-value (LTV) ratio of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
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https://www.investopedia.com/terms/g/government-broker.asp | GEMM: Government Broker 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-what-is-a-gilt-edged-market-maker-gemm"></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 Gilt-Edged Market Maker (GEMM)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A government broker is a senior British securities broker in the market for U.K. government gilts and is known as a gilt-edged <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp">market maker</a> (GEMM). The government broker is authorized to purchase and sell government <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gilt-edged-securities.asp">gilt securities</a> in the primary market and on the London Stock Exchange. Gilt securities are high-grade government bonds.
</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"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A government broker or GEMM is a British securities broker authorized to buy and sell government gilt securities.</li><li>Gilt securities are high-grade government bonds.</li><li>The "Big Bang" deregulated the London Stock Exchange in 1986, and the Bank of England opened the gilt-edged division.</li><li>Government brokers need licenses and are known as gilt-edged market makers (GEMMs).</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-big-bang"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> The Big Bang </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In 1986, the Bank of England opened its gilt-edged division as part of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bigbang.asp">Big Bang</a> agreement, which changed the operational activities for trading gilts.<span class="ql-inline-citation" data-cite="1"></span> The Big Bang reformed the London Stock Exchange by abolishing fixed commission rates for stockbrokers and exchange rules. The London securities market was modernized and became a force in the globalization of financial markets.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_9-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_10-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Gilts are the equivalent of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ustreasury.asp">U.S. Treasury</a> securities in the United Kingdom and its commonwealth. The original certificates issued by the British government had gilded edges.</p>
<p><br/></p></div></div></div>
<span class="heading-toc" id="toc-role-of-a-gilt-edged-market-maker-gemm"></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"> Role of a Gilt-Edged Market Maker (GEMM) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Gilt-edged market makers are authorized to deal in gilt-edged securities. GEMMs must obtain a gilt trading license from the Bank of England to access government reporting and authorization to trade gilts.
</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"> Licensed GEMMs can trade two types of gilts known as conventional and indexed. GEMMs participate in the primary issuance of gilts and the secondary trading market. The U.K. Debt Management Office (DMO) has specific obligations that GEMMs must meet, including quotas for primary issuance and participation expectations. The DMO’s expectations are detailed in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.dmo.gov.uk/media/15723/gemm-guidebook-2018-final.pdf">GEMM Guidebook</a> by the United Kingdom Debt Management Office.<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-role-of-a-dmo"></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"> Role of a DMO </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The DMO manages the gilt debt and holds primary issuance auctions for debt securities. Conventional gilts are the simplest of the two gilt offerings and the liability of the DMO. Index-linked gilts make regular payments and pay gilt holders coupons and principal at maturity.
</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"> Any individual or institutional investor can purchase gilts from the DMO or in the secondary market. Bidders in primary issuance can buy through a GEMM as an intermediary or register as a member of the DMO’s Approved Group of Investors for direct purchases. In the secondary market, GEMMs are market makers for gilt debt trading.
</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-in-what-denomination-are-gilts-issued"></span> <h2 class="mntl-sc-block-questionandanswer__question">In What Denomination are Gilts Issued?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Gilts are issued in 100-pound units.</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-who-buys-gilts"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Buys Gilts?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Pension funds are one of the most active buyers of gilts in both the primary and secondary markets. Individual investors choose gilts for their steady income and low-risk characteristics.</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-what-is-a-gilt-fund"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Gilt Fund?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Gilt funds are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">ETFs</a> or mutual funds that invest primarily in government bonds. Gilt funds often invest in several types of short-term, medium-term, and long-term government securities. </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"> The "Big Bang" deregulated the London Stock Exchange in 1986, and the Bank of England opened the gilt-edged division. A GEMM is a British securities broker authorized to buy and sell government gilt securities, commonly high-grade government bonds popular with conservative investors and pension funds.<br>
</br></p></div> | ## What Is a Gilt-Edged Market Maker (GEMM)?
A government broker is a senior British securities broker in the market for U.K. government gilts and is known as a gilt-edged [market maker](https://www.investopedia.com/terms/m/marketmaker.asp) (GEMM). The government broker is authorized to purchase and sell government [gilt securities](https://www.investopedia.com/terms/g/gilt-edged-securities.asp) in the primary market and on the London Stock Exchange. Gilt securities are high-grade government bonds.
###
* A government broker or GEMM is a British securities broker authorized to buy and sell government gilt securities.
* Gilt securities are high-grade government bonds.
* The "Big Bang" deregulated the London Stock Exchange in 1986, and the Bank of England opened the gilt-edged division.
* Government brokers need licenses and are known as gilt-edged market makers (GEMMs).
## The Big Bang
In 1986, the Bank of England opened its gilt-edged division as part of the [Big Bang](https://www.investopedia.com/terms/b/bigbang.asp) agreement, which changed the operational activities for trading gilts. The Big Bang reformed the London Stock Exchange by abolishing fixed commission rates for stockbrokers and exchange rules. The London securities market was modernized and became a force in the globalization of financial markets.
###
Gilts are the equivalent of [U.S. Treasury](https://www.investopedia.com/terms/u/ustreasury.asp) securities in the United Kingdom and its commonwealth. The original certificates issued by the British government had gilded edges.
## Role of a Gilt-Edged Market Maker (GEMM)
Gilt-edged market makers are authorized to deal in gilt-edged securities. GEMMs must obtain a gilt trading license from the Bank of England to access government reporting and authorization to trade gilts.
Licensed GEMMs can trade two types of gilts known as conventional and indexed. GEMMs participate in the primary issuance of gilts and the secondary trading market. The U.K. Debt Management Office (DMO) has specific obligations that GEMMs must meet, including quotas for primary issuance and participation expectations. The DMO’s expectations are detailed in the [GEMM Guidebook](https://www.dmo.gov.uk/media/15723/gemm-guidebook-2018-final.pdf) by the United Kingdom Debt Management Office.
## Role of a DMO
The DMO manages the gilt debt and holds primary issuance auctions for debt securities. Conventional gilts are the simplest of the two gilt offerings and the liability of the DMO. Index-linked gilts make regular payments and pay gilt holders coupons and principal at maturity.
Any individual or institutional investor can purchase gilts from the DMO or in the secondary market. Bidders in primary issuance can buy through a GEMM as an intermediary or register as a member of the DMO’s Approved Group of Investors for direct purchases. In the secondary market, GEMMs are market makers for gilt debt trading.
## In What Denomination are Gilts Issued?
Gilts are issued in 100-pound units.
## Who Buys Gilts?
Pension funds are one of the most active buyers of gilts in both the primary and secondary markets. Individual investors choose gilts for their steady income and low-risk characteristics.
## What Is a Gilt Fund?
Gilt funds are [ETFs](https://www.investopedia.com/terms/e/etf.asp) or mutual funds that invest primarily in government bonds. Gilt funds often invest in several types of short-term, medium-term, and long-term government securities.
## The Bottom Line
The "Big Bang" deregulated the London Stock Exchange in 1986, and the Bank of England opened the gilt-edged division. A GEMM is a British securities broker authorized to buy and sell government gilt securities, commonly high-grade government bonds popular with conservative investors and pension funds.
| What Is a Gilt-Edged Market Maker (GEMM)?
A government broker is a senior British securities broker in the market for U.K. government gilts and is known as a gilt-edged market maker (GEMM). The government broker is authorized to purchase and sell government gilt securities in the primary market and on the London Stock Exchange. Gilt securities are high-grade government bonds.
A government broker or GEMM is a British securities broker authorized to buy and sell government gilt securities.Gilt securities are high-grade government bonds.The "Big Bang" deregulated the London Stock Exchange in 1986, and the Bank of England opened the gilt-edged division.Government brokers need licenses and are known as gilt-edged market makers (GEMMs).
The Big Bang
In 1986, the Bank of England opened its gilt-edged division as part of the Big Bang agreement, which changed the operational activities for trading gilts. The Big Bang reformed the London Stock Exchange by abolishing fixed commission rates for stockbrokers and exchange rules. The London securities market was modernized and became a force in the globalization of financial markets.
Gilts are the equivalent of U.S. Treasury securities in the United Kingdom and its commonwealth. The original certificates issued by the British government had gilded edges.
Role of a Gilt-Edged Market Maker (GEMM)
Gilt-edged market makers are authorized to deal in gilt-edged securities. GEMMs must obtain a gilt trading license from the Bank of England to access government reporting and authorization to trade gilts.
Licensed GEMMs can trade two types of gilts known as conventional and indexed. GEMMs participate in the primary issuance of gilts and the secondary trading market. The U.K. Debt Management Office (DMO) has specific obligations that GEMMs must meet, including quotas for primary issuance and participation expectations. The DMO’s expectations are detailed in the GEMM Guidebook by the United Kingdom Debt Management Office.
Role of a DMO
The DMO manages the gilt debt and holds primary issuance auctions for debt securities. Conventional gilts are the simplest of the two gilt offerings and the liability of the DMO. Index-linked gilts make regular payments and pay gilt holders coupons and principal at maturity.
Any individual or institutional investor can purchase gilts from the DMO or in the secondary market. Bidders in primary issuance can buy through a GEMM as an intermediary or register as a member of the DMO’s Approved Group of Investors for direct purchases. In the secondary market, GEMMs are market makers for gilt debt trading.
In What Denomination are Gilts Issued?
Gilts are issued in 100-pound units.
Who Buys Gilts?
Pension funds are one of the most active buyers of gilts in both the primary and secondary markets. Individual investors choose gilts for their steady income and low-risk characteristics.
What Is a Gilt Fund?
Gilt funds are ETFs or mutual funds that invest primarily in government bonds. Gilt funds often invest in several types of short-term, medium-term, and long-term government securities.
The Bottom Line
The "Big Bang" deregulated the London Stock Exchange in 1986, and the Bank of England opened the gilt-edged division. A GEMM is a British securities broker authorized to buy and sell government gilt securities, commonly high-grade government bonds popular with conservative investors and pension funds.
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https://www.investopedia.com/terms/c/cashcow.asp | Cash Cow: Definition, Investment Type, 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-cash-cow"></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 Cow? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A cash cow is one of the four categories (quadrants) in the growth-share, BCG matrix that represents a product, product line, or company with a large market share within a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/matureindustry.asp">mature industry</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> A cash cow is also a reference to a business, product, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/what-is-an-asset.asp">asset</a> that, once acquired and paid off, will produce consistent <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashflow.asp">cash flows</a> over its lifespan.
</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 cow is a business or unit that, once it has been paid for, will produce steady cash flow over its lifespan.</li><li>A cash cow is also one of four quadrants in the BCG matrix, which looks at the value of different units within a corporation.</li><li>Cash cows are part of mature, slow-growing industries, have a large chunk of the market share and require minimal investment to thrive.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-cash-cows"></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 Cows </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little to no maintenance. The phrase is applied to a business that is also similarly low-maintenance. Modern-day cash cows require little investment capital and perennially provide positive cash flows, which can be allocated to other divisions within a corporation. They are low risk, high reward investments.
</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"> Cash cows are one of four quadrants in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bcg.asp">BCG matrix</a>, a business unit organization method introduced by the Boston Consulting Group in the early 1970s. The BCG matrix, also known as the Boston Box or Grid, places an organization's businesses or products into one of four categories: star, question mark, dog, and cash cow.<span class="ql-inline-citation" data-cite="1"></span> The matrix helps firms understand where their business stands in terms of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketshare.asp">market share</a> and industry growth rate. It serves as a comparative analysis of a business's potential and an evaluation of the industry and 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"> However, some firms, especially large corporations, realize that businesses/products within their portfolio lie between two categories. This is especially true with product lines at different points in the product life-cycle. Cash cows and stars tend to complement each other, whereas dogs and question marks use resources less efficiently.
</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 cash cow is a reference to a business, product, or asset that produces consistent cash flow over its lifespan; it's also a reference to one of the four quadrants in the BCG Matrix, a business unit organization method.</p></div></div></div>
<span class="heading-toc" id="toc-cash-cow-example"></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"> Cash Cow Example </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of the market and require little investment. For example, the iPhone is Apple's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl">AAPL</a>) cash cow. Its return on assets is far greater than its market growth rate; as a result, Apple can invest the excess cash generated by the iPhone into other projects or products.
</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"> Cash cows, such as 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>) and Intel (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=intc">INTL</a>), provide dividends and have the capacity to increase their dividend due to their ample free cash flows calculated as cash flows from operations minus capital expenditures. These companies are mature and do not need as much capital to grow. They are marked by high-profit margins and strong cash flows. Cash cows can also be slow-growth companies or business units with well-established brands in the industry.
</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"> In contrast to a cash cow, a star, in the BCG matrix, is a company or business unit that realizes a high market share in high-growth markets.<span class="ql-inline-citation" data-cite="1"></span> Stars require large capital outlays but can generate significant cash. If a successful strategy is adopted, stars can morph into cash cows.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/problemchild.asp">Question marks are the business units</a> experiencing low market share in a high-growth industry.<span class="ql-inline-citation" data-cite="1"></span> They require large amounts of cash to capture more of or sustain their position within the market. Depending on the strategy adopted by the firm, question marks can land in any of the other quadrants.
</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"> Lastly, dogs are the business units with low market shares in low-growth markets.<span class="ql-inline-citation" data-cite="1"></span> There is no large investment requirement, and they don't generate large cash flows. Often, dogs are phased out in an effort to salvage the organization.
</p></div> | ## What Is a Cash Cow?
A cash cow is one of the four categories (quadrants) in the growth-share, BCG matrix that represents a product, product line, or company with a large market share within a [mature industry](https://www.investopedia.com/terms/m/matureindustry.asp).
A cash cow is also a reference to a business, product, or [asset](https://www.investopedia.com/ask/answers/12/what-is-an-asset.asp) that, once acquired and paid off, will produce consistent [cash flows](https://www.investopedia.com/terms/c/cashflow.asp) over its lifespan.
### Key Takeaways
* A cash cow is a business or unit that, once it has been paid for, will produce steady cash flow over its lifespan.
* A cash cow is also one of four quadrants in the BCG matrix, which looks at the value of different units within a corporation.
* Cash cows are part of mature, slow-growing industries, have a large chunk of the market share and require minimal investment to thrive.
## Understanding Cash Cows
A cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little to no maintenance. The phrase is applied to a business that is also similarly low-maintenance. Modern-day cash cows require little investment capital and perennially provide positive cash flows, which can be allocated to other divisions within a corporation. They are low risk, high reward investments.
Cash cows are one of four quadrants in the [BCG matrix](https://www.investopedia.com/terms/b/bcg.asp), a business unit organization method introduced by the Boston Consulting Group in the early 1970s. The BCG matrix, also known as the Boston Box or Grid, places an organization's businesses or products into one of four categories: star, question mark, dog, and cash cow. The matrix helps firms understand where their business stands in terms of [market share](https://www.investopedia.com/terms/m/marketshare.asp) and industry growth rate. It serves as a comparative analysis of a business's potential and an evaluation of the industry and market.
However, some firms, especially large corporations, realize that businesses/products within their portfolio lie between two categories. This is especially true with product lines at different points in the product life-cycle. Cash cows and stars tend to complement each other, whereas dogs and question marks use resources less efficiently.
###
A cash cow is a reference to a business, product, or asset that produces consistent cash flow over its lifespan; it's also a reference to one of the four quadrants in the BCG Matrix, a business unit organization method.
## Cash Cow Example
A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of the market and require little investment. For example, the iPhone is Apple's ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) cash cow. Its return on assets is far greater than its market growth rate; as a result, Apple can invest the excess cash generated by the iPhone into other projects or products.
Cash cows, such as Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft)) and Intel ([INTL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=intc)), provide dividends and have the capacity to increase their dividend due to their ample free cash flows calculated as cash flows from operations minus capital expenditures. These companies are mature and do not need as much capital to grow. They are marked by high-profit margins and strong cash flows. Cash cows can also be slow-growth companies or business units with well-established brands in the industry.
## Special Considerations
In contrast to a cash cow, a star, in the BCG matrix, is a company or business unit that realizes a high market share in high-growth markets. Stars require large capital outlays but can generate significant cash. If a successful strategy is adopted, stars can morph into cash cows.
[Question marks are the business units](https://www.investopedia.com/terms/p/problemchild.asp) experiencing low market share in a high-growth industry. They require large amounts of cash to capture more of or sustain their position within the market. Depending on the strategy adopted by the firm, question marks can land in any of the other quadrants.
Lastly, dogs are the business units with low market shares in low-growth markets. There is no large investment requirement, and they don't generate large cash flows. Often, dogs are phased out in an effort to salvage the organization.
| What Is a Cash Cow?
A cash cow is one of the four categories (quadrants) in the growth-share, BCG matrix that represents a product, product line, or company with a large market share within a mature industry.
A cash cow is also a reference to a business, product, or asset that, once acquired and paid off, will produce consistent cash flows over its lifespan.
Key Takeaways
A cash cow is a business or unit that, once it has been paid for, will produce steady cash flow over its lifespan.A cash cow is also one of four quadrants in the BCG matrix, which looks at the value of different units within a corporation.Cash cows are part of mature, slow-growing industries, have a large chunk of the market share and require minimal investment to thrive.
Understanding Cash Cows
A cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little to no maintenance. The phrase is applied to a business that is also similarly low-maintenance. Modern-day cash cows require little investment capital and perennially provide positive cash flows, which can be allocated to other divisions within a corporation. They are low risk, high reward investments.
Cash cows are one of four quadrants in the BCG matrix, a business unit organization method introduced by the Boston Consulting Group in the early 1970s. The BCG matrix, also known as the Boston Box or Grid, places an organization's businesses or products into one of four categories: star, question mark, dog, and cash cow. The matrix helps firms understand where their business stands in terms of market share and industry growth rate. It serves as a comparative analysis of a business's potential and an evaluation of the industry and market.
However, some firms, especially large corporations, realize that businesses/products within their portfolio lie between two categories. This is especially true with product lines at different points in the product life-cycle. Cash cows and stars tend to complement each other, whereas dogs and question marks use resources less efficiently.
A cash cow is a reference to a business, product, or asset that produces consistent cash flow over its lifespan; it's also a reference to one of the four quadrants in the BCG Matrix, a business unit organization method.
Cash Cow Example
A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of the market and require little investment. For example, the iPhone is Apple's (AAPL) cash cow. Its return on assets is far greater than its market growth rate; as a result, Apple can invest the excess cash generated by the iPhone into other projects or products.
Cash cows, such as Microsoft (MSFT) and Intel (INTL), provide dividends and have the capacity to increase their dividend due to their ample free cash flows calculated as cash flows from operations minus capital expenditures. These companies are mature and do not need as much capital to grow. They are marked by high-profit margins and strong cash flows. Cash cows can also be slow-growth companies or business units with well-established brands in the industry.
Special Considerations
In contrast to a cash cow, a star, in the BCG matrix, is a company or business unit that realizes a high market share in high-growth markets. Stars require large capital outlays but can generate significant cash. If a successful strategy is adopted, stars can morph into cash cows.
Question marks are the business units experiencing low market share in a high-growth industry. They require large amounts of cash to capture more of or sustain their position within the market. Depending on the strategy adopted by the firm, question marks can land in any of the other quadrants.
Lastly, dogs are the business units with low market shares in low-growth markets. There is no large investment requirement, and they don't generate large cash flows. Often, dogs are phased out in an effort to salvage the organization.
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https://www.investopedia.com/my-parents-earn-more-rewards-with-capital-one-venture-x-business-card-8364350 | My Parents Earn Way More Travel Rewards With the Capital One Venture X Business Card | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <em>This column is the second in a series of articles that offer insights into personal experiences with the products and services that you read about on Investopedia every day.</em>
</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"> I write about financial products and rewards travel for a living, which makes me the de facto advisor whenever my family has questions about money. It also means that whenever a new or exciting product debuts, I pester them to take a look at the details. It’s how they’ve been able to earn top-tier American Airlines elite status, redeem American Express points for valuable flights, and maximize their online purchases with shopping portals.
</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"> So when the Capital One Venture X Business travel rewards credit card launched in September 2023, I raced to tell my parents to apply.<span class="ql-inline-citation" data-cite="1"></span> My stepmom and dad own a small business that remodels hotels, which means they have a significant amount of monthly business spending. This includes purchases for materials, rent, travel, payroll, and more. So a credit card that offers more rewards and a smaller annual fee was perfect for them.
</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-my-parents-have-an-american-express-card-but-capital-one-offers-them-better-rewards"></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"> My Parents Have an American Express Card, But Capital One Offers Them Better Rewards </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Switching credit cards meant we first had to compare my parents’ current business credit card to this new one from Capital One.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> For years, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-business-platinum-card-from-american-express-review-4801693">the Business Platinum Card from American Express</a> has been my parents’ go-to business credit card. It makes sense: The card earns 1.5 <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-ultimate-guide-to-amex-membership-rewards-5070975">American Express Membership Rewards points</a> per dollar spent on eligible construction purchases (among other specific categories) and on any charges of $5,000 or more on the first $2,000,000 spent on those purchases each year.<span class="ql-inline-citation" data-cite="2"></span>
</p>
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<div class="img-placeholder" style="padding-bottom:63.2%;">
<img alt="An image of the Business Platinum Card from American Express" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Up4-tNCA4ZNIYWkZJHkqidiLiT4=/948x0/filters:no_upscale():max_bytes(150000):strip_icc()/american-express-business-platinum_FINAL-8ebe969e712349e2851a3f8504a6a16f.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/59PTEG8Dm5FGVMvy5VGjoobfCCY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/american-express-business-platinum_FINAL-8ebe969e712349e2851a3f8504a6a16f.png" data-srcset="https://www.investopedia.com/thmb/3m6HgVDDZACR80XfNg6nZ94Tb18=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/american-express-business-platinum_FINAL-8ebe969e712349e2851a3f8504a6a16f.png 750w" data-tracking-container="true" height="600" id="mntl-sc-block-image_1-0" width="948"/>
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<img alt="An image of the Business Platinum Card from American Express" class="img--noscript universal-image__image" height="600" sizes="750px" src="https://www.investopedia.com/thmb/59PTEG8Dm5FGVMvy5VGjoobfCCY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/american-express-business-platinum_FINAL-8ebe969e712349e2851a3f8504a6a16f.png" srcset="https://www.investopedia.com/thmb/3m6HgVDDZACR80XfNg6nZ94Tb18=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/american-express-business-platinum_FINAL-8ebe969e712349e2851a3f8504a6a16f.png 750w" width="948"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>American Express</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The Amex Business Platinum also earns 5 points per dollar spent on flights and prepaid hotels via Amex Travel and 1 point per dollar on rental cars. This means they’ve been able to earn plenty of Amex points each month, which have provided valuable returns on and for flights, hotels, and gift cards.
</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 is especially true when it comes time to redeem rewards for business-class travel (since I tend to invite them along on my own trips). The Amex Business Platinum offers a 35% rebate on points redeemed for business class flights (or economy flights with an airline that you select), up to 1,000,000 points back each year.<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"> For my parents, who often have fixed travel dates and less flexibility when it comes to redeeming rewards, this 35% rebate offers a valuable way to redeem Amex points without sacrificing value.
</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"> However, the Business Platinum’s limited bonus reward categories have also meant that, a lot of the time, they’re earning just 1 Amex point for every dollar they spend.
</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 Capital One Venture X Business card offers stronger travel rewards like more miles per dollar spent—so I knew it’d be a better card for my parents.
</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-capital-one-venture-x-business-offers-up-to-10-miles-per-dollar-spent-on-travel"></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"> Capital One Venture X Business Offers Up to 10 Miles Per Dollar Spent on Travel </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The Capital One Venture X Business credit card offers at least 2 Capital One Venture miles per dollar spent on all purchases, with no limit. Unlike with the Amex card, Venture X Business cardholders don’t have to worry about earning less for certain ordinary expenses, and there are no annual caps. The Venture X Business also earns more on purchases booked through Capital One Travel: 5 miles per dollar spent on flights and 10 miles per dollar spent on hotels and rental cars.<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_25-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_26-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:63.0%;">
<img alt="Capital One Venture X Business Card" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/rtu-hzkbvW9LZovCYjzJCKfj1CY=/747x0/filters:no_upscale():max_bytes(150000):strip_icc()/Capital-One-Venture-X-Business-Card-6c4b648281db47e08c2a900ae4232669.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/7F5HMMFS8A6wvETg_-zUxwPJTTY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Capital-One-Venture-X-Business-Card-6c4b648281db47e08c2a900ae4232669.jpg" data-srcset="https://www.investopedia.com/thmb/L8vtNwvozMexw3dryR75lctSpV8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Capital-One-Venture-X-Business-Card-6c4b648281db47e08c2a900ae4232669.jpg 750w" data-tracking-container="true" height="471" id="mntl-sc-block-image_2-0" width="747"/>
<noscript>
<img alt="Capital One Venture X Business Card" class="img--noscript universal-image__image" height="471" sizes="750px" src="https://www.investopedia.com/thmb/7F5HMMFS8A6wvETg_-zUxwPJTTY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Capital-One-Venture-X-Business-Card-6c4b648281db47e08c2a900ae4232669.jpg" srcset="https://www.investopedia.com/thmb/L8vtNwvozMexw3dryR75lctSpV8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Capital-One-Venture-X-Business-Card-6c4b648281db47e08c2a900ae4232669.jpg 750w" width="747"/>
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</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">The Capital One Venture X Business Credit Card.</span>
<span class="figure-article-caption-owner"><p>Capital One</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Earning 2 miles for every dollar spent is a pretty compelling reason to switch to the Capital One Venture X Business card. It’s also why I recommended that my parents get the card.
</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"> Beyond this, though, the card compares favorably to the Amex Business Platinum in a few key areas.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_31-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th></th>
<th>American Express Business Platinum</th>
<th>Capital One Venture X Business</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><b>Annual Fee</b></td>
<td>$695</td>
<td>$395</td>
</tr>
<tr>
<td><b>Rewards</b></td>
<td>5X points on flights and prepaid hotels through Amex Travel<br/>1.5X points on eligible purchases of $5,000 or more<br/>1X point on all other purchases</td>
<td>10X miles on hotels and rental cars through Capital One Travel<br/>5X miles on flights through Capital One Travel<br/>2X miles on all other purchases</td>
</tr>
<tr>
<td><b>Annual Credits/Bonuses</b></td>
<td>$400 Dell credit<br/>$360 Indeed credit<br/>$200 airline fee credit<br/>$189 CLEAR Plus credit<br/>$150 Adobe credit<br/>$120 wireless credit</td>
<td>$300 travel credit<br/>10,000 bonus miles</td>
</tr>
<tr>
<td><b>Other Benefits</b></td>
<td>Global Lounge Collection<br/>35% airline point bonus<br/>Global Entry/TSA PreCheck credit<br/>Fine Hotels + Resorts Program<br/>Marriott/Hilton elite status</td>
<td>Priority Pass Select membership<br/>Capital One Lounge access<br/>Global Entry/TSA PreCheck credit<br/>Premier Collection hotel and resort perks<br/>Flight price drop protection</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<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_1-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>Do your research on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">best credit cards</a> for your financial situation. Not all cards will be right for every person or business owner. The best credit cards will help you with your financial situation while also offering rewards for travel or business; cash back on groceries; and more; some let you save money with balance transfers and low introductory rates, too.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> When it comes to annual fees, the Capital One card charges $395 per year compared to the $695 you’ll pay with the Amex.
</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"> This $395 is also offset by a $300 travel credit and a 10,000-mile bonus you’ll receive each year. While <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-are-credit-card-points-and-miles-worth-5203918">miles can vary in value</a>, at a minimum, that bonus is worth $100 towards travel. These two perks effectively wipe out the annual fee for the Venture X Business card.
</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"> While the Amex Business Platinum offers its own credits, including $400 per year at Dell and $200 per year in airline fee credits, they’re a lot more limited. They can also be difficult to use for many businesses, such as the $360 per year offered in quarterly credits for Indeed purchases. Although my parents were able to make use of some of these credits, the Venture X Business card’s annual bonuses are easier to use and the annual fee is lower, making it easier to offset.
</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"> My parents didn’t have to worry about comparing APRs of the Amex and Capital One cards either. That’s because, although the Amex card allows you to carry a balance, they always pay off their full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-card-balance.asp">statement balance</a> each month. This worked out well because the Venture X Business must be paid in full each month (if you fail to pay on time, you’re charged a 2.99% fee).<span class="ql-inline-citation" data-cite="3"></span> The only fee my parents needed to think about and compare was the annual fee.
</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"> Finally, although both the Capital One Venture X Business and the Amex Business Platinum offer airport lounge access with a Priority Pass Select membership, membership through Capital One’s Venture X Business also provides credits for spas and restaurants. (Note: The personal version of the card, the Venture X, does not provide those extra credits).
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> This isn’t to say that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/102315/best-worst-domestic-airline-lounge-memberships.asp">airport lounge access</a> offered by Capital One is better than the access offered by Amex. In fact, Amex’s offering includes more options and more lounges worldwide with the Global Lounge Collection. However, the airports that my parents frequent are home to those Priority Pass restaurants, which make an excellent alternative to the often crowded lounges they’d otherwise end up in.
</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 Capital One Venture X Business rewards card is also currently offering a 150,000-mile welcome bonus for meeting minimum spending requirements. In this case, cardholders need to spend $30,000 within the first three months.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> While this is out of range for many small business owners I know, it’s within reach for my parents. This will mean that after meeting the requirements, they’ll have at least 210,000 miles in their account.
</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"> Again, Capital One Venture miles can be redeemed for various values (and your best bet is to transfer them to airline and hotel partners). But 210,000 miles are worth a minimum of $2,100 toward travel purchases. If you redeem for more than the minimum of 1 cent per mile, it could be worth even more.
</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-the-pros-outweigh-the-cons-with-the-capital-one-venture-x-business-card"></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 Pros Outweigh the Cons With the Capital One Venture X Business Card </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> There are a few areas in which the Capital One Venture X Business card is weaker than its competitors. For example, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-ink-business-preferred-review-4800979">Chase Ink Business Preferred</a> earns 3 <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-ultimate-guide-to-chase-ultimate-rewards-5070944">Ultimate Rewards points</a> per dollar spent on some common business categories, including travel, shipping, eligible advertising, and internet services. However, those bonus categories are capped at the first $150,000 spent each year, after which the rate drops down to 1 point per dollar spent.<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_55-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The Venture X Business also lacks the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/elite-status.asp">elite status levels</a> that the Amex Business Platinum provides at Hilton and Marriott, which grant valuable benefits such as point bonuses, free breakfast, and room upgrades.
</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"> At the end of the day, the Capital One Venture X Business really is a perfect card for my parents. They’re not the kind of people to watch every dollar they spend and ensure that they maximize their point categories and benefits. Instead, they’d rather have a simple card that earns reliable, easy-to-use rewards. In that case, the Capital One Venture X Business credit card fits the bill.<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> | *This column is the second in a series of articles that offer insights into personal experiences with the products and services that you read about on Investopedia every day.*
I write about financial products and rewards travel for a living, which makes me the de facto advisor whenever my family has questions about money. It also means that whenever a new or exciting product debuts, I pester them to take a look at the details. It’s how they’ve been able to earn top-tier American Airlines elite status, redeem American Express points for valuable flights, and maximize their online purchases with shopping portals.
So when the Capital One Venture X Business travel rewards credit card launched in September 2023, I raced to tell my parents to apply. My stepmom and dad own a small business that remodels hotels, which means they have a significant amount of monthly business spending. This includes purchases for materials, rent, travel, payroll, and more. So a credit card that offers more rewards and a smaller annual fee was perfect for them.
## My Parents Have an American Express Card, But Capital One Offers Them Better Rewards
Switching credit cards meant we first had to compare my parents’ current business credit card to this new one from Capital One.
For years, [the Business Platinum Card from American Express](https://www.investopedia.com/the-business-platinum-card-from-american-express-review-4801693) has been my parents’ go-to business credit card. It makes sense: The card earns 1.5 [American Express Membership Rewards points](https://www.investopedia.com/the-ultimate-guide-to-amex-membership-rewards-5070975) per dollar spent on eligible construction purchases (among other specific categories) and on any charges of $5,000 or more on the first $2,000,000 spent on those purchases each year.
![An image of the Business Platinum Card from American Express]()
:max_bytes(150000):strip_icc()/american-express-business-platinum_FINAL-8ebe969e712349e2851a3f8504a6a16f.png)
American Express
The Amex Business Platinum also earns 5 points per dollar spent on flights and prepaid hotels via Amex Travel and 1 point per dollar on rental cars. This means they’ve been able to earn plenty of Amex points each month, which have provided valuable returns on and for flights, hotels, and gift cards.
This is especially true when it comes time to redeem rewards for business-class travel (since I tend to invite them along on my own trips). The Amex Business Platinum offers a 35% rebate on points redeemed for business class flights (or economy flights with an airline that you select), up to 1,000,000 points back each year.
For my parents, who often have fixed travel dates and less flexibility when it comes to redeeming rewards, this 35% rebate offers a valuable way to redeem Amex points without sacrificing value.
However, the Business Platinum’s limited bonus reward categories have also meant that, a lot of the time, they’re earning just 1 Amex point for every dollar they spend.
The Capital One Venture X Business card offers stronger travel rewards like more miles per dollar spent—so I knew it’d be a better card for my parents.
## Capital One Venture X Business Offers Up to 10 Miles Per Dollar Spent on Travel
The Capital One Venture X Business credit card offers at least 2 Capital One Venture miles per dollar spent on all purchases, with no limit. Unlike with the Amex card, Venture X Business cardholders don’t have to worry about earning less for certain ordinary expenses, and there are no annual caps. The Venture X Business also earns more on purchases booked through Capital One Travel: 5 miles per dollar spent on flights and 10 miles per dollar spent on hotels and rental cars.
![Capital One Venture X Business Card]()
:max_bytes(150000):strip_icc()/Capital-One-Venture-X-Business-Card-6c4b648281db47e08c2a900ae4232669.jpg)
The Capital One Venture X Business Credit Card.
Capital One
Earning 2 miles for every dollar spent is a pretty compelling reason to switch to the Capital One Venture X Business card. It’s also why I recommended that my parents get the card.
Beyond this, though, the card compares favorably to the Amex Business Platinum in a few key areas.
| | American Express Business Platinum | Capital One Venture X Business |
| --- | --- | --- |
| **Annual Fee** | $695 | $395 |
| **Rewards** | 5X points on flights and prepaid hotels through Amex Travel1.5X points on eligible purchases of $5,000 or more1X point on all other purchases | 10X miles on hotels and rental cars through Capital One Travel5X miles on flights through Capital One Travel2X miles on all other purchases |
| **Annual Credits/Bonuses** | $400 Dell credit$360 Indeed credit$200 airline fee credit$189 CLEAR Plus credit$150 Adobe credit$120 wireless credit | $300 travel credit10,000 bonus miles |
| **Other Benefits** | Global Lounge Collection35% airline point bonusGlobal Entry/TSA PreCheck creditFine Hotels + Resorts ProgramMarriott/Hilton elite status | Priority Pass Select membershipCapital One Lounge accessGlobal Entry/TSA PreCheck creditPremier Collection hotel and resort perksFlight price drop protection |
###
Do your research on the [best credit cards](https://www.investopedia.com/best-credit-cards-4801582) for your financial situation. Not all cards will be right for every person or business owner. The best credit cards will help you with your financial situation while also offering rewards for travel or business; cash back on groceries; and more; some let you save money with balance transfers and low introductory rates, too.
When it comes to annual fees, the Capital One card charges $395 per year compared to the $695 you’ll pay with the Amex.
This $395 is also offset by a $300 travel credit and a 10,000-mile bonus you’ll receive each year. While [miles can vary in value](https://www.investopedia.com/what-are-credit-card-points-and-miles-worth-5203918), at a minimum, that bonus is worth $100 towards travel. These two perks effectively wipe out the annual fee for the Venture X Business card.
While the Amex Business Platinum offers its own credits, including $400 per year at Dell and $200 per year in airline fee credits, they’re a lot more limited. They can also be difficult to use for many businesses, such as the $360 per year offered in quarterly credits for Indeed purchases. Although my parents were able to make use of some of these credits, the Venture X Business card’s annual bonuses are easier to use and the annual fee is lower, making it easier to offset.
My parents didn’t have to worry about comparing APRs of the Amex and Capital One cards either. That’s because, although the Amex card allows you to carry a balance, they always pay off their full [statement balance](https://www.investopedia.com/terms/c/credit-card-balance.asp) each month. This worked out well because the Venture X Business must be paid in full each month (if you fail to pay on time, you’re charged a 2.99% fee). The only fee my parents needed to think about and compare was the annual fee.
Finally, although both the Capital One Venture X Business and the Amex Business Platinum offer airport lounge access with a Priority Pass Select membership, membership through Capital One’s Venture X Business also provides credits for spas and restaurants. (Note: The personal version of the card, the Venture X, does not provide those extra credits).
This isn’t to say that the [airport lounge access](https://www.investopedia.com/articles/personal-finance/102315/best-worst-domestic-airline-lounge-memberships.asp) offered by Capital One is better than the access offered by Amex. In fact, Amex’s offering includes more options and more lounges worldwide with the Global Lounge Collection. However, the airports that my parents frequent are home to those Priority Pass restaurants, which make an excellent alternative to the often crowded lounges they’d otherwise end up in.
The Capital One Venture X Business rewards card is also currently offering a 150,000-mile welcome bonus for meeting minimum spending requirements. In this case, cardholders need to spend $30,000 within the first three months.
While this is out of range for many small business owners I know, it’s within reach for my parents. This will mean that after meeting the requirements, they’ll have at least 210,000 miles in their account.
Again, Capital One Venture miles can be redeemed for various values (and your best bet is to transfer them to airline and hotel partners). But 210,000 miles are worth a minimum of $2,100 toward travel purchases. If you redeem for more than the minimum of 1 cent per mile, it could be worth even more.
## The Pros Outweigh the Cons With the Capital One Venture X Business Card
There are a few areas in which the Capital One Venture X Business card is weaker than its competitors. For example, the [Chase Ink Business Preferred](https://www.investopedia.com/chase-ink-business-preferred-review-4800979) earns 3 [Ultimate Rewards points](https://www.investopedia.com/the-ultimate-guide-to-chase-ultimate-rewards-5070944) per dollar spent on some common business categories, including travel, shipping, eligible advertising, and internet services. However, those bonus categories are capped at the first $150,000 spent each year, after which the rate drops down to 1 point per dollar spent.
The Venture X Business also lacks the [elite status levels](https://www.investopedia.com/terms/e/elite-status.asp) that the Amex Business Platinum provides at Hilton and Marriott, which grant valuable benefits such as point bonuses, free breakfast, and room upgrades.
At the end of the day, the Capital One Venture X Business really is a perfect card for my parents. They’re not the kind of people to watch every dollar they spend and ensure that they maximize their point categories and benefits. Instead, they’d rather have a simple card that earns reliable, easy-to-use rewards. In that case, the Capital One Venture X Business credit card fits the bill.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | This column is the second in a series of articles that offer insights into personal experiences with the products and services that you read about on Investopedia every day.
I write about financial products and rewards travel for a living, which makes me the de facto advisor whenever my family has questions about money. It also means that whenever a new or exciting product debuts, I pester them to take a look at the details. It’s how they’ve been able to earn top-tier American Airlines elite status, redeem American Express points for valuable flights, and maximize their online purchases with shopping portals.
So when the Capital One Venture X Business travel rewards credit card launched in September 2023, I raced to tell my parents to apply. My stepmom and dad own a small business that remodels hotels, which means they have a significant amount of monthly business spending. This includes purchases for materials, rent, travel, payroll, and more. So a credit card that offers more rewards and a smaller annual fee was perfect for them.
My Parents Have an American Express Card, But Capital One Offers Them Better Rewards
Switching credit cards meant we first had to compare my parents’ current business credit card to this new one from Capital One.
For years, the Business Platinum Card from American Express has been my parents’ go-to business credit card. It makes sense: The card earns 1.5 American Express Membership Rewards points per dollar spent on eligible construction purchases (among other specific categories) and on any charges of $5,000 or more on the first $2,000,000 spent on those purchases each year.
American Express
The Amex Business Platinum also earns 5 points per dollar spent on flights and prepaid hotels via Amex Travel and 1 point per dollar on rental cars. This means they’ve been able to earn plenty of Amex points each month, which have provided valuable returns on and for flights, hotels, and gift cards.
This is especially true when it comes time to redeem rewards for business-class travel (since I tend to invite them along on my own trips). The Amex Business Platinum offers a 35% rebate on points redeemed for business class flights (or economy flights with an airline that you select), up to 1,000,000 points back each year.
For my parents, who often have fixed travel dates and less flexibility when it comes to redeeming rewards, this 35% rebate offers a valuable way to redeem Amex points without sacrificing value.
However, the Business Platinum’s limited bonus reward categories have also meant that, a lot of the time, they’re earning just 1 Amex point for every dollar they spend.
The Capital One Venture X Business card offers stronger travel rewards like more miles per dollar spent—so I knew it’d be a better card for my parents.
Capital One Venture X Business Offers Up to 10 Miles Per Dollar Spent on Travel
The Capital One Venture X Business credit card offers at least 2 Capital One Venture miles per dollar spent on all purchases, with no limit. Unlike with the Amex card, Venture X Business cardholders don’t have to worry about earning less for certain ordinary expenses, and there are no annual caps. The Venture X Business also earns more on purchases booked through Capital One Travel: 5 miles per dollar spent on flights and 10 miles per dollar spent on hotels and rental cars.
The Capital One Venture X Business Credit Card.
Capital One
Earning 2 miles for every dollar spent is a pretty compelling reason to switch to the Capital One Venture X Business card. It’s also why I recommended that my parents get the card.
Beyond this, though, the card compares favorably to the Amex Business Platinum in a few key areas.
American Express Business Platinum
Capital One Venture X Business
Annual Fee
$695
$395
Rewards
5X points on flights and prepaid hotels through Amex Travel1.5X points on eligible purchases of $5,000 or more1X point on all other purchases
10X miles on hotels and rental cars through Capital One Travel5X miles on flights through Capital One Travel2X miles on all other purchases
Annual Credits/Bonuses
$400 Dell credit$360 Indeed credit$200 airline fee credit$189 CLEAR Plus credit$150 Adobe credit$120 wireless credit
$300 travel credit10,000 bonus miles
Other Benefits
Global Lounge Collection35% airline point bonusGlobal Entry/TSA PreCheck creditFine Hotels + Resorts ProgramMarriott/Hilton elite status
Priority Pass Select membershipCapital One Lounge accessGlobal Entry/TSA PreCheck creditPremier Collection hotel and resort perksFlight price drop protection
Do your research on the best credit cards for your financial situation. Not all cards will be right for every person or business owner. The best credit cards will help you with your financial situation while also offering rewards for travel or business; cash back on groceries; and more; some let you save money with balance transfers and low introductory rates, too.
When it comes to annual fees, the Capital One card charges $395 per year compared to the $695 you’ll pay with the Amex.
This $395 is also offset by a $300 travel credit and a 10,000-mile bonus you’ll receive each year. While miles can vary in value, at a minimum, that bonus is worth $100 towards travel. These two perks effectively wipe out the annual fee for the Venture X Business card.
While the Amex Business Platinum offers its own credits, including $400 per year at Dell and $200 per year in airline fee credits, they’re a lot more limited. They can also be difficult to use for many businesses, such as the $360 per year offered in quarterly credits for Indeed purchases. Although my parents were able to make use of some of these credits, the Venture X Business card’s annual bonuses are easier to use and the annual fee is lower, making it easier to offset.
My parents didn’t have to worry about comparing APRs of the Amex and Capital One cards either. That’s because, although the Amex card allows you to carry a balance, they always pay off their full statement balance each month. This worked out well because the Venture X Business must be paid in full each month (if you fail to pay on time, you’re charged a 2.99% fee). The only fee my parents needed to think about and compare was the annual fee.
Finally, although both the Capital One Venture X Business and the Amex Business Platinum offer airport lounge access with a Priority Pass Select membership, membership through Capital One’s Venture X Business also provides credits for spas and restaurants. (Note: The personal version of the card, the Venture X, does not provide those extra credits).
This isn’t to say that the airport lounge access offered by Capital One is better than the access offered by Amex. In fact, Amex’s offering includes more options and more lounges worldwide with the Global Lounge Collection. However, the airports that my parents frequent are home to those Priority Pass restaurants, which make an excellent alternative to the often crowded lounges they’d otherwise end up in.
The Capital One Venture X Business rewards card is also currently offering a 150,000-mile welcome bonus for meeting minimum spending requirements. In this case, cardholders need to spend $30,000 within the first three months.
While this is out of range for many small business owners I know, it’s within reach for my parents. This will mean that after meeting the requirements, they’ll have at least 210,000 miles in their account.
Again, Capital One Venture miles can be redeemed for various values (and your best bet is to transfer them to airline and hotel partners). But 210,000 miles are worth a minimum of $2,100 toward travel purchases. If you redeem for more than the minimum of 1 cent per mile, it could be worth even more.
The Pros Outweigh the Cons With the Capital One Venture X Business Card
There are a few areas in which the Capital One Venture X Business card is weaker than its competitors. For example, the Chase Ink Business Preferred earns 3 Ultimate Rewards points per dollar spent on some common business categories, including travel, shipping, eligible advertising, and internet services. However, those bonus categories are capped at the first $150,000 spent each year, after which the rate drops down to 1 point per dollar spent.
The Venture X Business also lacks the elite status levels that the Amex Business Platinum provides at Hilton and Marriott, which grant valuable benefits such as point bonuses, free breakfast, and room upgrades.
At the end of the day, the Capital One Venture X Business really is a perfect card for my parents. They’re not the kind of people to watch every dollar they spend and ensure that they maximize their point categories and benefits. Instead, they’d rather have a simple card that earns reliable, easy-to-use rewards. In that case, the Capital One Venture X Business credit card fits the bill.
Do you have a news tip for Investopedia reporters? Please email us at
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https://www.investopedia.com/terms/a/accounting-postulate.asp | Accounting Postulate: 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-an-accounting-postulate"></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 Accounting Postulate? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An accounting postulate is an assumption in the field of accounting based on historical practice. Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.
</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 accounting postulate is an assumption in the field of accounting based on historical practice.</li><li>Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.</li><li>An accounting postulate example might be when revenue is recorded on an accrual basis—or when earned and not when it's received.</li><li>Consistency in accounting practices is another postulate, meaning once an accounting method is chosen, it shouldn't be changed.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-accounting-postulates"></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 Accounting Postulates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Accounting postulates include underlying assumptions and are usually not outlined in a company's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-statements.asp">financial statements</a>. For example, in the U.S., a postulate might outline that all numbers should be in U.S. dollars. Below are some of the most common accounting postulates in practice today.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-subheading__text"> Revenue Realization </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Revenue is recorded when it's earned and not when it's received. The revenue recognition uses an accrual basis for accounting, meaning it's recorded when the sale is made regardless of when the money or cash is collected from the customer. Conversely, expenses are typically recorded when the assets are used or consumed.
</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"> Consistency in Accounting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Once an accounting method is chosen, it shouldn't be changed by the company in the future without sufficient reason. Also, all transactions should be recorded if recording or not recording them might impact an investor's decision to invest in the company.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> The Company or Entity Postulate </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The financial reporting of assets, liabilities, and transactions involve the company and are not mixed those of the owners or principals.
</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"> Going Concern </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Companies will exist indefinitely, which assumes the company won't go out of business in the short-term unless something significant occurs to the contrary. The going concern postulate helps with valuing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a>, which can be done at historical cost and not based on liquidation value. Companies may also be able to defer expenses to later periods, such as the depreciation of assets.
</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"> Money Measurement </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The money measurability postulate states that only items of monetary value will be reported on a company's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-statements.asp">financial statements</a>. In other words, anything that can be quantified is not reported, such as employee morale.
</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"> Time Periods </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The timeframe that the financial statements cover is outlined in a postulate so that comparisons can be made. For example, companies report annual results while and many other companies also report interim statements via quarterly and semi-annual financial reports. Having consistent, specific time periods is easier for investors and analysts to compare one period to another. However, valuing costs and income for a long-term asset can be difficult over multiple periods.
</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"> Although the postulates are widely accepted, disagreements can arise in specific circumstances. For example, for certain transactions, there may be disagreement on the timing for recording items of revenue and expense. Also, other accounting postulates might vary slightly depending on the industry or sector.
</p></div> | ## What Is an Accounting Postulate?
An accounting postulate is an assumption in the field of accounting based on historical practice. Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.
### Key Takeaways
* An accounting postulate is an assumption in the field of accounting based on historical practice.
* Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.
* An accounting postulate example might be when revenue is recorded on an accrual basis—or when earned and not when it's received.
* Consistency in accounting practices is another postulate, meaning once an accounting method is chosen, it shouldn't be changed.
## Understanding Accounting Postulates
Accounting postulates include underlying assumptions and are usually not outlined in a company's [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp). For example, in the U.S., a postulate might outline that all numbers should be in U.S. dollars. Below are some of the most common accounting postulates in practice today.
### Revenue Realization
Revenue is recorded when it's earned and not when it's received. The revenue recognition uses an accrual basis for accounting, meaning it's recorded when the sale is made regardless of when the money or cash is collected from the customer. Conversely, expenses are typically recorded when the assets are used or consumed.
### Consistency in Accounting
Once an accounting method is chosen, it shouldn't be changed by the company in the future without sufficient reason. Also, all transactions should be recorded if recording or not recording them might impact an investor's decision to invest in the company.
### The Company or Entity Postulate
The financial reporting of assets, liabilities, and transactions involve the company and are not mixed those of the owners or principals.
### Going Concern
Companies will exist indefinitely, which assumes the company won't go out of business in the short-term unless something significant occurs to the contrary. The going concern postulate helps with valuing [assets](https://www.investopedia.com/terms/a/asset.asp), which can be done at historical cost and not based on liquidation value. Companies may also be able to defer expenses to later periods, such as the depreciation of assets.
### Money Measurement
The money measurability postulate states that only items of monetary value will be reported on a company's [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp). In other words, anything that can be quantified is not reported, such as employee morale.
### Time Periods
The timeframe that the financial statements cover is outlined in a postulate so that comparisons can be made. For example, companies report annual results while and many other companies also report interim statements via quarterly and semi-annual financial reports. Having consistent, specific time periods is easier for investors and analysts to compare one period to another. However, valuing costs and income for a long-term asset can be difficult over multiple periods.
Although the postulates are widely accepted, disagreements can arise in specific circumstances. For example, for certain transactions, there may be disagreement on the timing for recording items of revenue and expense. Also, other accounting postulates might vary slightly depending on the industry or sector.
| What Is an Accounting Postulate?
An accounting postulate is an assumption in the field of accounting based on historical practice. Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.
Key Takeaways
An accounting postulate is an assumption in the field of accounting based on historical practice.Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.An accounting postulate example might be when revenue is recorded on an accrual basis—or when earned and not when it's received.Consistency in accounting practices is another postulate, meaning once an accounting method is chosen, it shouldn't be changed.
Understanding Accounting Postulates
Accounting postulates include underlying assumptions and are usually not outlined in a company's financial statements. For example, in the U.S., a postulate might outline that all numbers should be in U.S. dollars. Below are some of the most common accounting postulates in practice today.
Revenue Realization
Revenue is recorded when it's earned and not when it's received. The revenue recognition uses an accrual basis for accounting, meaning it's recorded when the sale is made regardless of when the money or cash is collected from the customer. Conversely, expenses are typically recorded when the assets are used or consumed.
Consistency in Accounting
Once an accounting method is chosen, it shouldn't be changed by the company in the future without sufficient reason. Also, all transactions should be recorded if recording or not recording them might impact an investor's decision to invest in the company.
The Company or Entity Postulate
The financial reporting of assets, liabilities, and transactions involve the company and are not mixed those of the owners or principals.
Going Concern
Companies will exist indefinitely, which assumes the company won't go out of business in the short-term unless something significant occurs to the contrary. The going concern postulate helps with valuing assets, which can be done at historical cost and not based on liquidation value. Companies may also be able to defer expenses to later periods, such as the depreciation of assets.
Money Measurement
The money measurability postulate states that only items of monetary value will be reported on a company's financial statements. In other words, anything that can be quantified is not reported, such as employee morale.
Time Periods
The timeframe that the financial statements cover is outlined in a postulate so that comparisons can be made. For example, companies report annual results while and many other companies also report interim statements via quarterly and semi-annual financial reports. Having consistent, specific time periods is easier for investors and analysts to compare one period to another. However, valuing costs and income for a long-term asset can be difficult over multiple periods.
Although the postulates are widely accepted, disagreements can arise in specific circumstances. For example, for certain transactions, there may be disagreement on the timing for recording items of revenue and expense. Also, other accounting postulates might vary slightly depending on the industry or sector.
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https://www.investopedia.com/ripple-launching-stablecoin-8624930 | Why Ripple Is Launching a Stablecoin | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Blockchain technology company Ripple on Thursday announced a plan to issue a U.S. dollar-backed stablecoin on the XRP Ledger and Ethereum networks.</li><li>Stablecoins operate at the center of the emerging decentralized finance (DeFi) sector, and this new stablecoin issuance is intended to attract new users and liquidity to XRP Ledger.</li><li>Currently, Tether USD is by far the largest stablecoin when measured by market capitalization, with more than $100 billion worth of tokens in circulation.</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"> Blockchain technology company Ripple said Thursday that it plans to launch a U.S. dollar-denominated stablecoin in an effort to bridge the gap between cryptocurrency and traditional finance and to generate more uses and liquidity for the XRP Ledger blockchain.<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"> Ripple's new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stablecoin.asp">stablecoin</a> will be issued on both the XRP Ledger and Ethereum networks at first, and the main goal is to drive more <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>, developers, and users to XRP Ledger, which is the native blockchain of the digital asset <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-xrp-6362550">XRP</a>. It joins the growing stablecoin market, in which crypto tokens are pegged 1:1 to the U.S. dollar and are backed by U.S. dollar deposits, short-term U.S. Treasurys, and other <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashequivalents.asp">cash equivalents</a>.
</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 Ripple stablecoin is also expected to be launched on additional blockchains over time. “This is a natural step for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/whats-difference-between-bitcoin-and-ripple/">Ripple</a> to continue bridging the gap between traditional finance and crypto,” Ripple CEO Brad Garlinghouse said in a statement.
</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"> Ripple continues to deal with a lawsuit from the Securities and Exchange Commission (SEC) regarding the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-vs-ripple-6743752">legal classification of XRP as a security</a>.
</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-defi-is-built-on-stablecoins"></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"> DeFi Is Built on Stablecoins </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> As a massive holder of XRP, Ripple has an incentive to bring more financial activity to XRP Ledger.<span class="ql-inline-citation" data-cite="6"></span> And it's no secret that the decentralized finance (DeFi) sector is mostly built on stablecoins on various <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchains</a>.
</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"> For example, six of the top 10 trading pairs ranked by seven-day trading volume on the version of DeFi exchange Uniswap that exists on Ethereum involved at least one stablecoin as of Thursday.<span class="ql-inline-citation" data-cite="2"></span> Additionally, three of the top five borrowed assets on the Ethereum version of open-source liquidity protocol <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-aave-6823617">Aave</a> are stablecoins.<span class="ql-inline-citation" data-cite="7"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Wrapped Bitcoin, which is a token backed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/how-bitcoin-works/">Bitcoin</a> that's held by digital asset custody provider BitGo in a manner similar to a stablecoin, is also a top asset used in these DeFi apps.<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>
<span class="heading-toc" id="toc-way-to-attract-more-users-to-xrp-ledger"></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"> Way To Attract More Users to XRP Ledger </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> With so much concentration of DeFi activity in stablecoins, Ripple said it sees the issuance of its own stablecoin as a way to attract users to the XRP Ledger ecosystem.
</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 XRP Ledger’s native capabilities, including a decentralized exchange and automated market maker, were built to utilize XRP as the bridge asset," Ripple President Monica Long said. "Bringing a trusted stablecoin onto XRPL will drive more adoption and development, contributing to a vibrant ecosystem.”<br/>
</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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tether-usdt.asp">Tether (USDT)</a> is the current juggernaut of the stablecoin market, with a total value of just over $106 billion in circulation on various blockchains as of Thursday, according to data from CoinMarketCap.<span class="ql-inline-citation" data-cite="4"></span> The only other noteworthy stablecoin offering in terms of size is USD Coin, which had a total market cap of just under $33 billion as of Thursday afternoon.
</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
* Blockchain technology company Ripple on Thursday announced a plan to issue a U.S. dollar-backed stablecoin on the XRP Ledger and Ethereum networks.
* Stablecoins operate at the center of the emerging decentralized finance (DeFi) sector, and this new stablecoin issuance is intended to attract new users and liquidity to XRP Ledger.
* Currently, Tether USD is by far the largest stablecoin when measured by market capitalization, with more than $100 billion worth of tokens in circulation.
Blockchain technology company Ripple said Thursday that it plans to launch a U.S. dollar-denominated stablecoin in an effort to bridge the gap between cryptocurrency and traditional finance and to generate more uses and liquidity for the XRP Ledger blockchain.
Ripple's new [stablecoin](https://www.investopedia.com/terms/s/stablecoin.asp) will be issued on both the XRP Ledger and Ethereum networks at first, and the main goal is to drive more [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), developers, and users to XRP Ledger, which is the native blockchain of the digital asset [XRP](https://www.investopedia.com/what-is-xrp-6362550). It joins the growing stablecoin market, in which crypto tokens are pegged 1:1 to the U.S. dollar and are backed by U.S. dollar deposits, short-term U.S. Treasurys, and other [cash equivalents](https://www.investopedia.com/terms/c/cashequivalents.asp).
The Ripple stablecoin is also expected to be launched on additional blockchains over time. “This is a natural step for [Ripple](https://www.investopedia.com/tech/whats-difference-between-bitcoin-and-ripple/) to continue bridging the gap between traditional finance and crypto,” Ripple CEO Brad Garlinghouse said in a statement.
Ripple continues to deal with a lawsuit from the Securities and Exchange Commission (SEC) regarding the [legal classification of XRP as a security](https://www.investopedia.com/sec-vs-ripple-6743752).
## DeFi Is Built on Stablecoins
As a massive holder of XRP, Ripple has an incentive to bring more financial activity to XRP Ledger. And it's no secret that the decentralized finance (DeFi) sector is mostly built on stablecoins on various [blockchains](https://www.investopedia.com/terms/b/blockchain.asp).
For example, six of the top 10 trading pairs ranked by seven-day trading volume on the version of DeFi exchange Uniswap that exists on Ethereum involved at least one stablecoin as of Thursday. Additionally, three of the top five borrowed assets on the Ethereum version of open-source liquidity protocol [Aave](https://www.investopedia.com/what-is-aave-6823617) are stablecoins.
Wrapped Bitcoin, which is a token backed by [Bitcoin](https://www.investopedia.com/news/how-bitcoin-works/) that's held by digital asset custody provider BitGo in a manner similar to a stablecoin, is also a top asset used in these DeFi apps.
## Way To Attract More Users to XRP Ledger
With so much concentration of DeFi activity in stablecoins, Ripple said it sees the issuance of its own stablecoin as a way to attract users to the XRP Ledger ecosystem.
“The XRP Ledger’s native capabilities, including a decentralized exchange and automated market maker, were built to utilize XRP as the bridge asset," Ripple President Monica Long said. "Bringing a trusted stablecoin onto XRPL will drive more adoption and development, contributing to a vibrant ecosystem.”
[Tether (USDT)](https://www.investopedia.com/terms/t/tether-usdt.asp) is the current juggernaut of the stablecoin market, with a total value of just over $106 billion in circulation on various blockchains as of Thursday, according to data from CoinMarketCap. The only other noteworthy stablecoin offering in terms of size is USD Coin, which had a total market cap of just under $33 billion as of Thursday afternoon.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Blockchain technology company Ripple on Thursday announced a plan to issue a U.S. dollar-backed stablecoin on the XRP Ledger and Ethereum networks.Stablecoins operate at the center of the emerging decentralized finance (DeFi) sector, and this new stablecoin issuance is intended to attract new users and liquidity to XRP Ledger.Currently, Tether USD is by far the largest stablecoin when measured by market capitalization, with more than $100 billion worth of tokens in circulation.
Blockchain technology company Ripple said Thursday that it plans to launch a U.S. dollar-denominated stablecoin in an effort to bridge the gap between cryptocurrency and traditional finance and to generate more uses and liquidity for the XRP Ledger blockchain.
Ripple's new stablecoin will be issued on both the XRP Ledger and Ethereum networks at first, and the main goal is to drive more liquidity, developers, and users to XRP Ledger, which is the native blockchain of the digital asset XRP. It joins the growing stablecoin market, in which crypto tokens are pegged 1:1 to the U.S. dollar and are backed by U.S. dollar deposits, short-term U.S. Treasurys, and other cash equivalents.
The Ripple stablecoin is also expected to be launched on additional blockchains over time. “This is a natural step for Ripple to continue bridging the gap between traditional finance and crypto,” Ripple CEO Brad Garlinghouse said in a statement.
Ripple continues to deal with a lawsuit from the Securities and Exchange Commission (SEC) regarding the legal classification of XRP as a security.
DeFi Is Built on Stablecoins
As a massive holder of XRP, Ripple has an incentive to bring more financial activity to XRP Ledger. And it's no secret that the decentralized finance (DeFi) sector is mostly built on stablecoins on various blockchains.
For example, six of the top 10 trading pairs ranked by seven-day trading volume on the version of DeFi exchange Uniswap that exists on Ethereum involved at least one stablecoin as of Thursday. Additionally, three of the top five borrowed assets on the Ethereum version of open-source liquidity protocol Aave are stablecoins.
Wrapped Bitcoin, which is a token backed by Bitcoin that's held by digital asset custody provider BitGo in a manner similar to a stablecoin, is also a top asset used in these DeFi apps.
Way To Attract More Users to XRP Ledger
With so much concentration of DeFi activity in stablecoins, Ripple said it sees the issuance of its own stablecoin as a way to attract users to the XRP Ledger ecosystem.
“The XRP Ledger’s native capabilities, including a decentralized exchange and automated market maker, were built to utilize XRP as the bridge asset," Ripple President Monica Long said. "Bringing a trusted stablecoin onto XRPL will drive more adoption and development, contributing to a vibrant ecosystem.”
Tether (USDT) is the current juggernaut of the stablecoin market, with a total value of just over $106 billion in circulation on various blockchains as of Thursday, according to data from CoinMarketCap. The only other noteworthy stablecoin offering in terms of size is USD Coin, which had a total market cap of just under $33 billion as of Thursday afternoon.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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"https://www.investopedia.com/terms/c/cashequivalents.asp"
],
[
"Ripple",
"https://www.investopedia.com/tech/whats-difference-between-bitcoin-and-ripple/"
],
[
"legal classification of XRP as a security",
"https://www.investopedia.com/sec-vs-ripple-6743752"
],
[
"blockchains",
"https://www.investopedia.com/terms/b/blockchain.asp"
],
[
"Aave",
"https://www.investopedia.com/what-is-aave-6823617"
],
[
"Bitcoin",
"https://www.investopedia.com/news/how-bitcoin-works/"
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https://www.investopedia.com/terms/p/preferredstock.asp | Preferred 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"><span class="heading-toc" id="toc-what-is-preferred-stock"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Preferred Stock? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term “stock” refers to ownership or equity in a firm. There are two types of equity: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commonstock.asp">common stock</a> and preferred stock. Preferred stockholders have a higher claim to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> or asset distribution than common stockholders. The details of each preferred stock depend on the issue.
</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>Preferred stock is a different type of equity that represents ownership of a company and the right to claim income from the company’s operations.</li><li>Preferred stockholders have a higher claim on distributions (e.g., dividends) than common stockholders.</li><li>Preferred stockholders usually have no or limited voting rights in corporate governance.<span class="ql-inline-citation" data-cite="1"></span></li><li>In the event of a liquidation, preferred stockholders’ claim on assets is greater than common stockholders but less than bondholders.<span class="ql-inline-citation" data-cite="2"></span></li><li>Preferred stock has characteristics of both bonds and common stock, which enhances its appeal to certain investors.</li></ul></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_6-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:66.6%;">
<img alt="Preferred Stock" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/iauU7v57A3ZQOlZ09L90GsIX2VE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Preferred-Stock-Final-0b2696b31b744e33b21c40ac913daf0f.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/iauU7v57A3ZQOlZ09L90GsIX2VE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Preferred-Stock-Final-0b2696b31b744e33b21c40ac913daf0f.jpg" data-srcset="https://www.investopedia.com/thmb/iom22PfI8ostEpq92QRMa5T1-e4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Preferred-Stock-Final-0b2696b31b744e33b21c40ac913daf0f.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/>
<noscript>
<img alt="Preferred Stock" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/iauU7v57A3ZQOlZ09L90GsIX2VE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Preferred-Stock-Final-0b2696b31b744e33b21c40ac913daf0f.jpg" srcset="https://www.investopedia.com/thmb/iom22PfI8ostEpq92QRMa5T1-e4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Preferred-Stock-Final-0b2696b31b744e33b21c40ac913daf0f.jpg 750w" width="1500"/>
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</div> </div>
<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Jiaqi Zhou / Investopedia</p></span>
</figcaption></figure>
<span class="heading-toc" id="toc-understanding-preferred-stock"></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 Preferred Stock </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly.<span class="ql-inline-citation" data-cite="1"></span> These dividends can be fixed or set in terms of a benchmark interest rate like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor.asp">London Interbank Offered Rate (LIBOR)</a>, and are often quoted as a percentage in the issuing description.
</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"> Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company’s profits. The decision to pay the dividend is at the discretion of a company’s board of directors.
</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 common stockholders, preferred stockholders have limited rights, which usually does not include voting.<span class="ql-inline-citation" data-cite="1"></span> Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. This appeals to investors seeking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/perpetual-preferred-stock.asp">stability in potential future cash flows</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<span class="heading-toc" id="toc-types-of-preferred-stock"></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 Preferred Stock </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> All of the types of preferred stock are exactly that—preferred stock. However, not all preferred stocks are the same. Each may or may not have different features that make them more or less favorable compared to other types.
</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"> Prior Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Prior preferred stock refers to the order in which preferred stock is ranked when considered for prioritization for creditors or dividend awards. Though regular preferred stock and prior preferred stock both hold precedence over common stock, prior preferred stock refers to an earlier issuance of preferred stock that takes priority. For example, if a company can only financially afford to pay one tier of shares its dividend, it must start with its prior preferred stock issuance.
</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"> Preference Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Preference preferred stock is considered the next tier of stock in terms of prioritization. Though it falls behind prior preferred stock, preference preferred stock often has greater priority compared to other issuances of preferred stock. If there are multiple tiers of preference preferred stock, each issuance is usually given its rank (i.e., most senior, second senior, etc.).
</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"> Perpetual Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Some types of preferred stock have a fixed end date in which, much like a bond, the original capital contributed is returned to shareholders. In most cases, preferred stock is considered perpetual. This means that the initial capital invested will not be returned. An investor must sell their shares at their choosing to redeem the shares.
</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"> Convertible Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> In most cases, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convertibles.asp">convertible</a> preferred stock allows a shareholder to trade their preferred stock for common stock shares. The exchange may happen when the investor wants, regardless of the price of either share. Once the exchange has occurred, the investor has relinquished its right to trade and cannot convert the common shares back to preferred shares. Convertible preferred stock usually has predefined guidance on how many shares of common stock it can be exchanged for.
</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"> Cumulative Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> If a company issues a dividend, it may issue cumulative preferred stock. This means that should a company issue a dividend but not actually pay it out, that unpaid dividend is accumulated and must be made in a future period. It is also important to note that preferred stock takes precedence over common stock for receiving dividend payments. This means that a share of cumulative preferred stock must have all accumulated dividends from all prior years paid before any other lower-tier share can receive dividend payments.
</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"> Noncumulative Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> It’s worth pointing out that some preferred stock may explicitly state that it is noncumulative. This means that if a company does not pay a dividend in a given year, that “missed” dividend is not directly made up for in a future period. Dividends are treated as year-to-year; any prior period does not carry over and does not hold weight into the order of who gets paid what. This type of stock is common in banking, as there are international rules that dictate how certain capital is classified by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp">regulators</a>.
</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"> Participating Preferred Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> In some years, a company may decide it cannot financially afford to issue a dividend. However, participating preferred stockholders may still be entitled to a dividend. These participating dividends may be tied to company achievements such as total sales, earnings, or specific margins. A participating preferred stockholder may also earn these types of dividends on top of what the company issues as “normal dividends,” assuming the company has enough finances to make all payments.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<span class="heading-toc" id="toc-preferred-stock-vs-common-stock"></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"> Preferred Stock vs. Common Stock </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> While preferred stock and common stock are both equity instruments, they share important distinctions. First, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/preferredstock.asp">preferred stock receive a fixed dividend</a> as dividend obligations to preferred shareholders must be satisfied first. Common stockholders, on the other hand, may not always receive a dividend. A company may fully pay all dividends (even prior years) to preferred stockholders before any dividends can be issued to common stockholders.
</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"> Second, preferred stock typically do not share in the price <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciation</a> (or depreciation) to the same degree as common stock. The inherent value of preferred stock is the ongoing cash proceeds that investors receive. Common stock, on the other hand, are more difficult to value. However, because they are not tied to semi-fixed payments, investors hold common stock for the potential capital appreciation.
</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"> Lastly, the two types of equity have different terms or conditions. Preferred stockholders typically have no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/votingright.asp">voting rights</a>, whereas common stockholders do. Preferred stockholders may have the option to convert shares to common shares, but not vice versa. Preferred shares may be callable where the company can demand to repurchase them at par value. Preferred stock also receives better treatment during liquidations.
</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-comparisonlist mntl-block" id="mntl-sc-block_45-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_46-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Preferred Stock</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Equity ownership of a company</p></li>
<li><p>Tradable on public exchanges (for public companies)</p></li>
<li><p>Have first right to dividends and must be paid before common stockholders</p></li>
<li><p>Typically do not have as much capital appreciation</p></li>
<li><p>Typically have no voting rights</p></li>
<li><p>May have the option to be convertible to common stock</p></li>
<li><p>Receive better treatment during liquidations</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">Common Stock </span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Equity ownership of a company</p></li>
<li><p>Tradable on public exchanges (for public companies)</p></li>
<li><p>No guarantee of dividends; must wait until preferred stockholders are made whole</p></li>
<li><p>Often have higher capital appreciation</p></li>
<li><p>Typically have voting rights</p></li>
<li><p>Do not have the option to be convertible to preferred stock</p></li>
<li><p>Receive worse treatment during liquidations</p></li>
</ul>
</div>
</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-preferred-stock-vs-bonds"></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"> Preferred Stock vs. Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Preferred stock is often compared to bonds because both may offer recurring cash distributions. However, as there are many differences between stocks and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>, there are differences with preferred equity as well.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> In terms of similarities, both securities are often issued at face value or par value. This value is used to calculate future dividend payments and is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/020515/why-do-preferred-stocks-have-face-value-and-why-it-different-market-value.asp">unrelated to the market price of the security</a>. Then, companies may issue dividends similar to how bonds issue coupon payments. Though the mechanism is different, the end result is ongoing payments derived from an investment.
</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"> There are still many differences between the two. Preferred stock dividend payments are not fixed and can change or be stopped. However, these payments are often <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102714/how-are-preferred-stock-dividends-taxed.asp">taxed at a lower rate</a> than bond interest. In addition, bonds often have a term that matures after a certain amount of time. There is, theoretically, no “end date” to preferred stock.
</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"> In addition, there are considerations to make regarding the order of rights should a company be liquidated. In most cases, debtholders receive preferential treatment, and bondholders receive proceeds from liquidated assets. Then, preferred shareholders receive distributions if any assets remain. Common stockholders are last in line and often receive minimal or no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a> proceeds.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_57-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_58-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Preferred Stock</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Often issue periodic, ongoing cash payments</p></li>
<li><p>Issued at par value (which is independent of market value)</p></li>
<li><p>Dividends may increase, decrease, or end at a company’s discretion</p></li>
<li><p>Preferred stockholders are behind bondholders during bankruptcy or liquidations</p></li>
<li><p>Often do not have an end date</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">Bonds</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Often issue periodic, ongoing cash payments</p></li>
<li><p>Issued at par value (which is independent of market value)</p></li>
<li><p>Interest is fixed and will not change over the life of the bond</p></li>
<li><p>Bondholders receive preferential treatment during bankruptcy or liquidation</p></li>
<li><p>Have a fixed term or maturity date</p></li>
</ul>
</div>
</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-companies-in-distress"></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"> Companies in Distress </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> If a company is struggling and has to suspend its dividend, preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders.<span class="ql-inline-citation" data-cite="1"></span> Shares that have this arrangement are known as cumulative. If a company has multiple simultaneous issues of preferred stock, these may in turn be ranked in terms of priority. The highest ranking is called prior, followed by first preference, second preference, etc.
</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"> Preferred shareholders have a prior claim on a company’s assets if it is liquidated, though they remain subordinate to bondholders. Preferred shares are equity, but in many ways, they are hybrid assets that lie between stock and bonds. They offer more predictable income than common stock and are rated by the major credit rating agencies.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Unlike bondholders, failing to pay a dividend to preferred shareholders does not mean a company is in default. Because preferred shareholders do not enjoy the same guarantees as creditors, the ratings on preferred shares are generally lower than the same issuer’s bonds, with the yields being accordingly higher.<span class="ql-inline-citation" data-cite="2"></span>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_67-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_68-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Cumulative preferred stock have the condition that any previously awarded dividends that have not yet been paid must be distributed before any common shareholder receives any dividend distribution. This is in contrast to noncumulative preferred stock, which does not accumulate prior unpaid dividends.</p></div></div></div>
<span class="heading-toc" id="toc-voting-rights-calling-and-convertibility"></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"> Voting Rights, Calling, and Convertibility </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Preferred shares usually do not carry voting rights, although under some agreements, these rights may revert to shareholders who have not received their dividend.<span class="ql-inline-citation" data-cite="1"></span>
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<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"> Preferred shares have less potential to appreciate in price than common stock, and they usually trade within a few dollars of their issue price, most commonly $25. Whether they trade at a discount or premium to the issue price depends on the company’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-worthiness.asp">creditworthiness</a> and the specifics of the issue—for example, whether the shares are cumulative, their priority relative to other issues, and whether they are callable.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> If shares are callable, the issuer can purchase them back at par value after a set date. If interest rates fall, for example, and the dividend yield does not have to be as high to be attractive, the company may call its shares and issue another series with a lower yield. Shares can continue to trade past their call date if the company does not exercise this option.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Some preferred stock are convertible, meaning they can be exchanged for a given number of common shares under certain circumstances.<span class="ql-inline-citation" data-cite="2"></span> The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date when it automatically converts. Whether this is advantageous to the investor depends on the market price of the common stock.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_78-0"><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_79-0"><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>Pay attention to whether a preferred stock is callable. The issuing company holds the right to buy the security back.</p></div></div></div>
<span class="heading-toc" id="toc-typical-buyers-of-preferred-stock"></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"> Typical Buyers of Preferred Stock </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Preferred stock come in a wide variety of forms and are generally purchased through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">online stockbrokers</a> by individual investors. The features described above are only the more common examples, and these are frequently combined in a number of ways. A company can issue preferred shares under almost any set of terms, assuming they don’t fall afoul of laws or regulations. Most preferred issues have no maturity dates or have very distant ones.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Institutions are usually the most common purchasers of preferred stock, especially during the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primary-distribution.asp">primary distribution phase</a>. This is due to certain tax advantages that are available to them but that are not available to individual investors.<span class="ql-inline-citation" data-cite="3"></span> Because these institutions buy in bulk, preferred issues are a relatively simple way to raise large amounts of capital. Private or pre-public companies issue preferred stock for this reason.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Preferred stock issuers tend to group near the upper and lower limits of the creditworthiness spectrum. Some issue preferred shares because regulations prohibit them from taking on any more debt or because they risk being downgraded. On the other hand, several established names like General Electric, Bank of America, and Georgia Power issue preferred stock to finance projects.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="7"></span>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_87-0"><span class="heading-toc" id="toc-what-are-the-advantages-of-a-preferred-stock"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Advantages of a Preferred Stock?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A preferred stock is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blankcheckpreferred.asp">class of stock</a> that is granted certain rights that differ from common stock. Namely, preferred stock often possess higher dividend payments, and a higher claim to assets in the event of liquidation. In addition, preferred stock can have a callable feature, which means that the issuer has the right to redeem the shares at a predetermined price and date as indicated in the prospectus. In many ways, preferred stock share similar characteristics to bonds, and because of this are sometimes referred to as hybrid securities.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_89-0"><span class="heading-toc" id="toc-who-buys-preferred-stock"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Buys Preferred Stock?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Preferred stock often provides more stability and cash flow compared to common stock. Therefore, investors looking to hold equities but not overexpose their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> to risk often buy preferred stock. In addition, preferred stock investors receive favorable tax treatment. The company issuing the preferred stock <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/preferredsharestaxbenefit.asp">does not receive a tax advantage</a>, however. Institutional investors and large firms may be enticed to the investment due to its tax advantages.<br/></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_91-0"><span class="heading-toc" id="toc-what-is-an-example-of-a-preferred-stock"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of a Preferred Stock?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Consider a company is issuing a 7% preferred stock at a $1,000 par value. In turn, the investor would receive a $70 annual dividend, or $17.50 quarterly. Typically, this preferred stock will trade around its par value, behaving more similarly to a bond. Investors who are looking to generate income may choose to invest in this security. The most common sector that issues preferred stock is the financial sector, where preferred stock may be issued as a means to raise capital.</p></div>
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<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-can-you-lose-money-on-preferred-stock"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Lose Money on Preferred Stock?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Like any other type of equity investment, there are risks of investing, including the loss of capital you invest into the company. Preferred stock have specific features different from common stock, so they may perform differently. However, both investments are reflections of the performance of the underlying company. Should the company begin to struggle, this may result in a loss or decrease in value in the preferred stock price.</p></div>
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<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-downside-of-preferred-stock"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Downside of Preferred Stock?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Though preferred stock often have greater rights and claims to dividends, this type of investment often does not appreciate in value as much as common stock. In addition, preferred stockholders have little to no say in the operations of the company, as they often forgo voting capabilities.</p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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"> Investors interested in generating cash flow from their equity holdings may be better suited holding preferred equity or preferred stock. This type of equity investment represents ownership of a company and results in prioritized treatment for dividend distributions. Though there are sacrifices for this right, preferred stock are simply a different vehicle for owning part of a business.
</p></div> | ## What Is Preferred Stock?
The term “stock” refers to ownership or equity in a firm. There are two types of equity: [common stock](https://www.investopedia.com/terms/c/commonstock.asp) and preferred stock. Preferred stockholders have a higher claim to [dividends](https://www.investopedia.com/terms/d/dividend.asp) or asset distribution than common stockholders. The details of each preferred stock depend on the issue.
### Key Takeaways
* Preferred stock is a different type of equity that represents ownership of a company and the right to claim income from the company’s operations.
* Preferred stockholders have a higher claim on distributions (e.g., dividends) than common stockholders.
* Preferred stockholders usually have no or limited voting rights in corporate governance.
* In the event of a liquidation, preferred stockholders’ claim on assets is greater than common stockholders but less than bondholders.
* Preferred stock has characteristics of both bonds and common stock, which enhances its appeal to certain investors.
![Preferred Stock]()
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Jiaqi Zhou / Investopedia
## Understanding Preferred Stock
Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. These dividends can be fixed or set in terms of a benchmark interest rate like the [London Interbank Offered Rate (LIBOR)](https://www.investopedia.com/terms/l/libor.asp), and are often quoted as a percentage in the issuing description.
Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company’s profits. The decision to pay the dividend is at the discretion of a company’s board of directors.
Unlike common stockholders, preferred stockholders have limited rights, which usually does not include voting. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. This appeals to investors seeking [stability in potential future cash flows](https://www.investopedia.com/terms/p/perpetual-preferred-stock.asp).
## Types of Preferred Stock
All of the types of preferred stock are exactly that—preferred stock. However, not all preferred stocks are the same. Each may or may not have different features that make them more or less favorable compared to other types.
### Prior Preferred Stock
Prior preferred stock refers to the order in which preferred stock is ranked when considered for prioritization for creditors or dividend awards. Though regular preferred stock and prior preferred stock both hold precedence over common stock, prior preferred stock refers to an earlier issuance of preferred stock that takes priority. For example, if a company can only financially afford to pay one tier of shares its dividend, it must start with its prior preferred stock issuance.
### Preference Preferred Stock
Preference preferred stock is considered the next tier of stock in terms of prioritization. Though it falls behind prior preferred stock, preference preferred stock often has greater priority compared to other issuances of preferred stock. If there are multiple tiers of preference preferred stock, each issuance is usually given its rank (i.e., most senior, second senior, etc.).
### Perpetual Preferred Stock
Some types of preferred stock have a fixed end date in which, much like a bond, the original capital contributed is returned to shareholders. In most cases, preferred stock is considered perpetual. This means that the initial capital invested will not be returned. An investor must sell their shares at their choosing to redeem the shares.
### Convertible Preferred Stock
In most cases, [convertible](https://www.investopedia.com/terms/c/convertibles.asp) preferred stock allows a shareholder to trade their preferred stock for common stock shares. The exchange may happen when the investor wants, regardless of the price of either share. Once the exchange has occurred, the investor has relinquished its right to trade and cannot convert the common shares back to preferred shares. Convertible preferred stock usually has predefined guidance on how many shares of common stock it can be exchanged for.
### Cumulative Preferred Stock
If a company issues a dividend, it may issue cumulative preferred stock. This means that should a company issue a dividend but not actually pay it out, that unpaid dividend is accumulated and must be made in a future period. It is also important to note that preferred stock takes precedence over common stock for receiving dividend payments. This means that a share of cumulative preferred stock must have all accumulated dividends from all prior years paid before any other lower-tier share can receive dividend payments.
### Noncumulative Preferred Stock
It’s worth pointing out that some preferred stock may explicitly state that it is noncumulative. This means that if a company does not pay a dividend in a given year, that “missed” dividend is not directly made up for in a future period. Dividends are treated as year-to-year; any prior period does not carry over and does not hold weight into the order of who gets paid what. This type of stock is common in banking, as there are international rules that dictate how certain capital is classified by [regulators](https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp).
### Participating Preferred Stock
In some years, a company may decide it cannot financially afford to issue a dividend. However, participating preferred stockholders may still be entitled to a dividend. These participating dividends may be tied to company achievements such as total sales, earnings, or specific margins. A participating preferred stockholder may also earn these types of dividends on top of what the company issues as “normal dividends,” assuming the company has enough finances to make all payments.
## Preferred Stock vs. Common Stock
While preferred stock and common stock are both equity instruments, they share important distinctions. First, [preferred stock receive a fixed dividend](https://www.investopedia.com/ask/answers/06/preferredstock.asp) as dividend obligations to preferred shareholders must be satisfied first. Common stockholders, on the other hand, may not always receive a dividend. A company may fully pay all dividends (even prior years) to preferred stockholders before any dividends can be issued to common stockholders.
Second, preferred stock typically do not share in the price [appreciation](https://www.investopedia.com/terms/a/appreciation.asp) (or depreciation) to the same degree as common stock. The inherent value of preferred stock is the ongoing cash proceeds that investors receive. Common stock, on the other hand, are more difficult to value. However, because they are not tied to semi-fixed payments, investors hold common stock for the potential capital appreciation.
Lastly, the two types of equity have different terms or conditions. Preferred stockholders typically have no [voting rights](https://www.investopedia.com/terms/v/votingright.asp), whereas common stockholders do. Preferred stockholders may have the option to convert shares to common shares, but not vice versa. Preferred shares may be callable where the company can demand to repurchase them at par value. Preferred stock also receives better treatment during liquidations.
Preferred Stock
* Equity ownership of a company
* Tradable on public exchanges (for public companies)
* Have first right to dividends and must be paid before common stockholders
* Typically do not have as much capital appreciation
* Typically have no voting rights
* May have the option to be convertible to common stock
* Receive better treatment during liquidations
Common Stock
* Equity ownership of a company
* Tradable on public exchanges (for public companies)
* No guarantee of dividends; must wait until preferred stockholders are made whole
* Often have higher capital appreciation
* Typically have voting rights
* Do not have the option to be convertible to preferred stock
* Receive worse treatment during liquidations
## Preferred Stock vs. Bonds
Preferred stock is often compared to bonds because both may offer recurring cash distributions. However, as there are many differences between stocks and [bonds](https://www.investopedia.com/terms/b/bond.asp), there are differences with preferred equity as well.
In terms of similarities, both securities are often issued at face value or par value. This value is used to calculate future dividend payments and is [unrelated to the market price of the security](https://www.investopedia.com/ask/answers/020515/why-do-preferred-stocks-have-face-value-and-why-it-different-market-value.asp). Then, companies may issue dividends similar to how bonds issue coupon payments. Though the mechanism is different, the end result is ongoing payments derived from an investment.
There are still many differences between the two. Preferred stock dividend payments are not fixed and can change or be stopped. However, these payments are often [taxed at a lower rate](https://www.investopedia.com/ask/answers/102714/how-are-preferred-stock-dividends-taxed.asp) than bond interest. In addition, bonds often have a term that matures after a certain amount of time. There is, theoretically, no “end date” to preferred stock.
In addition, there are considerations to make regarding the order of rights should a company be liquidated. In most cases, debtholders receive preferential treatment, and bondholders receive proceeds from liquidated assets. Then, preferred shareholders receive distributions if any assets remain. Common stockholders are last in line and often receive minimal or no [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) proceeds.
Preferred Stock
* Often issue periodic, ongoing cash payments
* Issued at par value (which is independent of market value)
* Dividends may increase, decrease, or end at a company’s discretion
* Preferred stockholders are behind bondholders during bankruptcy or liquidations
* Often do not have an end date
Bonds
* Often issue periodic, ongoing cash payments
* Issued at par value (which is independent of market value)
* Interest is fixed and will not change over the life of the bond
* Bondholders receive preferential treatment during bankruptcy or liquidation
* Have a fixed term or maturity date
## Companies in Distress
If a company is struggling and has to suspend its dividend, preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders. Shares that have this arrangement are known as cumulative. If a company has multiple simultaneous issues of preferred stock, these may in turn be ranked in terms of priority. The highest ranking is called prior, followed by first preference, second preference, etc.
Preferred shareholders have a prior claim on a company’s assets if it is liquidated, though they remain subordinate to bondholders. Preferred shares are equity, but in many ways, they are hybrid assets that lie between stock and bonds. They offer more predictable income than common stock and are rated by the major credit rating agencies.
Unlike bondholders, failing to pay a dividend to preferred shareholders does not mean a company is in default. Because preferred shareholders do not enjoy the same guarantees as creditors, the ratings on preferred shares are generally lower than the same issuer’s bonds, with the yields being accordingly higher.
###
Cumulative preferred stock have the condition that any previously awarded dividends that have not yet been paid must be distributed before any common shareholder receives any dividend distribution. This is in contrast to noncumulative preferred stock, which does not accumulate prior unpaid dividends.
## Voting Rights, Calling, and Convertibility
Preferred shares usually do not carry voting rights, although under some agreements, these rights may revert to shareholders who have not received their dividend.
Preferred shares have less potential to appreciate in price than common stock, and they usually trade within a few dollars of their issue price, most commonly $25. Whether they trade at a discount or premium to the issue price depends on the company’s [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp) and the specifics of the issue—for example, whether the shares are cumulative, their priority relative to other issues, and whether they are callable.
If shares are callable, the issuer can purchase them back at par value after a set date. If interest rates fall, for example, and the dividend yield does not have to be as high to be attractive, the company may call its shares and issue another series with a lower yield. Shares can continue to trade past their call date if the company does not exercise this option.
Some preferred stock are convertible, meaning they can be exchanged for a given number of common shares under certain circumstances. The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date when it automatically converts. Whether this is advantageous to the investor depends on the market price of the common stock.
###
Pay attention to whether a preferred stock is callable. The issuing company holds the right to buy the security back.
## Typical Buyers of Preferred Stock
Preferred stock come in a wide variety of forms and are generally purchased through [online stockbrokers](https://www.investopedia.com/best-online-brokers-4587872) by individual investors. The features described above are only the more common examples, and these are frequently combined in a number of ways. A company can issue preferred shares under almost any set of terms, assuming they don’t fall afoul of laws or regulations. Most preferred issues have no maturity dates or have very distant ones.
Institutions are usually the most common purchasers of preferred stock, especially during the [primary distribution phase](https://www.investopedia.com/terms/p/primary-distribution.asp). This is due to certain tax advantages that are available to them but that are not available to individual investors. Because these institutions buy in bulk, preferred issues are a relatively simple way to raise large amounts of capital. Private or pre-public companies issue preferred stock for this reason.
Preferred stock issuers tend to group near the upper and lower limits of the creditworthiness spectrum. Some issue preferred shares because regulations prohibit them from taking on any more debt or because they risk being downgraded. On the other hand, several established names like General Electric, Bank of America, and Georgia Power issue preferred stock to finance projects.
## What Are the Advantages of a Preferred Stock?
A preferred stock is a [class of stock](https://www.investopedia.com/terms/b/blankcheckpreferred.asp) that is granted certain rights that differ from common stock. Namely, preferred stock often possess higher dividend payments, and a higher claim to assets in the event of liquidation. In addition, preferred stock can have a callable feature, which means that the issuer has the right to redeem the shares at a predetermined price and date as indicated in the prospectus. In many ways, preferred stock share similar characteristics to bonds, and because of this are sometimes referred to as hybrid securities.
## Who Buys Preferred Stock?
Preferred stock often provides more stability and cash flow compared to common stock. Therefore, investors looking to hold equities but not overexpose their [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) to risk often buy preferred stock. In addition, preferred stock investors receive favorable tax treatment. The company issuing the preferred stock [does not receive a tax advantage](https://www.investopedia.com/ask/answers/06/preferredsharestaxbenefit.asp), however. Institutional investors and large firms may be enticed to the investment due to its tax advantages.
## What Is an Example of a Preferred Stock?
Consider a company is issuing a 7% preferred stock at a $1,000 par value. In turn, the investor would receive a $70 annual dividend, or $17.50 quarterly. Typically, this preferred stock will trade around its par value, behaving more similarly to a bond. Investors who are looking to generate income may choose to invest in this security. The most common sector that issues preferred stock is the financial sector, where preferred stock may be issued as a means to raise capital.
## Can You Lose Money on Preferred Stock?
Like any other type of equity investment, there are risks of investing, including the loss of capital you invest into the company. Preferred stock have specific features different from common stock, so they may perform differently. However, both investments are reflections of the performance of the underlying company. Should the company begin to struggle, this may result in a loss or decrease in value in the preferred stock price.
## What Is the Downside of Preferred Stock?
Though preferred stock often have greater rights and claims to dividends, this type of investment often does not appreciate in value as much as common stock. In addition, preferred stockholders have little to no say in the operations of the company, as they often forgo voting capabilities.
## The Bottom Line
Investors interested in generating cash flow from their equity holdings may be better suited holding preferred equity or preferred stock. This type of equity investment represents ownership of a company and results in prioritized treatment for dividend distributions. Though there are sacrifices for this right, preferred stock are simply a different vehicle for owning part of a business.
| What Is Preferred Stock?
The term “stock” refers to ownership or equity in a firm. There are two types of equity: common stock and preferred stock. Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders. The details of each preferred stock depend on the issue.
Key Takeaways
Preferred stock is a different type of equity that represents ownership of a company and the right to claim income from the company’s operations.Preferred stockholders have a higher claim on distributions (e.g., dividends) than common stockholders.Preferred stockholders usually have no or limited voting rights in corporate governance.In the event of a liquidation, preferred stockholders’ claim on assets is greater than common stockholders but less than bondholders.Preferred stock has characteristics of both bonds and common stock, which enhances its appeal to certain investors.
Jiaqi Zhou / Investopedia
Understanding Preferred Stock
Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. These dividends can be fixed or set in terms of a benchmark interest rate like the London Interbank Offered Rate (LIBOR), and are often quoted as a percentage in the issuing description.
Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company’s profits. The decision to pay the dividend is at the discretion of a company’s board of directors.
Unlike common stockholders, preferred stockholders have limited rights, which usually does not include voting. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. This appeals to investors seeking stability in potential future cash flows.
Types of Preferred Stock
All of the types of preferred stock are exactly that—preferred stock. However, not all preferred stocks are the same. Each may or may not have different features that make them more or less favorable compared to other types.
Prior Preferred Stock
Prior preferred stock refers to the order in which preferred stock is ranked when considered for prioritization for creditors or dividend awards. Though regular preferred stock and prior preferred stock both hold precedence over common stock, prior preferred stock refers to an earlier issuance of preferred stock that takes priority. For example, if a company can only financially afford to pay one tier of shares its dividend, it must start with its prior preferred stock issuance.
Preference Preferred Stock
Preference preferred stock is considered the next tier of stock in terms of prioritization. Though it falls behind prior preferred stock, preference preferred stock often has greater priority compared to other issuances of preferred stock. If there are multiple tiers of preference preferred stock, each issuance is usually given its rank (i.e., most senior, second senior, etc.).
Perpetual Preferred Stock
Some types of preferred stock have a fixed end date in which, much like a bond, the original capital contributed is returned to shareholders. In most cases, preferred stock is considered perpetual. This means that the initial capital invested will not be returned. An investor must sell their shares at their choosing to redeem the shares.
Convertible Preferred Stock
In most cases, convertible preferred stock allows a shareholder to trade their preferred stock for common stock shares. The exchange may happen when the investor wants, regardless of the price of either share. Once the exchange has occurred, the investor has relinquished its right to trade and cannot convert the common shares back to preferred shares. Convertible preferred stock usually has predefined guidance on how many shares of common stock it can be exchanged for.
Cumulative Preferred Stock
If a company issues a dividend, it may issue cumulative preferred stock. This means that should a company issue a dividend but not actually pay it out, that unpaid dividend is accumulated and must be made in a future period. It is also important to note that preferred stock takes precedence over common stock for receiving dividend payments. This means that a share of cumulative preferred stock must have all accumulated dividends from all prior years paid before any other lower-tier share can receive dividend payments.
Noncumulative Preferred Stock
It’s worth pointing out that some preferred stock may explicitly state that it is noncumulative. This means that if a company does not pay a dividend in a given year, that “missed” dividend is not directly made up for in a future period. Dividends are treated as year-to-year; any prior period does not carry over and does not hold weight into the order of who gets paid what. This type of stock is common in banking, as there are international rules that dictate how certain capital is classified by regulators.
Participating Preferred Stock
In some years, a company may decide it cannot financially afford to issue a dividend. However, participating preferred stockholders may still be entitled to a dividend. These participating dividends may be tied to company achievements such as total sales, earnings, or specific margins. A participating preferred stockholder may also earn these types of dividends on top of what the company issues as “normal dividends,” assuming the company has enough finances to make all payments.
Preferred Stock vs. Common Stock
While preferred stock and common stock are both equity instruments, they share important distinctions. First, preferred stock receive a fixed dividend as dividend obligations to preferred shareholders must be satisfied first. Common stockholders, on the other hand, may not always receive a dividend. A company may fully pay all dividends (even prior years) to preferred stockholders before any dividends can be issued to common stockholders.
Second, preferred stock typically do not share in the price appreciation (or depreciation) to the same degree as common stock. The inherent value of preferred stock is the ongoing cash proceeds that investors receive. Common stock, on the other hand, are more difficult to value. However, because they are not tied to semi-fixed payments, investors hold common stock for the potential capital appreciation.
Lastly, the two types of equity have different terms or conditions. Preferred stockholders typically have no voting rights, whereas common stockholders do. Preferred stockholders may have the option to convert shares to common shares, but not vice versa. Preferred shares may be callable where the company can demand to repurchase them at par value. Preferred stock also receives better treatment during liquidations.
Preferred Stock
Equity ownership of a company
Tradable on public exchanges (for public companies)
Have first right to dividends and must be paid before common stockholders
Typically do not have as much capital appreciation
Typically have no voting rights
May have the option to be convertible to common stock
Receive better treatment during liquidations
Common Stock
Equity ownership of a company
Tradable on public exchanges (for public companies)
No guarantee of dividends; must wait until preferred stockholders are made whole
Often have higher capital appreciation
Typically have voting rights
Do not have the option to be convertible to preferred stock
Receive worse treatment during liquidations
Preferred Stock vs. Bonds
Preferred stock is often compared to bonds because both may offer recurring cash distributions. However, as there are many differences between stocks and bonds, there are differences with preferred equity as well.
In terms of similarities, both securities are often issued at face value or par value. This value is used to calculate future dividend payments and is unrelated to the market price of the security. Then, companies may issue dividends similar to how bonds issue coupon payments. Though the mechanism is different, the end result is ongoing payments derived from an investment.
There are still many differences between the two. Preferred stock dividend payments are not fixed and can change or be stopped. However, these payments are often taxed at a lower rate than bond interest. In addition, bonds often have a term that matures after a certain amount of time. There is, theoretically, no “end date” to preferred stock.
In addition, there are considerations to make regarding the order of rights should a company be liquidated. In most cases, debtholders receive preferential treatment, and bondholders receive proceeds from liquidated assets. Then, preferred shareholders receive distributions if any assets remain. Common stockholders are last in line and often receive minimal or no bankruptcy proceeds.
Preferred Stock
Often issue periodic, ongoing cash payments
Issued at par value (which is independent of market value)
Dividends may increase, decrease, or end at a company’s discretion
Preferred stockholders are behind bondholders during bankruptcy or liquidations
Often do not have an end date
Bonds
Often issue periodic, ongoing cash payments
Issued at par value (which is independent of market value)
Interest is fixed and will not change over the life of the bond
Bondholders receive preferential treatment during bankruptcy or liquidation
Have a fixed term or maturity date
Companies in Distress
If a company is struggling and has to suspend its dividend, preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders. Shares that have this arrangement are known as cumulative. If a company has multiple simultaneous issues of preferred stock, these may in turn be ranked in terms of priority. The highest ranking is called prior, followed by first preference, second preference, etc.
Preferred shareholders have a prior claim on a company’s assets if it is liquidated, though they remain subordinate to bondholders. Preferred shares are equity, but in many ways, they are hybrid assets that lie between stock and bonds. They offer more predictable income than common stock and are rated by the major credit rating agencies.
Unlike bondholders, failing to pay a dividend to preferred shareholders does not mean a company is in default. Because preferred shareholders do not enjoy the same guarantees as creditors, the ratings on preferred shares are generally lower than the same issuer’s bonds, with the yields being accordingly higher.
Cumulative preferred stock have the condition that any previously awarded dividends that have not yet been paid must be distributed before any common shareholder receives any dividend distribution. This is in contrast to noncumulative preferred stock, which does not accumulate prior unpaid dividends.
Voting Rights, Calling, and Convertibility
Preferred shares usually do not carry voting rights, although under some agreements, these rights may revert to shareholders who have not received their dividend.
Preferred shares have less potential to appreciate in price than common stock, and they usually trade within a few dollars of their issue price, most commonly $25. Whether they trade at a discount or premium to the issue price depends on the company’s creditworthiness and the specifics of the issue—for example, whether the shares are cumulative, their priority relative to other issues, and whether they are callable.
If shares are callable, the issuer can purchase them back at par value after a set date. If interest rates fall, for example, and the dividend yield does not have to be as high to be attractive, the company may call its shares and issue another series with a lower yield. Shares can continue to trade past their call date if the company does not exercise this option.
Some preferred stock are convertible, meaning they can be exchanged for a given number of common shares under certain circumstances. The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date when it automatically converts. Whether this is advantageous to the investor depends on the market price of the common stock.
Pay attention to whether a preferred stock is callable. The issuing company holds the right to buy the security back.
Typical Buyers of Preferred Stock
Preferred stock come in a wide variety of forms and are generally purchased through online stockbrokers by individual investors. The features described above are only the more common examples, and these are frequently combined in a number of ways. A company can issue preferred shares under almost any set of terms, assuming they don’t fall afoul of laws or regulations. Most preferred issues have no maturity dates or have very distant ones.
Institutions are usually the most common purchasers of preferred stock, especially during the primary distribution phase. This is due to certain tax advantages that are available to them but that are not available to individual investors. Because these institutions buy in bulk, preferred issues are a relatively simple way to raise large amounts of capital. Private or pre-public companies issue preferred stock for this reason.
Preferred stock issuers tend to group near the upper and lower limits of the creditworthiness spectrum. Some issue preferred shares because regulations prohibit them from taking on any more debt or because they risk being downgraded. On the other hand, several established names like General Electric, Bank of America, and Georgia Power issue preferred stock to finance projects.
What Are the Advantages of a Preferred Stock?
A preferred stock is a class of stock that is granted certain rights that differ from common stock. Namely, preferred stock often possess higher dividend payments, and a higher claim to assets in the event of liquidation. In addition, preferred stock can have a callable feature, which means that the issuer has the right to redeem the shares at a predetermined price and date as indicated in the prospectus. In many ways, preferred stock share similar characteristics to bonds, and because of this are sometimes referred to as hybrid securities.
Who Buys Preferred Stock?
Preferred stock often provides more stability and cash flow compared to common stock. Therefore, investors looking to hold equities but not overexpose their portfolio to risk often buy preferred stock. In addition, preferred stock investors receive favorable tax treatment. The company issuing the preferred stock does not receive a tax advantage, however. Institutional investors and large firms may be enticed to the investment due to its tax advantages.
What Is an Example of a Preferred Stock?
Consider a company is issuing a 7% preferred stock at a $1,000 par value. In turn, the investor would receive a $70 annual dividend, or $17.50 quarterly. Typically, this preferred stock will trade around its par value, behaving more similarly to a bond. Investors who are looking to generate income may choose to invest in this security. The most common sector that issues preferred stock is the financial sector, where preferred stock may be issued as a means to raise capital.
Can You Lose Money on Preferred Stock?
Like any other type of equity investment, there are risks of investing, including the loss of capital you invest into the company. Preferred stock have specific features different from common stock, so they may perform differently. However, both investments are reflections of the performance of the underlying company. Should the company begin to struggle, this may result in a loss or decrease in value in the preferred stock price.
What Is the Downside of Preferred Stock?
Though preferred stock often have greater rights and claims to dividends, this type of investment often does not appreciate in value as much as common stock. In addition, preferred stockholders have little to no say in the operations of the company, as they often forgo voting capabilities.
The Bottom Line
Investors interested in generating cash flow from their equity holdings may be better suited holding preferred equity or preferred stock. This type of equity investment represents ownership of a company and results in prioritized treatment for dividend distributions. Though there are sacrifices for this right, preferred stock are simply a different vehicle for owning part of a business.
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https://www.investopedia.com/terms/c/consumption-tax.asp | Consumption Tax: Definition, Types, vs. Income Tax | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-consumption-tax"></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 Consumption Tax? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A consumption tax is a tax on the purchase of a good or service. Consumption taxes can take the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services.
</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 consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy (income tax).
</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>Taxes on goods and services are commonly referred to as consumption taxes.</li><li>Retail sales tax and value-added tax are examples of a consumption tax.</li><li>A consumption tax is charged when consumers spend money, while an income tax is assessed on earned money.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-consumption-taxes-work"></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 Consumption Taxes Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Examples of consumption taxes include retail sales taxes, excise taxes, value-added taxes, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/use-tax.asp">use taxes</a>, taxes on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gross-receipts.asp">gross business receipts</a>, and import duties. These taxes are borne by consumers who pay a higher retail price for the good or service.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The higher price includes the consumption tax, which is collected by the vendor and remitted to the appropriate federal, state, or local government. Consumption taxes are often levied at different rates on different commodities according to perceptions of whether a commodity is considered a necessity (such as food) or a luxury (such as jewelry).
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The consumption tax is not a new idea. The U.S. government used a consumption tax for much of its history before replacing it with an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incometax.asp">income tax</a>. The Bush administration backed a version of this, although the proposal was defeated. The proposal called for the United States to shift from a mainly <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/progressivetax.asp">progressive income tax</a> system to a national tax system that uses consumption taxes exclusively.
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Ideally, a properly designed consumption tax system would reward savers and penalize spenders. While the U.S. does not have a national consumption tax, many other countries have imposed some form of a national consumption tax.</p><p><br/></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Japan, for example, added a 3% consumption tax to its income tax in 1989. The Japanese Consumption Tax (JCT) rose to 5% in 1997.<span class="ql-inline-citation" data-cite="1"></span> In 2012, a two-part tax increase to double the tax raised it first to 8% in April 2014. It was originally scheduled to rise to 10% in October 2015, but two delays pushed it to October 2019.<span class="ql-inline-citation" data-cite="4"></span> There are exemptions that include food, newspapers, and some other daily items to keep the consumption tax at 8% for those items.<br/>
</p>
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<span class="heading-toc" id="toc-types-of-consumption-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Types of Consumption Taxes </span> </h2>
<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"> Value-Added Tax </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Most European countries and Canada have a consumption tax system in the form of VATs, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valueaddedtax.asp">value-added taxes</a>. In Canada, the VAT is referred to as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gst.asp">goods and services tax (GST)</a> in some provinces, and a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/harmonized-sales-tax.asp">harmonized sales tax (HST)</a> in others.<span class="ql-inline-citation" data-cite="5"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> A VAT is a tax on the difference between what a producer pays for raw materials and labor and what the producer charges for finished goods. Hence this consumption tax is levied on the “value added” to goods and services from the production stage to the final consumption stage.
</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"> Excise Tax </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/excisetax.asp">excise tax</a> is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior or purchase of certain goods that are thought to be detrimental to the economy. These excise taxes are more commonly known as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sin_tax.asp">sin taxes</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_29-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Other excise taxes are applied to people who benefit from a program or infrastructure. For example, taxes on gasoline are collected from drivers to maintain roads, highways, and bridges.</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"> Import Duties </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/import-duty.asp">Import duties</a> are taxes levied on an importer for goods entering the country. The taxes are passed on by the importer to final consumers through higher costs. The amount of this consumption tax payable varies greatly depending on the imported good, the country of origin, and several other factors. Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<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"> Retail Sales Tax </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The sales tax is usually <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/advaloremtax.asp" rel="noopener noreferrer">ad valorem</a>, that is, it is calculated by applying a percentage rate to the taxable price of a sale. Although there is a sales tax in the U.S., it is a form of state tax, not a federal tax. In addition, state sales taxes exempt all sorts of spending, such as food, health, and housing. Countries that have implemented the sales tax as a federal consumption tax, tax almost all consumption.
</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-consumption-tax-vs-income-tax"></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"> Consumption Tax vs. Income Tax </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> A consumption tax is charged to people when they spend money. An income tax is levied on people when they earn money or when they receive interest, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a>, or <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> from their investments.
</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"> Proponents of a consumption tax argue that it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders. Thus, they argue that it is only fair that people are taxed on what they take out of the limited resource pool through consumption, rather than what they contribute to the pool using their income.
</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"> On the other hand, opponents maintain that a consumption tax adversely affects the poor who, by necessity, spend more of their income. They state that since a consumption tax is a form of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regressivetax.asp">regressive tax</a>, the wealthy population consumes a smaller fraction of their income than do poorer households.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_43-0"><span class="heading-toc" id="toc-does-the-us-have-a-national-consumption-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the U.S. Have a National Consumption Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The United States does not have a federal consumption tax. However, it does impose a federal excise tax when certain types of goods and services are purchased, such as gas, airline tickets, alcohol, and cigarettes. </p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-which-countries-have-a-consumption-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Countries Have a Consumption Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Many countries, including many European countries, have a consumption tax.<span class="ql-inline-citation" data-cite="9"></span> Japan, Australia, New Zealand, Singapore, Canada, and India are among the countries with a form of national consumption tax. </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-many-states-collect-sales-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many States Collect Sales Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In total, 45 states and the District of Columbia collect a sales tax. The states that don't collect a sales tax are: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska permits localities to charge local sales taxes.<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_48-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Consumption taxes are taxes on the purchase of goods and services. An income tax, in contrast, is imposed when you earn money, a consumption tax is imposed when an you spend money. Examples of consumption taxes include sales taxes, excise taxes, VAT taxes, and taxes on imported goods. Proponents argue that consumption taxes are more fair than income tax, since there are ways to hide income. But critics say that consumption taxes discourage spending and adversely hurt low-income households.
</p></div> | ## What Is a Consumption Tax?
A consumption tax is a tax on the purchase of a good or service. Consumption taxes can take the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services.
A consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy (income tax).
### Key Takeaways
* Taxes on goods and services are commonly referred to as consumption taxes.
* Retail sales tax and value-added tax are examples of a consumption tax.
* A consumption tax is charged when consumers spend money, while an income tax is assessed on earned money.
## How Consumption Taxes Work
Examples of consumption taxes include retail sales taxes, excise taxes, value-added taxes, [use taxes](https://www.investopedia.com/terms/u/use-tax.asp), taxes on [gross business receipts](https://www.investopedia.com/terms/g/gross-receipts.asp), and import duties. These taxes are borne by consumers who pay a higher retail price for the good or service.
The higher price includes the consumption tax, which is collected by the vendor and remitted to the appropriate federal, state, or local government. Consumption taxes are often levied at different rates on different commodities according to perceptions of whether a commodity is considered a necessity (such as food) or a luxury (such as jewelry).
The consumption tax is not a new idea. The U.S. government used a consumption tax for much of its history before replacing it with an [income tax](https://www.investopedia.com/terms/i/incometax.asp). The Bush administration backed a version of this, although the proposal was defeated. The proposal called for the United States to shift from a mainly [progressive income tax](https://www.investopedia.com/terms/p/progressivetax.asp) system to a national tax system that uses consumption taxes exclusively.
### Note
Ideally, a properly designed consumption tax system would reward savers and penalize spenders. While the U.S. does not have a national consumption tax, many other countries have imposed some form of a national consumption tax.
Japan, for example, added a 3% consumption tax to its income tax in 1989. The Japanese Consumption Tax (JCT) rose to 5% in 1997. In 2012, a two-part tax increase to double the tax raised it first to 8% in April 2014. It was originally scheduled to rise to 10% in October 2015, but two delays pushed it to October 2019. There are exemptions that include food, newspapers, and some other daily items to keep the consumption tax at 8% for those items.
## Types of Consumption Taxes
### Value-Added Tax
Most European countries and Canada have a consumption tax system in the form of VATs, or [value-added taxes](https://www.investopedia.com/terms/v/valueaddedtax.asp). In Canada, the VAT is referred to as a [goods and services tax (GST)](https://www.investopedia.com/terms/g/gst.asp) in some provinces, and a [harmonized sales tax (HST)](https://www.investopedia.com/terms/h/harmonized-sales-tax.asp) in others.
A VAT is a tax on the difference between what a producer pays for raw materials and labor and what the producer charges for finished goods. Hence this consumption tax is levied on the “value added” to goods and services from the production stage to the final consumption stage.
### Excise Tax
An [excise tax](https://www.investopedia.com/terms/e/excisetax.asp) is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior or purchase of certain goods that are thought to be detrimental to the economy. These excise taxes are more commonly known as [sin taxes](https://www.investopedia.com/terms/s/sin_tax.asp).
### Note
Other excise taxes are applied to people who benefit from a program or infrastructure. For example, taxes on gasoline are collected from drivers to maintain roads, highways, and bridges.
### Import Duties
[Import duties](https://www.investopedia.com/terms/i/import-duty.asp) are taxes levied on an importer for goods entering the country. The taxes are passed on by the importer to final consumers through higher costs. The amount of this consumption tax payable varies greatly depending on the imported good, the country of origin, and several other factors. Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported.
### Retail Sales Tax
The sales tax is usually [ad valorem](https://www.investopedia.com/terms/a/advaloremtax.asp), that is, it is calculated by applying a percentage rate to the taxable price of a sale. Although there is a sales tax in the U.S., it is a form of state tax, not a federal tax. In addition, state sales taxes exempt all sorts of spending, such as food, health, and housing. Countries that have implemented the sales tax as a federal consumption tax, tax almost all consumption.
## Consumption Tax vs. Income Tax
A consumption tax is charged to people when they spend money. An income tax is levied on people when they earn money or when they receive interest, [dividends](https://www.investopedia.com/terms/d/dividend.asp), or [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) from their investments.
Proponents of a consumption tax argue that it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders. Thus, they argue that it is only fair that people are taxed on what they take out of the limited resource pool through consumption, rather than what they contribute to the pool using their income.
On the other hand, opponents maintain that a consumption tax adversely affects the poor who, by necessity, spend more of their income. They state that since a consumption tax is a form of a [regressive tax](https://www.investopedia.com/terms/r/regressivetax.asp), the wealthy population consumes a smaller fraction of their income than do poorer households.
## Does the U.S. Have a National Consumption Tax?
The United States does not have a federal consumption tax. However, it does impose a federal excise tax when certain types of goods and services are purchased, such as gas, airline tickets, alcohol, and cigarettes.
## Which Countries Have a Consumption Tax?
Many countries, including many European countries, have a consumption tax. Japan, Australia, New Zealand, Singapore, Canada, and India are among the countries with a form of national consumption tax.
## How Many States Collect Sales Tax?
In total, 45 states and the District of Columbia collect a sales tax. The states that don't collect a sales tax are: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska permits localities to charge local sales taxes.
## The Bottom Line
Consumption taxes are taxes on the purchase of goods and services. An income tax, in contrast, is imposed when you earn money, a consumption tax is imposed when an you spend money. Examples of consumption taxes include sales taxes, excise taxes, VAT taxes, and taxes on imported goods. Proponents argue that consumption taxes are more fair than income tax, since there are ways to hide income. But critics say that consumption taxes discourage spending and adversely hurt low-income households.
| What Is a Consumption Tax?
A consumption tax is a tax on the purchase of a good or service. Consumption taxes can take the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services.
A consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy (income tax).
Key Takeaways
Taxes on goods and services are commonly referred to as consumption taxes.Retail sales tax and value-added tax are examples of a consumption tax.A consumption tax is charged when consumers spend money, while an income tax is assessed on earned money.
How Consumption Taxes Work
Examples of consumption taxes include retail sales taxes, excise taxes, value-added taxes, use taxes, taxes on gross business receipts, and import duties. These taxes are borne by consumers who pay a higher retail price for the good or service.
The higher price includes the consumption tax, which is collected by the vendor and remitted to the appropriate federal, state, or local government. Consumption taxes are often levied at different rates on different commodities according to perceptions of whether a commodity is considered a necessity (such as food) or a luxury (such as jewelry).
The consumption tax is not a new idea. The U.S. government used a consumption tax for much of its history before replacing it with an income tax. The Bush administration backed a version of this, although the proposal was defeated. The proposal called for the United States to shift from a mainly progressive income tax system to a national tax system that uses consumption taxes exclusively.
Note
Ideally, a properly designed consumption tax system would reward savers and penalize spenders. While the U.S. does not have a national consumption tax, many other countries have imposed some form of a national consumption tax.
Japan, for example, added a 3% consumption tax to its income tax in 1989. The Japanese Consumption Tax (JCT) rose to 5% in 1997. In 2012, a two-part tax increase to double the tax raised it first to 8% in April 2014. It was originally scheduled to rise to 10% in October 2015, but two delays pushed it to October 2019. There are exemptions that include food, newspapers, and some other daily items to keep the consumption tax at 8% for those items.
Types of Consumption Taxes
Value-Added Tax
Most European countries and Canada have a consumption tax system in the form of VATs, or value-added taxes. In Canada, the VAT is referred to as a goods and services tax (GST) in some provinces, and a harmonized sales tax (HST) in others.
A VAT is a tax on the difference between what a producer pays for raw materials and labor and what the producer charges for finished goods. Hence this consumption tax is levied on the “value added” to goods and services from the production stage to the final consumption stage.
Excise Tax
An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior or purchase of certain goods that are thought to be detrimental to the economy. These excise taxes are more commonly known as sin taxes.
Note
Other excise taxes are applied to people who benefit from a program or infrastructure. For example, taxes on gasoline are collected from drivers to maintain roads, highways, and bridges.
Import Duties
Import duties are taxes levied on an importer for goods entering the country. The taxes are passed on by the importer to final consumers through higher costs. The amount of this consumption tax payable varies greatly depending on the imported good, the country of origin, and several other factors. Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported.
Retail Sales Tax
The sales tax is usually ad valorem, that is, it is calculated by applying a percentage rate to the taxable price of a sale. Although there is a sales tax in the U.S., it is a form of state tax, not a federal tax. In addition, state sales taxes exempt all sorts of spending, such as food, health, and housing. Countries that have implemented the sales tax as a federal consumption tax, tax almost all consumption.
Consumption Tax vs. Income Tax
A consumption tax is charged to people when they spend money. An income tax is levied on people when they earn money or when they receive interest, dividends, or capital gains from their investments.
Proponents of a consumption tax argue that it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders. Thus, they argue that it is only fair that people are taxed on what they take out of the limited resource pool through consumption, rather than what they contribute to the pool using their income.
On the other hand, opponents maintain that a consumption tax adversely affects the poor who, by necessity, spend more of their income. They state that since a consumption tax is a form of a regressive tax, the wealthy population consumes a smaller fraction of their income than do poorer households.
Does the U.S. Have a National Consumption Tax?
The United States does not have a federal consumption tax. However, it does impose a federal excise tax when certain types of goods and services are purchased, such as gas, airline tickets, alcohol, and cigarettes.
Which Countries Have a Consumption Tax?
Many countries, including many European countries, have a consumption tax. Japan, Australia, New Zealand, Singapore, Canada, and India are among the countries with a form of national consumption tax.
How Many States Collect Sales Tax?
In total, 45 states and the District of Columbia collect a sales tax. The states that don't collect a sales tax are: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska permits localities to charge local sales taxes.
The Bottom Line
Consumption taxes are taxes on the purchase of goods and services. An income tax, in contrast, is imposed when you earn money, a consumption tax is imposed when an you spend money. Examples of consumption taxes include sales taxes, excise taxes, VAT taxes, and taxes on imported goods. Proponents argue that consumption taxes are more fair than income tax, since there are ways to hide income. But critics say that consumption taxes discourage spending and adversely hurt low-income households.
| [
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],
[
"gross business receipts",
"https://www.investopedia.com/terms/g/gross-receipts.asp"
],
[
"income tax",
"https://www.investopedia.com/terms/i/incometax.asp"
],
[
"progressive income tax",
"https://www.investopedia.com/terms/p/progressivetax.asp"
],
[
"value-added taxes",
"https://www.investopedia.com/terms/v/valueaddedtax.asp"
],
[
"goods and services tax (GST)",
"https://www.investopedia.com/terms/g/gst.asp"
],
[
"harmonized sales tax (HST)",
"https://www.investopedia.com/terms/h/harmonized-sales-tax.asp"
],
[
"excise tax",
"https://www.investopedia.com/terms/e/excisetax.asp"
],
[
"sin taxes",
"https://www.investopedia.com/terms/s/sin_tax.asp"
],
[
"Import duties",
"https://www.investopedia.com/terms/i/import-duty.asp"
],
[
"ad valorem",
"https://www.investopedia.com/terms/a/advaloremtax.asp"
],
[
"dividends",
"https://www.investopedia.com/terms/d/dividend.asp"
],
[
"capital gains",
"https://www.investopedia.com/terms/c/capitalgain.asp"
],
[
"regressive tax",
"https://www.investopedia.com/terms/r/regressivetax.asp"
]
] |
https://www.investopedia.com/bbva-bank-review-4802089 | BBVA Bank Review | <div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body">
<span class="comp external-content mntl-external-component" id="external-content_1-0"><div class="comp product-review-content product-review-content--finance product-review--base" id="product-review-content--finance_1-0">
<div class="comp js-toc-appear article-container article-intro mntl-block" id="article-intro_1-0">
<div class="comp product-card" data-tracking-container="true" data-tracking-id="product-card" id="product-card_1-0" style="--imgWidth: 0px">
<div class="product-card__content">
<div class="product-card__intro expert-content">
<figure class="comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image" id="product-card__image_1-0">
<div class="primary-image__media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="BBVA" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/-OaSNJiZQjMLt0KirbTfLAcYxGk=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhDwAEAPAAAAAAAABFgCH5BAEAAAAALAAAAAAPAAQAQAgdAAEIHEiwYAAABxMSPCiQIcKHCgMklIiQ4kOCAQEAOw==')" width="1500"/>
<noscript>
<img alt="BBVA" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/-OaSNJiZQjMLt0KirbTfLAcYxGk=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png" width="1500"/>
</noscript>
</div> </div>
</figure><!-- end: comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image -->
<div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0">
<a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.bbvausa.com/" id="commerce-button_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link -->
</div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0">
BBVA has a strong <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp">online banking</a> presence and branches in seven states. Based in Birmingham, Alabama, the bank launched its first online offerings as far back as 1995.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-1">
In our in-depth review of BBVA bank, we'll look at the products and services available and whether it's a good fit for your banking needs.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review">
<ul class="tabbed-sc-block__tabs">
<li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros & Cons</span></li>
<li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li>
</ul>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-3">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Full service banking options</p></li>
<li><p>Cash bank rewards with some checking accounts</p></li>
<li><p>Large ATM network</p></li>
<li><p>Award-winning mobile app and online banking service</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>High overdraft fees</p></li>
<li><p>Low interest rates</p></li>
<li><p>Branches in only a few states</p></li>
<li><p>Few monthly transactions without a fee</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Company Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2">
<div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-5">
<div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0">
<ul class="definition-list__container">
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Year Founded</span>
<span class="definition-list__item-content definition-list__item-content-0">
1964
</span>
</span>
</li>
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Official Website</span>
<span class="definition-list__item-content definition-list__item-content-1">
www.bbvausa.com
</span>
</span>
</li>
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Official Products Offered</span>
<span class="definition-list__item-content definition-list__item-content-2">
Savings, checking, CDs, MMA
</span>
</span>
</li>
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Customer Service</span>
<span class="definition-list__item-content definition-list__item-content-3">
Phone line: 1-844-228-2872 (Ala., Ariz., California, Colo., Fla., N.M., and Texas) & 1-866-534-4482 (all other states)
</span>
</span>
</li>
</ul>
</div><!-- end: comp product-spec-tool definition-list -->
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<img alt="BBVA" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/-OaSNJiZQjMLt0KirbTfLAcYxGk=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhDwAEAPAAAAAAAABFgCH5BAEAAAAALAAAAAAPAAQAQAgdAAEIHEiwYAAABxMSPCiQIcKHCgMklIiQ4kOCAQEAOw==')" width="1500"/>
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<img alt="BBVA" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/-OaSNJiZQjMLt0KirbTfLAcYxGk=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png" width="1500"/>
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<div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0">
<a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.bbvausa.com/" id="commerce-button_2-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link -->
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Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
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<div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-BBVA Bank Review" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0">
<span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0">
BBVA Bank Review</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
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<ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0">
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<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Best For" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-who-is-bbva-bank-best-for" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Best For</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bank Offerings" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-does-bbva-bank-offer" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Bank Offerings</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Other Products" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-other-financial-products-offered-by-bbva" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Other Products</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-bank-with-bbva" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">How to Bank</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
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<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0">
<span class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">
Important</span><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0">
<p>BBVA USA is now part of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pnc-bank-review-4845401">PNC Bank</a>, and is no longer accepting applications.<span class="ql-inline-citation" data-cite="20"></span></p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-1"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-2">
<li><strong>Full service banking options:</strong> BBVA has accounts to meet almost every need, including checking, savings, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">money market</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificates of deposit (CDs)</a>, IRAs, and more.</li>
<li><strong>Cash-back rewards with some checking accounts:</strong> Both BBVA online checking and free checking accounts earn cash-back rewards for debit card purchases through BBVA's Simple Cash Back program.</li>
<li><strong>Large ATM network:</strong> Most BBVA accounts with debit cards have access to 64,000 BBVA and other participating ATMs.</li>
<li><strong>Award-winning mobile app and online banking service:</strong> BBVA's mobile app was named a 2019 leader in mobile banking by independent research firm Javelin Strategy & Research.<span class="ql-inline-citation" data-cite="19"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-3"> <span class="mntl-sc-block-heading__text"> Cons Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-4">
<li><strong>High overdraft fees:</strong> BBVA has an overdraft fee of $38 per transaction, up to six per day.</li><li><strong>Low interest rates:</strong> Interest rates on BBVA accounts are much lower than other online banks.</li><li><strong>Branches in only a few states:</strong> BBVA only has branches in seven states: Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. </li><li><strong>Few monthly transactions without a fee:</strong> Some BBVA accounts, like BBVA Savings and Online Savings, only allow four free transactions a month.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-who-is-bbva-bank-best-for"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-5"> <span class="mntl-sc-block-heading__text"> Who Is BBVA Bank Best For? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6">
<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bbvausa.com/" rel="noopener noreferrer sponsored nofollow">BBVA</a> should appeal to consumers looking for a full-service online bank. It may be a good fit for customers who want to:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-7">
<li>Have a variety of accounts at the same bank</li><li>Do the majority of their banking online or via mobile app</li><li>Aren’t interested in earning interest from savings or checking accounts</li><li>Plan to keep large enough account balances to avoid monthly service fees</li><li>Access a large no-fee ATM network</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_2-0-8">
<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/7jJ40/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="BVVA Bank Branches by State"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
</div><!-- end: comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block -->
<span class="heading-toc" id="toc-what-does-bbva-bank-offer"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-9"> <span class="mntl-sc-block-heading__text"> What Does BBVA Bank Offer? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-10">
BBVA Bank has a full array of banking solutions available to appeal to a wide range of customers including:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11">
<li>Savings accounts</li><li>Checking accounts</li><li>Money market accounts</li><li>CDs</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-12"> <span class="mntl-sc-block-subheading__text"> Savings Accounts </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-13">
<strong>BBVA Savings Account</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-14">
A BBVA savings account is a basic savings account with a 0.01% <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>. Other account features include:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15">
<li>$25 minimum opening deposit</li><li>No fees at BBVA ATMs</li><li>Only four withdrawals per statement period before incurring fees</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-16">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-1">
<p>There is a $15 quarterly service fee with this account, which is waived if you set up an automatic monthly transfer of at least $25 from a BBVA checking account or maintain a daily balance of at least $500. Electronic statements are free, but choosing paper statements costs $3 per quarter.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-17">
<strong>Online Savings Account</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-18">
BBVA's online savings account isn't much different from its standard account, other than not having a quarterly maintenance fee. It also earns a 0.01% APY, much less than the <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">best online savings accounts</a>. Other account features include:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-19">
<li>$25 minimum opening deposit</li><li>Only four withdrawals per statement period before incurring fees</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-20">
<div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">BBVA Bank Savings Accounts</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Account Name</b></td>
<td><b>Min Opening Deposit</b></td>
<td><b> Quarterly Fee</b></td>
<td><b>APY</b></td>
</tr>
<tr>
<td>BBVA Savings</td>
<td>$25</td>
<td>$15 (Waivable)</td>
<td>0.01%</td>
</tr>
<tr>
<td>Online Savings </td>
<td>$25</td>
<td>$0</td>
<td>0.01%</td>
</tr>
</tbody>
</table>
<figcaption>BBVA Bank Savings Accounts</figcaption>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-21"> <span class="mntl-sc-block-subheading__text"> Checking Accounts </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-22">
<strong>Premium Checking Account</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-23">
Premium checking is the bank's only interest-bearing checking option, earning 0.01% APY. It also levies a $19 monthly maintenance fee that is waived by keeping a daily balance of at least $4,000 or making at least $4,000 in direct deposits monthly. Other features include:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-24">
<li>$25 minimum opening deposit</li><li>Access to 64,000 BBVA, AllPoint, and 7-Eleven ATMs across the U.S.</li><li>Automatic rebate of two out-of-network ATM fees a month</li><li>Personalized debit cards available</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-25">
<strong>Online Checking Account</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-26">
Another checking account option is BBVA's online checking. An account can be opened with a $25 initial deposit. Other features include:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27">
<li>No monthly maintenance fee</li><li>Access to 64,000 BBVA, AllPoint, and 7-Eleven ATMs across the U.S.</li><li>Free BBVA Visa debit card (One per account holder)</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-28">
Online checking also includes access to Simple Cash Back. Customers earn cash back rewards for qualifying purchases using a BBVA debit card.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-29">
<strong>Free Checking Account</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-30">
BBVA's free checking is a basic checking account. The account does offer several free perks, similar to its other checking accounts such as:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-31">
<li>No ATM fees at BBVA ATMs</li><li>No monthly maintenance fees</li><li>Free Visa debit card (One per account holder)</li><li>Free unlimited check writing privileges</li><li>Free online and paper monthly statements</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-32">
You can open an account with a $25 initial deposit. Accountholders also have access to the Simply Cash Back program. The account offers several add on features for additional costs:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-33">
<li>Unlimited cashier's checks for $2 per month</li><li>Safe deposit box for $3 per month</li><li>No BBVA fees for using another bank's ATM and four ATM fee rebates for $5 per month</li><li>An option to personalize debit card with a photo for a $10 fee</li><li>Unlimited standard checks (50% other styles) for $2 per month</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-34">
<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">BBVA Bank Checking Accounts</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Account Name </b></td>
<td><b>Min Opening Deposit</b></td>
<td><b>Monthly Fee</b></td>
<td><b>APY</b></td>
</tr>
<tr>
<td>Premium Checking</td>
<td>$25</td>
<td>$19 (Waivable)</td>
<td>0.01%</td>
</tr>
<tr>
<td>Online Checking</td>
<td>$25</td>
<td>$0</td>
<td>N/A</td>
</tr>
<tr>
<td>Free Checking </td>
<td>$25</td>
<td>$0</td>
<td>N/A</td>
</tr>
</tbody>
</table>
<figcaption>BBVA Bank Checking Accounts</figcaption>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-35"> <span class="mntl-sc-block-subheading__text"> Money Market Accounts </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-36">
BBVA’s money market accounts offer an APY of 0.01%.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-37">
Rates are based on standard rates set by BBVA, which may change depending on where you reside, and are tiered based on daily balance.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-38">
You can open a money market account with a $25 deposit. There is a $15 monthly service charge which is waived if you either keep a daily balance of $10,000 or set up an automatic monthly transfer of at least $25 from a BBVA checking account.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-warning mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-39">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-2">
<p>Money market accounts have a limit of six free withdrawals per month.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-warning mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-40">
<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">BBVA Money Market Account</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Daily Balance</b></td>
<td><b>APY</b></td>
</tr>
<tr>
<td>$25 - $9,999</td>
<td>0.01%</td>
</tr>
<tr>
<td>$10,000 - $999,999</td>
<td>0.01%</td>
</tr>
<tr>
<td>$1,000,000+</td>
<td>0.02%</td>
</tr>
</tbody>
</table>
<figcaption>BBVA Money Market Account Rates as of July 16, 2021</figcaption>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-41"> <span class="mntl-sc-block-subheading__text"> CDs </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-42">
BBVA offers CDs online and from local branches. To access local CD rates, stop in or call your local BBVA branch, or call BBVA at 1-844-BBVA USA. Online CDs are only available in four term lengths, all with lower interest rates than offered by the top online banks.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-43">
BBVA CDs require a $500 minimum deposit and have no monthly maintenance fees. Terms available are 11, 12, 18, and 36 months.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-44">
There are early withdrawal penalties for pulling funds from CDs before your term ends:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-45">
<li>Terms of 12 months or less: $25 plus 1% of the amount withdrawn</li><li>Terms longer than 12 months: $25 plus 3% of withdrawn amount</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-46">
<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">BBVA Online CD Terms and Rates</th>
</tr>
<tr>
<th>Term</th>
<th>APY</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>11 months</td>
<td>0.05%</td>
</tr>
<tr>
<td>12 months</td>
<td>0.05%</td>
</tr>
<tr>
<td>18 months</td>
<td>0.05%</td>
</tr>
<tr>
<td>36 months</td>
<td>0.05%</td>
</tr>
</tbody>
</table>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<span class="heading-toc" id="toc-other-financial-products-offered-by-bbva"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-47"> <span class="mntl-sc-block-heading__text"> Other Financial Products Offered by BBVA </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-48">
BBVA also offers other products to complement its personal banking accounts including:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-49">
<li>Auto loans</li>
<li>Purchase mortgages</li>
<li>Refinance mortgages</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeequityloan.asp" rel="noopener noreferrer">Home equity loans</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/" rel="noopener noreferrer">Home equity lines of credit (HELOCs)</a></li>
<li>IRAs</li>
<li>Investment accounts</li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bbva-personal-loans-review-4846166" rel="noopener noreferrer">Personal loans</a></li>
<li>Small business banking solutions</li>
<li>Commercial banking solutions</li>
<li>Corporate banking solutions</li>
<li>Wealth management </li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-how-to-bank-with-bbva"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-50"> <span class="mntl-sc-block-heading__text"> How to Bank With BBVA </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-51">
Customers can open an account with BBVA online via its website. Select bank accounts can be opened in person at a BBVA bank branch or by phone.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-52">
To open an account, customers need to verify their identity by providing info from one of the following sources:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-53">
<li>Driver's license</li><li>Passport</li><li>State issued ID with photo</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-54">
Opening a new account requires a deposit from a debit or credit card, an account at another bank, or an existing BBVA account.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-55">
<span class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-1">
Verdict</span><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-3">
<p>BBVA provides customers a full-service online banking experience with options that fit a wide range of needs. But its interest-bearing accounts don't have the higher rates you associate with top online banks. Most of its bank branches are located in the southwest region of the U.S., which limits customers looking for both online and local banking services. Customers face monthly transaction limits with some BBVA accounts. BBVA Bank offers enough variety and value through its banking services to warrant at least a long look from most potential customers.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<span class="heading-toc" id="toc-methodology"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-56"> <span class="mntl-sc-block-heading__text"> Methodology </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-57">
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected over 20 data points across more than 80 banks including products available, interest rates, fees, and accessibility to ensure that our content helps users make the right decision for their savings and banking needs.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="false" data-link-closest-header="false" data-tracking-container="true" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_2-0-58">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-retailer-type="none" data-tracking-container="true" href="https://www.bbvausa.com/" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div><!-- end: comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block -->
</div><!-- end: comp article-body article-content mntl-block -->
</div>
</div><!-- end: comp product-review-content product-review-content--finance product-review--base -->
</span>
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<li class="mntl-sources__source" id="citation-20"><p>Cision PR Newswire. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.prnewswire.com/news-releases/pnc-completes-acquisition-of-bbva-usa-301302917.html">PNC Completes Acquisition of BBVA USA</a>."</p></li>
<li class="mntl-sources__source" id="citation-19"><p>BBVA. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bbva.com/en/bbva-recognized-once-again-by-javelin-strategy-research-for-mobile-and-online-banking-in-the-u-s/" rel="nofollow sponsored">BBVA Recognized Once Again By Javeline Strategy & Research For Mobile and Online Banking in the U.S.</a>"</p></li>
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:fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png)
:fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png)
[Open Account](https://www.bbvausa.com/)
BBVA has a strong [online banking](https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp) presence and branches in seven states. Based in Birmingham, Alabama, the bank launched its first online offerings as far back as 1995.
In our in-depth review of BBVA bank, we'll look at the products and services available and whether it's a good fit for your banking needs.
* Pros & Cons
* Company Overview
Pros & Cons
Pros
* Full service banking options
* Cash bank rewards with some checking accounts
* Large ATM network
* Award-winning mobile app and online banking service
Cons
* High overdraft fees
* Low interest rates
* Branches in only a few states
* Few monthly transactions without a fee
Company Overview
* Year Founded
1964
* Official Website
www.bbvausa.com
* Official Products Offered
Savings, checking, CDs, MMA
* Customer Service
Phone line: 1-844-228-2872 (Ala., Ariz., California, Colo., Fla., N.M., and Texas) & 1-866-534-4482 (all other states)
:fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png)
:fill(white):max_bytes(150000):strip_icc()/bbva-logo-19386384f313475ca9c033f15117e849.png)
[Open Account](https://www.bbvausa.com/)
Table of Contents
View All
BBVA Bank Review
* [Pros Explained](#toc-pros-explained)
* [Cons Explained](#toc-cons-explained)
* [Best For](#toc-who-is-bbva-bank-best-for)
* [Bank Offerings](#toc-what-does-bbva-bank-offer)
* [Other Products](#toc-other-financial-products-offered-by-bbva)
* [How to Bank](#toc-how-to-bank-with-bbva)
* [Methodology](#toc-methodology)
Important
BBVA USA is now part of [PNC Bank](https://www.investopedia.com/pnc-bank-review-4845401), and is no longer accepting applications.
## Pros Explained
* **Full service banking options:** BBVA has accounts to meet almost every need, including checking, savings, [money market](https://www.investopedia.com/terms/m/moneymarket.asp), [certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp), IRAs, and more.
* **Cash-back rewards with some checking accounts:** Both BBVA online checking and free checking accounts earn cash-back rewards for debit card purchases through BBVA's Simple Cash Back program.
* **Large ATM network:** Most BBVA accounts with debit cards have access to 64,000 BBVA and other participating ATMs.
* **Award-winning mobile app and online banking service:** BBVA's mobile app was named a 2019 leader in mobile banking by independent research firm Javelin Strategy & Research.
## Cons Explained
* **High overdraft fees:** BBVA has an overdraft fee of $38 per transaction, up to six per day.
* **Low interest rates:** Interest rates on BBVA accounts are much lower than other online banks.
* **Branches in only a few states:** BBVA only has branches in seven states: Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas.
* **Few monthly transactions without a fee:** Some BBVA accounts, like BBVA Savings and Online Savings, only allow four free transactions a month.
## Who Is BBVA Bank Best For?
[BBVA](https://www.bbvausa.com/) should appeal to consumers looking for a full-service online bank. It may be a good fit for customers who want to:
* Have a variety of accounts at the same bank
* Do the majority of their banking online or via mobile app
* Aren’t interested in earning interest from savings or checking accounts
* Plan to keep large enough account balances to avoid monthly service fees
* Access a large no-fee ATM network
## What Does BBVA Bank Offer?
BBVA Bank has a full array of banking solutions available to appeal to a wide range of customers including:
* Savings accounts
* Checking accounts
* Money market accounts
* CDs
### Savings Accounts
**BBVA Savings Account**
A BBVA savings account is a basic savings account with a 0.01% [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp). Other account features include:
* $25 minimum opening deposit
* No fees at BBVA ATMs
* Only four withdrawals per statement period before incurring fees
There is a $15 quarterly service fee with this account, which is waived if you set up an automatic monthly transfer of at least $25 from a BBVA checking account or maintain a daily balance of at least $500. Electronic statements are free, but choosing paper statements costs $3 per quarter.
**Online Savings Account**
BBVA's online savings account isn't much different from its standard account, other than not having a quarterly maintenance fee. It also earns a 0.01% APY, much less than the [best online savings accounts](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp). Other account features include:
* $25 minimum opening deposit
* Only four withdrawals per statement period before incurring fees
| BBVA Bank Savings Accounts | | | |
| --- | --- | --- | --- |
| **Account Name** | **Min Opening Deposit** | **Quarterly Fee** | **APY** |
| BBVA Savings | $25 | $15 (Waivable) | 0.01% |
| Online Savings | $25 | $0 | 0.01% |
BBVA Bank Savings Accounts
### Checking Accounts
**Premium Checking Account**
Premium checking is the bank's only interest-bearing checking option, earning 0.01% APY. It also levies a $19 monthly maintenance fee that is waived by keeping a daily balance of at least $4,000 or making at least $4,000 in direct deposits monthly. Other features include:
* $25 minimum opening deposit
* Access to 64,000 BBVA, AllPoint, and 7-Eleven ATMs across the U.S.
* Automatic rebate of two out-of-network ATM fees a month
* Personalized debit cards available
**Online Checking Account**
Another checking account option is BBVA's online checking. An account can be opened with a $25 initial deposit. Other features include:
* No monthly maintenance fee
* Access to 64,000 BBVA, AllPoint, and 7-Eleven ATMs across the U.S.
* Free BBVA Visa debit card (One per account holder)
Online checking also includes access to Simple Cash Back. Customers earn cash back rewards for qualifying purchases using a BBVA debit card.
**Free Checking Account**
BBVA's free checking is a basic checking account. The account does offer several free perks, similar to its other checking accounts such as:
* No ATM fees at BBVA ATMs
* No monthly maintenance fees
* Free Visa debit card (One per account holder)
* Free unlimited check writing privileges
* Free online and paper monthly statements
You can open an account with a $25 initial deposit. Accountholders also have access to the Simply Cash Back program. The account offers several add on features for additional costs:
* Unlimited cashier's checks for $2 per month
* Safe deposit box for $3 per month
* No BBVA fees for using another bank's ATM and four ATM fee rebates for $5 per month
* An option to personalize debit card with a photo for a $10 fee
* Unlimited standard checks (50% other styles) for $2 per month
| BBVA Bank Checking Accounts | | | |
| --- | --- | --- | --- |
| **Account Name** | **Min Opening Deposit** | **Monthly Fee** | **APY** |
| Premium Checking | $25 | $19 (Waivable) | 0.01% |
| Online Checking | $25 | $0 | N/A |
| Free Checking | $25 | $0 | N/A |
BBVA Bank Checking Accounts
### Money Market Accounts
BBVA’s money market accounts offer an APY of 0.01%.
Rates are based on standard rates set by BBVA, which may change depending on where you reside, and are tiered based on daily balance.
You can open a money market account with a $25 deposit. There is a $15 monthly service charge which is waived if you either keep a daily balance of $10,000 or set up an automatic monthly transfer of at least $25 from a BBVA checking account.
Money market accounts have a limit of six free withdrawals per month.
| BBVA Money Market Account | |
| --- | --- |
| **Daily Balance** | **APY** |
| $25 - $9,999 | 0.01% |
| $10,000 - $999,999 | 0.01% |
| $1,000,000+ | 0.02% |
BBVA Money Market Account Rates as of July 16, 2021
### CDs
BBVA offers CDs online and from local branches. To access local CD rates, stop in or call your local BBVA branch, or call BBVA at 1-844-BBVA USA. Online CDs are only available in four term lengths, all with lower interest rates than offered by the top online banks.
BBVA CDs require a $500 minimum deposit and have no monthly maintenance fees. Terms available are 11, 12, 18, and 36 months.
There are early withdrawal penalties for pulling funds from CDs before your term ends:
* Terms of 12 months or less: $25 plus 1% of the amount withdrawn
* Terms longer than 12 months: $25 plus 3% of withdrawn amount
| BBVA Online CD Terms and Rates | |
| --- | --- |
| Term | APY |
| 11 months | 0.05% |
| 12 months | 0.05% |
| 18 months | 0.05% |
| 36 months | 0.05% |
## Other Financial Products Offered by BBVA
BBVA also offers other products to complement its personal banking accounts including:
* Auto loans
* Purchase mortgages
* Refinance mortgages
* [Home equity loans](https://www.investopedia.com/terms/h/homeequityloan.asp)
* [Home equity lines of credit (HELOCs)](https://www.investopedia.com/mortgage/heloc/)
* IRAs
* Investment accounts
* [Personal loans](https://www.investopedia.com/bbva-personal-loans-review-4846166)
* Small business banking solutions
* Commercial banking solutions
* Corporate banking solutions
* Wealth management
## How to Bank With BBVA
Customers can open an account with BBVA online via its website. Select bank accounts can be opened in person at a BBVA bank branch or by phone.
To open an account, customers need to verify their identity by providing info from one of the following sources:
* Driver's license
* Passport
* State issued ID with photo
Opening a new account requires a deposit from a debit or credit card, an account at another bank, or an existing BBVA account.
Verdict
BBVA provides customers a full-service online banking experience with options that fit a wide range of needs. But its interest-bearing accounts don't have the higher rates you associate with top online banks. Most of its bank branches are located in the southwest region of the U.S., which limits customers looking for both online and local banking services. Customers face monthly transaction limits with some BBVA accounts. BBVA Bank offers enough variety and value through its banking services to warrant at least a long look from most potential customers.
## Methodology
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected over 20 data points across more than 80 banks including products available, interest rates, fees, and accessibility to ensure that our content helps users make the right decision for their savings and banking needs.
[Open Account](https://www.bbvausa.com/)
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
[editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy)
1. Cision PR Newswire. "[PNC Completes Acquisition of BBVA USA](https://www.prnewswire.com/news-releases/pnc-completes-acquisition-of-bbva-usa-301302917.html)."
2. BBVA. "[BBVA Recognized Once Again By Javeline Strategy & Research For Mobile and Online Banking in the U.S.](https://www.bbva.com/en/bbva-recognized-once-again-by-javelin-strategy-research-for-mobile-and-online-banking-in-the-u-s/)"
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|
Open Account
BBVA has a strong online banking presence and branches in seven states. Based in Birmingham, Alabama, the bank launched its first online offerings as far back as 1995.
In our in-depth review of BBVA bank, we'll look at the products and services available and whether it's a good fit for your banking needs.
Pros & Cons
Company Overview
Pros & Cons
Pros
Full service banking options
Cash bank rewards with some checking accounts
Large ATM network
Award-winning mobile app and online banking service
Cons
High overdraft fees
Low interest rates
Branches in only a few states
Few monthly transactions without a fee
Company Overview
Year Founded
1964
Official Website
www.bbvausa.com
Official Products Offered
Savings, checking, CDs, MMA
Customer Service
Phone line: 1-844-228-2872 (Ala., Ariz., California, Colo., Fla., N.M., and Texas) & 1-866-534-4482 (all other states)
Open Account
Table of Contents
View All
BBVA Bank Review
Pros Explained
Cons Explained
Best For
Bank Offerings
Other Products
How to Bank
Methodology
Important
BBVA USA is now part of PNC Bank, and is no longer accepting applications.
Pros Explained
Full service banking options: BBVA has accounts to meet almost every need, including checking, savings, money market, certificates of deposit (CDs), IRAs, and more.
Cash-back rewards with some checking accounts: Both BBVA online checking and free checking accounts earn cash-back rewards for debit card purchases through BBVA's Simple Cash Back program.
Large ATM network: Most BBVA accounts with debit cards have access to 64,000 BBVA and other participating ATMs.
Award-winning mobile app and online banking service: BBVA's mobile app was named a 2019 leader in mobile banking by independent research firm Javelin Strategy & Research.
Cons Explained
High overdraft fees: BBVA has an overdraft fee of $38 per transaction, up to six per day.Low interest rates: Interest rates on BBVA accounts are much lower than other online banks.Branches in only a few states: BBVA only has branches in seven states: Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. Few monthly transactions without a fee: Some BBVA accounts, like BBVA Savings and Online Savings, only allow four free transactions a month.
Who Is BBVA Bank Best For?
BBVA should appeal to consumers looking for a full-service online bank. It may be a good fit for customers who want to:
Have a variety of accounts at the same bankDo the majority of their banking online or via mobile appAren’t interested in earning interest from savings or checking accountsPlan to keep large enough account balances to avoid monthly service feesAccess a large no-fee ATM network
What Does BBVA Bank Offer?
BBVA Bank has a full array of banking solutions available to appeal to a wide range of customers including:
Savings accountsChecking accountsMoney market accountsCDs
Savings Accounts
BBVA Savings Account
A BBVA savings account is a basic savings account with a 0.01% annual percentage yield (APY). Other account features include:
$25 minimum opening depositNo fees at BBVA ATMsOnly four withdrawals per statement period before incurring fees
There is a $15 quarterly service fee with this account, which is waived if you set up an automatic monthly transfer of at least $25 from a BBVA checking account or maintain a daily balance of at least $500. Electronic statements are free, but choosing paper statements costs $3 per quarter.
Online Savings Account
BBVA's online savings account isn't much different from its standard account, other than not having a quarterly maintenance fee. It also earns a 0.01% APY, much less than the best online savings accounts. Other account features include:
$25 minimum opening depositOnly four withdrawals per statement period before incurring fees
BBVA Bank Savings Accounts
Account Name
Min Opening Deposit
Quarterly Fee
APY
BBVA Savings
$25
$15 (Waivable)
0.01%
Online Savings
$25
$0
0.01%
BBVA Bank Savings Accounts
Checking Accounts
Premium Checking Account
Premium checking is the bank's only interest-bearing checking option, earning 0.01% APY. It also levies a $19 monthly maintenance fee that is waived by keeping a daily balance of at least $4,000 or making at least $4,000 in direct deposits monthly. Other features include:
$25 minimum opening depositAccess to 64,000 BBVA, AllPoint, and 7-Eleven ATMs across the U.S.Automatic rebate of two out-of-network ATM fees a monthPersonalized debit cards available
Online Checking Account
Another checking account option is BBVA's online checking. An account can be opened with a $25 initial deposit. Other features include:
No monthly maintenance feeAccess to 64,000 BBVA, AllPoint, and 7-Eleven ATMs across the U.S.Free BBVA Visa debit card (One per account holder)
Online checking also includes access to Simple Cash Back. Customers earn cash back rewards for qualifying purchases using a BBVA debit card.
Free Checking Account
BBVA's free checking is a basic checking account. The account does offer several free perks, similar to its other checking accounts such as:
No ATM fees at BBVA ATMsNo monthly maintenance feesFree Visa debit card (One per account holder)Free unlimited check writing privilegesFree online and paper monthly statements
You can open an account with a $25 initial deposit. Accountholders also have access to the Simply Cash Back program. The account offers several add on features for additional costs:
Unlimited cashier's checks for $2 per monthSafe deposit box for $3 per monthNo BBVA fees for using another bank's ATM and four ATM fee rebates for $5 per monthAn option to personalize debit card with a photo for a $10 feeUnlimited standard checks (50% other styles) for $2 per month
BBVA Bank Checking Accounts
Account Name
Min Opening Deposit
Monthly Fee
APY
Premium Checking
$25
$19 (Waivable)
0.01%
Online Checking
$25
$0
N/A
Free Checking
$25
$0
N/A
BBVA Bank Checking Accounts
Money Market Accounts
BBVA’s money market accounts offer an APY of 0.01%.
Rates are based on standard rates set by BBVA, which may change depending on where you reside, and are tiered based on daily balance.
You can open a money market account with a $25 deposit. There is a $15 monthly service charge which is waived if you either keep a daily balance of $10,000 or set up an automatic monthly transfer of at least $25 from a BBVA checking account.
Money market accounts have a limit of six free withdrawals per month.
BBVA Money Market Account
Daily Balance
APY
$25 - $9,999
0.01%
$10,000 - $999,999
0.01%
$1,000,000+
0.02%
BBVA Money Market Account Rates as of July 16, 2021
CDs
BBVA offers CDs online and from local branches. To access local CD rates, stop in or call your local BBVA branch, or call BBVA at 1-844-BBVA USA. Online CDs are only available in four term lengths, all with lower interest rates than offered by the top online banks.
BBVA CDs require a $500 minimum deposit and have no monthly maintenance fees. Terms available are 11, 12, 18, and 36 months.
There are early withdrawal penalties for pulling funds from CDs before your term ends:
Terms of 12 months or less: $25 plus 1% of the amount withdrawnTerms longer than 12 months: $25 plus 3% of withdrawn amount
BBVA Online CD Terms and Rates
Term
APY
11 months
0.05%
12 months
0.05%
18 months
0.05%
36 months
0.05%
Other Financial Products Offered by BBVA
BBVA also offers other products to complement its personal banking accounts including:
Auto loans
Purchase mortgages
Refinance mortgages
Home equity loans
Home equity lines of credit (HELOCs)
IRAs
Investment accounts
Personal loans
Small business banking solutions
Commercial banking solutions
Corporate banking solutions
Wealth management
How to Bank With BBVA
Customers can open an account with BBVA online via its website. Select bank accounts can be opened in person at a BBVA bank branch or by phone.
To open an account, customers need to verify their identity by providing info from one of the following sources:
Driver's licensePassportState issued ID with photo
Opening a new account requires a deposit from a debit or credit card, an account at another bank, or an existing BBVA account.
Verdict
BBVA provides customers a full-service online banking experience with options that fit a wide range of needs. But its interest-bearing accounts don't have the higher rates you associate with top online banks. Most of its bank branches are located in the southwest region of the U.S., which limits customers looking for both online and local banking services. Customers face monthly transaction limits with some BBVA accounts. BBVA Bank offers enough variety and value through its banking services to warrant at least a long look from most potential customers.
Methodology
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected over 20 data points across more than 80 banks including products available, interest rates, fees, and accessibility to ensure that our content helps users make the right decision for their savings and banking needs.
Open Account
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
editorial policy.
Cision PR Newswire. "PNC Completes Acquisition of BBVA USA."
BBVA. "BBVA Recognized Once Again By Javeline Strategy & Research For Mobile and Online Banking in the U.S."
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https://www.investopedia.com/articles/financial-theory/09/calculating-beta.asp | Calculating Beta in Excel: Portfolio Math For The Average Investor | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 measure the risk of a particular equity, many investors turn to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp" rel="noopener noreferrer">beta</a>. Though plenty of financial sites provide them, what risks are you taking by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/beta-know-risk/" rel="noopener noreferrer">using one of the betas</a> provided by an outside source? Betas provided for you by online services have unknown variable inputs, which in all likelihood are not adaptive to your unique portfolio. Betas can be calculated in a number of ways, since the variables for input depend on <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/110813/using-time-horizons-investing.asp" rel="noopener noreferrer">your investment time horizon</a>, your view of what constitutes "the market" and several other factors. This means a customized version is best.
</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 how to calculate your own beta using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://academy.investopedia.com/collections/excel-for-finance" rel="noopener noreferrer">Microsoft Excel</a> in order to provide a risk measure that's personalized for your individual portfolio.
</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>Beta is a measure of a particular stock's relative risk to the broader stock market.</li><li>Beta looks at the correlation in price movement between the stock and the S&P 500 index.</li><li>Beta can be calculated using Excel in order to determine the riskiness of stock on your own.</li></ul></div></div></div>
<span class="heading-toc" id="toc-provided-betas-vs-calculated-betas"></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"> Provided Betas Vs. Calculated Betas </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Begin by looking at the time frame chosen for calculating beta. Provided betas are calculated with time frames unknown to their consumers. This poses a unique problem to end users, who need this measurement to gauge portfolio risk. Long-term investors will certainly want to gauge the risk over a longer time period than a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/positiontrader.asp" rel="noopener noreferrer">position trader</a> who turns over their portfolio every few months.
</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"> Another problem may be the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp" rel="noopener noreferrer">index</a> used to calculate beta. Most provided betas use the American standard of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp" rel="noopener noreferrer">S&P 500 Index</a>. If your portfolio contains equities that extend beyond U.S. borders, like a company that is based and operated in China, the S&P 500 may not be the best measure of the market. By calculating your own beta you can adjust for these differences and create a more encompassing view of risk.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> One distinct advantage of calculating the beta yourself is the ability to gauge the beta's reliability by calculating the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coefficient-of-determination.asp" rel="noopener noreferrer">coefficient of determination</a>, or as it is better known, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/r-squared.asp" rel="noopener noreferrer">r-squared</a>. This is a powerful tool that can determine how well your beta measures risk. The range of this statistic is zero to one. The closer the r-squared is to one, the more reliable your beta is.
</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"> Another unknown factor of pre-made betas is the method used to calculate them. There are two ways to calculate: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regression.asp" rel="noopener noreferrer">regression</a> and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp" rel="noopener noreferrer">capital asset pricing model</a> (CAPM). <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp" rel="noopener noreferrer">CAPM is used more commonly</a> in academic finance; investment practitioners more often use the regression technique. This allows for a better explanation of returns pertaining to the market rather than a theoretical explanation of the overall return of an asset, which takes interest rates as well as market returns into account.
</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"> Inevitably, there are also disadvantages to doing it yourself. The main issue is the time involved. Calculating beta yourself takes longer than doing it through a website, but this time can be significantly cut down by using programs such as Microsoft Excel or Open Office Calc.
</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-preliminary-steps--calculating-beta"></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"> Preliminary Steps & Calculating Beta </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Once you've decided on a time frame that aligns itself with your investment time horizon and have chosen an appropriate index, you can then move on to gathering data. Look for historical prices of each equity to find the appropriate date information matching your chosen time horizon. On some sites, you will have the option to download the information as a spreadsheet. Choose this option and save the spreadsheet. Do the same for your chosen index as well.
</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"> Copy both of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/closingprice.asp" rel="noopener noreferrer">closing price</a> columns into a new spreadsheet. They should be in order from newest to oldest. To obtain the correct format for calculation we must convert these prices into return percentages for both the index and the stock price. To do this, just take the price from today minus the price from yesterday and divide the answer by the price of yesterday. The result is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/percentage-change.asp" rel="noopener noreferrer">percentage change</a>. Below is an example showing this in Excel.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-square figure-low-res" id="mntl-sc-block_23-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:83.7%;">
<img class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/HYZBFcYYsXsphywlsWVt-i59eAs=/485x0/filters:no_upscale():max_bytes(150000):strip_icc()/returnscalc-5bfd919a4cedfd0026022afe" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/LwD3NbJLtE6GNRT77lBZ9jhMbS8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/returnscalc-5bfd919a4cedfd0026022afe" data-srcset="https://www.investopedia.com/thmb/eXm-3pEL_5g6G_XzkGYekn1IJS0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/returnscalc-5bfd919a4cedfd0026022afe 750w" data-tracking-container="true" height="406" id="mntl-sc-block-image_1-0" width="485"/>
<noscript>
<img class="img--noscript universal-image__image" height="406" sizes="750px" src="https://www.investopedia.com/thmb/LwD3NbJLtE6GNRT77lBZ9jhMbS8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/returnscalc-5bfd919a4cedfd0026022afe" srcset="https://www.investopedia.com/thmb/eXm-3pEL_5g6G_XzkGYekn1IJS0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/returnscalc-5bfd919a4cedfd0026022afe 750w" width="485"/>
</noscript>
</div> </div>
</figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <em>Figure 1: Results</em>
</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 calculation of beta through regression is simply the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/covariance.asp" rel="noopener noreferrer">covariance</a> of the two arrays divided by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variance.asp" rel="noopener noreferrer">variance</a> of the array of the index. The formula is shown below.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <strong>Beta = COVAR(E2:E99,D2:D99)/VAR(D2:D99)</strong>
</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"> One advantage we discussed earlier is the ability to gauge the reliability of your beta. This is done by calculating the r-squared. From here we input the two arrays containing the percentage changes. Below is this formula in Excel.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <strong>R-Squared = RSQ(D2:D99,E2:E99)</strong>
</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-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"> Although calculating your own betas can be time-consuming compared to using service-provided betas, they do offer a better look at risk through personalization. In addition, we can also gauge the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/measure-mutual-fund-risk/" rel="noopener noreferrer">reliability of this risk</a> measurement by calculating its r-squared. These advantages are a valuable tool to an investment arsenal and should be used by any serious investor.
</p></div> | To measure the risk of a particular equity, many investors turn to [beta](https://www.investopedia.com/terms/b/beta.asp). Though plenty of financial sites provide them, what risks are you taking by [using one of the betas](https://www.investopedia.com/investing/beta-know-risk/) provided by an outside source? Betas provided for you by online services have unknown variable inputs, which in all likelihood are not adaptive to your unique portfolio. Betas can be calculated in a number of ways, since the variables for input depend on [your investment time horizon](https://www.investopedia.com/articles/investing/110813/using-time-horizons-investing.asp), your view of what constitutes "the market" and several other factors. This means a customized version is best.
Learn how to calculate your own beta using [Microsoft Excel](https://academy.investopedia.com/collections/excel-for-finance) in order to provide a risk measure that's personalized for your individual portfolio.
### Key Takeaways
* Beta is a measure of a particular stock's relative risk to the broader stock market.
* Beta looks at the correlation in price movement between the stock and the S&P 500 index.
* Beta can be calculated using Excel in order to determine the riskiness of stock on your own.
## Provided Betas Vs. Calculated Betas
Begin by looking at the time frame chosen for calculating beta. Provided betas are calculated with time frames unknown to their consumers. This poses a unique problem to end users, who need this measurement to gauge portfolio risk. Long-term investors will certainly want to gauge the risk over a longer time period than a [position trader](https://www.investopedia.com/terms/p/positiontrader.asp) who turns over their portfolio every few months.
Another problem may be the [index](https://www.investopedia.com/terms/i/index.asp) used to calculate beta. Most provided betas use the American standard of the [S&P 500 Index](https://www.investopedia.com/terms/s/sp500.asp). If your portfolio contains equities that extend beyond U.S. borders, like a company that is based and operated in China, the S&P 500 may not be the best measure of the market. By calculating your own beta you can adjust for these differences and create a more encompassing view of risk.
One distinct advantage of calculating the beta yourself is the ability to gauge the beta's reliability by calculating the [coefficient of determination](https://www.investopedia.com/terms/c/coefficient-of-determination.asp), or as it is better known, the [r-squared](https://www.investopedia.com/terms/r/r-squared.asp). This is a powerful tool that can determine how well your beta measures risk. The range of this statistic is zero to one. The closer the r-squared is to one, the more reliable your beta is.
Another unknown factor of pre-made betas is the method used to calculate them. There are two ways to calculate: [regression](https://www.investopedia.com/terms/r/regression.asp) and the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM). [CAPM is used more commonly](https://www.investopedia.com/terms/c/capm.asp) in academic finance; investment practitioners more often use the regression technique. This allows for a better explanation of returns pertaining to the market rather than a theoretical explanation of the overall return of an asset, which takes interest rates as well as market returns into account.
Inevitably, there are also disadvantages to doing it yourself. The main issue is the time involved. Calculating beta yourself takes longer than doing it through a website, but this time can be significantly cut down by using programs such as Microsoft Excel or Open Office Calc.
## Preliminary Steps & Calculating Beta
Once you've decided on a time frame that aligns itself with your investment time horizon and have chosen an appropriate index, you can then move on to gathering data. Look for historical prices of each equity to find the appropriate date information matching your chosen time horizon. On some sites, you will have the option to download the information as a spreadsheet. Choose this option and save the spreadsheet. Do the same for your chosen index as well.
Copy both of the [closing price](https://www.investopedia.com/terms/c/closingprice.asp) columns into a new spreadsheet. They should be in order from newest to oldest. To obtain the correct format for calculation we must convert these prices into return percentages for both the index and the stock price. To do this, just take the price from today minus the price from yesterday and divide the answer by the price of yesterday. The result is the [percentage change](https://www.investopedia.com/terms/p/percentage-change.asp). Below is an example showing this in Excel.
![]()
:max_bytes(150000):strip_icc()/returnscalc-5bfd919a4cedfd0026022afe)
*Figure 1: Results*
The calculation of beta through regression is simply the [covariance](https://www.investopedia.com/terms/c/covariance.asp) of the two arrays divided by the [variance](https://www.investopedia.com/terms/v/variance.asp) of the array of the index. The formula is shown below.
**Beta = COVAR(E2:E99,D2:D99)/VAR(D2:D99)**
One advantage we discussed earlier is the ability to gauge the reliability of your beta. This is done by calculating the r-squared. From here we input the two arrays containing the percentage changes. Below is this formula in Excel.
**R-Squared = RSQ(D2:D99,E2:E99)**
## The Bottom Line
Although calculating your own betas can be time-consuming compared to using service-provided betas, they do offer a better look at risk through personalization. In addition, we can also gauge the [reliability of this risk](https://www.investopedia.com/investing/measure-mutual-fund-risk/) measurement by calculating its r-squared. These advantages are a valuable tool to an investment arsenal and should be used by any serious investor.
| To measure the risk of a particular equity, many investors turn to beta. Though plenty of financial sites provide them, what risks are you taking by using one of the betas provided by an outside source? Betas provided for you by online services have unknown variable inputs, which in all likelihood are not adaptive to your unique portfolio. Betas can be calculated in a number of ways, since the variables for input depend on your investment time horizon, your view of what constitutes "the market" and several other factors. This means a customized version is best.
Learn how to calculate your own beta using Microsoft Excel in order to provide a risk measure that's personalized for your individual portfolio.
Key Takeaways
Beta is a measure of a particular stock's relative risk to the broader stock market.Beta looks at the correlation in price movement between the stock and the S&P 500 index.Beta can be calculated using Excel in order to determine the riskiness of stock on your own.
Provided Betas Vs. Calculated Betas
Begin by looking at the time frame chosen for calculating beta. Provided betas are calculated with time frames unknown to their consumers. This poses a unique problem to end users, who need this measurement to gauge portfolio risk. Long-term investors will certainly want to gauge the risk over a longer time period than a position trader who turns over their portfolio every few months.
Another problem may be the index used to calculate beta. Most provided betas use the American standard of the S&P 500 Index. If your portfolio contains equities that extend beyond U.S. borders, like a company that is based and operated in China, the S&P 500 may not be the best measure of the market. By calculating your own beta you can adjust for these differences and create a more encompassing view of risk.
One distinct advantage of calculating the beta yourself is the ability to gauge the beta's reliability by calculating the coefficient of determination, or as it is better known, the r-squared. This is a powerful tool that can determine how well your beta measures risk. The range of this statistic is zero to one. The closer the r-squared is to one, the more reliable your beta is.
Another unknown factor of pre-made betas is the method used to calculate them. There are two ways to calculate: regression and the capital asset pricing model (CAPM). CAPM is used more commonly in academic finance; investment practitioners more often use the regression technique. This allows for a better explanation of returns pertaining to the market rather than a theoretical explanation of the overall return of an asset, which takes interest rates as well as market returns into account.
Inevitably, there are also disadvantages to doing it yourself. The main issue is the time involved. Calculating beta yourself takes longer than doing it through a website, but this time can be significantly cut down by using programs such as Microsoft Excel or Open Office Calc.
Preliminary Steps & Calculating Beta
Once you've decided on a time frame that aligns itself with your investment time horizon and have chosen an appropriate index, you can then move on to gathering data. Look for historical prices of each equity to find the appropriate date information matching your chosen time horizon. On some sites, you will have the option to download the information as a spreadsheet. Choose this option and save the spreadsheet. Do the same for your chosen index as well.
Copy both of the closing price columns into a new spreadsheet. They should be in order from newest to oldest. To obtain the correct format for calculation we must convert these prices into return percentages for both the index and the stock price. To do this, just take the price from today minus the price from yesterday and divide the answer by the price of yesterday. The result is the percentage change. Below is an example showing this in Excel.
Figure 1: Results
The calculation of beta through regression is simply the covariance of the two arrays divided by the variance of the array of the index. The formula is shown below.
Beta = COVAR(E2:E99,D2:D99)/VAR(D2:D99)
One advantage we discussed earlier is the ability to gauge the reliability of your beta. This is done by calculating the r-squared. From here we input the two arrays containing the percentage changes. Below is this formula in Excel.
R-Squared = RSQ(D2:D99,E2:E99)
The Bottom Line
Although calculating your own betas can be time-consuming compared to using service-provided betas, they do offer a better look at risk through personalization. In addition, we can also gauge the reliability of this risk measurement by calculating its r-squared. These advantages are a valuable tool to an investment arsenal and should be used by any serious investor.
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https://www.investopedia.com/articles/financialcareers/06/whatisaria.asp | Registered Investment Advisor: Definition, Duties, and 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-a-registered-investment-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"> What Is a Registered Investment Advisor? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The financial services industry is a rapidly changing professional environment. As the needs and desires of consumers change, firms engaged in managing money are also evolving.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/ria.asp">registered investment advisor</a> (RIA) manages the assets of high-net-worth individuals and institutional investors and sits on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyside.asp">buy-side</a> of the investment field. They must register with the Securities and Exchange Commission (SEC) and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/series63-050509.asp">any states in which they operate</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_5-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Most RIAs are partnerships or corporations, but individuals can also register as RIAs.
</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>Registered investment advisors (RIAs) manage the assets of high-net-worth individuals and institutional investors.</li><li>RIAs can create portfolios with individual stocks, bonds, and mutual funds; they may use a mix of funds and individual issues or only funds to streamline asset allocation and cut down on commission costs.</li><li>An RIA usually generates revenue through a management fee, which is made up of a percentage of assets held for a client—fees of 0.5% to 2% are not unusual.</li><li>An RIA must register with the Securities and Exchange Commission (SEC) as well as with any states in which they operate.<span class="ql-inline-citation" data-cite="1"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-registered-investment-advisors"></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 Registered Investment Advisors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Most Americans who participate in the stock market have done so through mutual funds, though crypto has recently been outpacing mutual funds. Exchange traded funds (ETFs) have also become a popular investment class.<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"> As the amount of money that an individual or group has increases, the ability to achieve the best results with mutual funds or ETFs diminishes. This is where RIAs are able to provide additional services mutual funds can't.
</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-what-does-an-ria-do"></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"> What Does an RIA Do? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Paid much like mutual fund managers, RIAs usually earn their revenue through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managementfee.asp">management fee</a> consisting of a percentage of assets held for a client. Fees fluctuate, some close to 0.5% and others upwards of 2%.
</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"> Generally, the more assets a client has, the lower the fee they can negotiate—sometimes as little as 0.35%. This serves to align the best interests of the client with those of the RIA, as the advisor cannot make any more money on the account unless the client increases their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset-base.asp">asset base</a>.
</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 most common definition of a high-net-worth investor is someone with a net worth of $1 million or more. Amounts below this tend to be more difficult to manage while still making a profit. If the average management fee is 1% of assets annually, a $100,000 account only earns an RIA $1,000 in annual fees, which is probably less than the costs the firm would incur internally to service the account.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Before hiring a registered investment advisor, make sure they are vetted, which includes opinions from friends and family, have the appropriate credentials, and can demonstrate a track record.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Registered investment advisors can be managing thousands of unique portfolios. This is because high-net-worth individuals and institutional investors are groups with unique needs. The advising firm will work with the clients to design a portfolio that suits their situation.
</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"> It could be the client has a large position in one particular stock with a very low <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/costbasis.asp">cost basis</a>; even though it represents a larger portion of its portfolio than would be ideal for diversification, the tax consequences are too severe to sell the position all at once. Or the client may be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/drawdown.asp">drawing down</a> on an account using a combination of interest income and outflows and needs the assistance of a professional to map the asset's life.
</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"> An RIA can create portfolios using individual stocks, bonds, and mutual funds. RIA firms can cover the spectrum as far as what goes into their clients' portfolios. They may use a mix of funds and individual issues or only funds as a way to streamline <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 cut down on commission costs.
</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-state-of-the-industry"></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"> State of the Industry </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The old model of a broker calling wealthy clients with stock ideas is dying. In fact, there has been a mass exodus of client assets leaving this model. There are several reasons for this change, including very high commission fees (the big profit vehicle of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wirehouse.asp" rel="noopener noreferrer">wirehouse</a> firms at the time), and often inadequate <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp" rel="noopener noreferrer">diversification</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Many of these brokers were not CFAs or MBAs, just glorified salesmen whose knowledge base was due more to happenstance than true education.
</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"> RIAs tend to compete with mutual funds, hedge funds, wirehouse firms—via <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wrapaccount.asp" rel="noopener noreferrer">wrap programs</a> or individual brokers—and do-it-yourselfers for the provision of investment services.
</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>Many clients are looking to have a true "financial quarterback," a resource they can use for solid advice on their total financial picture. A good RIA will speak to the client in terms of their overall goals and objectives and review these with the client at regular intervals.</li>
<li>Clients increasingly want to have more options and easier access to the decision-makers on their accounts. There are no direct access lines to the managers of a mutual fund account. There is no easy way to ask your mutual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundmanager.asp" rel="noopener noreferrer">fund manager</a> questions like, "Why did you choose to buy Walmart?" or "What's a good estimate for what my <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp" rel="noopener noreferrer">capital gains</a> could be this year?" Many clients want this either as part of their education or for their own peace of mind.</li>
<li>Mutual fund assets are <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pooledfunds.asp" rel="noopener noreferrer">pooled funds</a> with no tax considerations to any one holder of mutual fund shares. For a wealthy investor, there are simply too many dollars at stake for taxes to not be taken into account.</li>
<li>If the client is a large group and there are many interested parties (such as a nonprofit endowment, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp" rel="noopener noreferrer">pension plan</a>, or court-mandated trust), the extra service of having annual reports and other performance attribution can increase the attractiveness of an investment advisor in comparison to a mutual fund.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<span class="heading-toc" id="toc-what-types-of-professionals-work-for-rias"></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"> What Types of Professionals Work for RIAs? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> As they operate in many similar ways, the same types of jobs associated with a mutual fund are also found in an RIA: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/research-analyst.asp">research analysts</a>, portfolio managers, traders, technical/operational staff, and client service professionals.
</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 research conducted for an RIA is also similar to what you would find at a mutual fund. The main responsibilities include monitoring existing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdings.asp">holdings</a> and searching for suitable candidates for purchase.
</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 RIA provides an additional responsibility through the holdings brought in by clients and requested not to be sold. Many times a portfolio must be constructed around a large position; in these cases, the <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> must devise ways to mitigate the risk inherent in owning so much of one company.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_46-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_47-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wealthmanagement.asp">Wealth managers</a> are seen as financial planners, those that create long-term financial plans for their clients, which is different from a registered investment advisor, who is primarily concerned with growing the wealth of its client through investing.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Most firms handle order creation <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/in-house.asp">in-house</a> but do not actually execute the trades themselves. For this, they will have established brokerage relationships with firms catering to large orders from institutional clients.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cpa.asp">CPAs</a>, attorneys, and other financial professionals are increasingly being hired by RIAs as they attempt to offer all the services a wealthy client could want. Sometimes a separate fee is charged for one-time services, like a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_plan.asp">financial plan</a> from a CPA or the establishment of a family trust.
</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"> Other times, it is all blended into a single management fee. Being able to offer more services under one umbrella opens the doors to truly lucrative accounts: $10 million or more. Many RIA firms have only two or three clients so large they occupy all the resources of the firm. These firms can do quite well.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<span class="heading-toc" id="toc-why-become-an-ria"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> Why Become an RIA? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> An RIA firm is a progressive business in today's changing landscape of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymanagement.asp">money management</a>. It is an excellent place to begin a career or to hone in on a particular aspect of the business after cutting your teeth elsewhere for a few years.
</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"> Most RIA firms are owned privately, which can allow for greater opportunities for equity in the company. They are poised for fantastic growth as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/baby_boomer.asp">baby boomers</a> are finishing up their peak earnings years and entering into the highest net-worth phase of their lives.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-what-is-the-difference-between-a-registered-investment-advisor-and-a-financial-planner"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between a Registered Investment Advisor and a Financial Planner?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A registered investment advisor seeks to grow the wealth of their wealthy clients by making investments. RIAs are primarily concerned with the investment portfolios of high-net-worth individuals. Financial planners, on the other hand, are focused on long-term planning for their clients, touching upon the areas of retirement planning, estate planning, investing, and saving for a child's college education.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-what-do-registered-investment-advisors-do"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Do Registered Investment Advisors Do?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Registered investment advisors invest the money of high-net-worth individuals in order to generate profits; the ultimate goal is to increase the wealth of their clients. They are typically financial institutions that create tailored investment strategies for their clients and invest in a multitude of assets.</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-do-registered-investment-advisors-get-paid"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Registered Investment Advisors Get Paid?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Because registered investment advisors are held to a fiduciary duty, they do not get paid on commission, which could create a conflict of interest between the advisor and their client. Instead, registered investment advisors get paid based on a feed schedule.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Registered investment advisors manage money for extremely wealthy people as well as for financial institutions. RIAs make investments in many asset classes and work together with their clients in designing unique portfolios. RIAs provide a much more detailed and comprehensive portfolio than financial advisors can, particularly with access to more complex investments.
</p></div> | ## What Is a Registered Investment Advisor?
The financial services industry is a rapidly changing professional environment. As the needs and desires of consumers change, firms engaged in managing money are also evolving.
A [registered investment advisor](https://www.investopedia.com/terms/r/ria.asp) (RIA) manages the assets of high-net-worth individuals and institutional investors and sits on the [buy-side](https://www.investopedia.com/terms/b/buyside.asp) of the investment field. They must register with the Securities and Exchange Commission (SEC) and [any states in which they operate](https://www.investopedia.com/ask/answers/09/series63-050509.asp).
Most RIAs are partnerships or corporations, but individuals can also register as RIAs.
### Key Takeaways
* Registered investment advisors (RIAs) manage the assets of high-net-worth individuals and institutional investors.
* RIAs can create portfolios with individual stocks, bonds, and mutual funds; they may use a mix of funds and individual issues or only funds to streamline asset allocation and cut down on commission costs.
* An RIA usually generates revenue through a management fee, which is made up of a percentage of assets held for a client—fees of 0.5% to 2% are not unusual.
* An RIA must register with the Securities and Exchange Commission (SEC) as well as with any states in which they operate.
## Understanding Registered Investment Advisors
Most Americans who participate in the stock market have done so through mutual funds, though crypto has recently been outpacing mutual funds. Exchange traded funds (ETFs) have also become a popular investment class.
As the amount of money that an individual or group has increases, the ability to achieve the best results with mutual funds or ETFs diminishes. This is where RIAs are able to provide additional services mutual funds can't.
## What Does an RIA Do?
Paid much like mutual fund managers, RIAs usually earn their revenue through a [management fee](https://www.investopedia.com/terms/m/managementfee.asp) consisting of a percentage of assets held for a client. Fees fluctuate, some close to 0.5% and others upwards of 2%.
Generally, the more assets a client has, the lower the fee they can negotiate—sometimes as little as 0.35%. This serves to align the best interests of the client with those of the RIA, as the advisor cannot make any more money on the account unless the client increases their [asset base](https://www.investopedia.com/terms/a/asset-base.asp).
The most common definition of a high-net-worth investor is someone with a net worth of $1 million or more. Amounts below this tend to be more difficult to manage while still making a profit. If the average management fee is 1% of assets annually, a $100,000 account only earns an RIA $1,000 in annual fees, which is probably less than the costs the firm would incur internally to service the account.
###
Before hiring a registered investment advisor, make sure they are vetted, which includes opinions from friends and family, have the appropriate credentials, and can demonstrate a track record.
Registered investment advisors can be managing thousands of unique portfolios. This is because high-net-worth individuals and institutional investors are groups with unique needs. The advising firm will work with the clients to design a portfolio that suits their situation.
It could be the client has a large position in one particular stock with a very low [cost basis](https://www.investopedia.com/terms/c/costbasis.asp); even though it represents a larger portion of its portfolio than would be ideal for diversification, the tax consequences are too severe to sell the position all at once. Or the client may be [drawing down](https://www.investopedia.com/terms/d/drawdown.asp) on an account using a combination of interest income and outflows and needs the assistance of a professional to map the asset's life.
An RIA can create portfolios using individual stocks, bonds, and mutual funds. RIA firms can cover the spectrum as far as what goes into their clients' portfolios. They may use a mix of funds and individual issues or only funds as a way to streamline [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp) and cut down on commission costs.
## State of the Industry
The old model of a broker calling wealthy clients with stock ideas is dying. In fact, there has been a mass exodus of client assets leaving this model. There are several reasons for this change, including very high commission fees (the big profit vehicle of the [wirehouse](https://www.investopedia.com/terms/w/wirehouse.asp) firms at the time), and often inadequate [diversification](https://www.investopedia.com/terms/d/diversification.asp).
Many of these brokers were not CFAs or MBAs, just glorified salesmen whose knowledge base was due more to happenstance than true education.
RIAs tend to compete with mutual funds, hedge funds, wirehouse firms—via [wrap programs](https://www.investopedia.com/terms/w/wrapaccount.asp) or individual brokers—and do-it-yourselfers for the provision of investment services.
* Many clients are looking to have a true "financial quarterback," a resource they can use for solid advice on their total financial picture. A good RIA will speak to the client in terms of their overall goals and objectives and review these with the client at regular intervals.
* Clients increasingly want to have more options and easier access to the decision-makers on their accounts. There are no direct access lines to the managers of a mutual fund account. There is no easy way to ask your mutual [fund manager](https://www.investopedia.com/terms/f/fundmanager.asp) questions like, "Why did you choose to buy Walmart?" or "What's a good estimate for what my [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) could be this year?" Many clients want this either as part of their education or for their own peace of mind.
* Mutual fund assets are [pooled funds](https://www.investopedia.com/terms/p/pooledfunds.asp) with no tax considerations to any one holder of mutual fund shares. For a wealthy investor, there are simply too many dollars at stake for taxes to not be taken into account.
* If the client is a large group and there are many interested parties (such as a nonprofit endowment, [pension plan](https://www.investopedia.com/terms/p/pensionplan.asp), or court-mandated trust), the extra service of having annual reports and other performance attribution can increase the attractiveness of an investment advisor in comparison to a mutual fund.
## What Types of Professionals Work for RIAs?
As they operate in many similar ways, the same types of jobs associated with a mutual fund are also found in an RIA: [research analysts](https://www.investopedia.com/terms/r/research-analyst.asp), portfolio managers, traders, technical/operational staff, and client service professionals.
The research conducted for an RIA is also similar to what you would find at a mutual fund. The main responsibilities include monitoring existing [holdings](https://www.investopedia.com/terms/h/holdings.asp) and searching for suitable candidates for purchase.
The RIA provides an additional responsibility through the holdings brought in by clients and requested not to be sold. Many times a portfolio must be constructed around a large position; in these cases, the [portfolio manager](https://www.investopedia.com/terms/p/portfoliomanager.asp) must devise ways to mitigate the risk inherent in owning so much of one company.
###
[Wealth managers](https://www.investopedia.com/terms/w/wealthmanagement.asp) are seen as financial planners, those that create long-term financial plans for their clients, which is different from a registered investment advisor, who is primarily concerned with growing the wealth of its client through investing.
Most firms handle order creation [in-house](https://www.investopedia.com/terms/i/in-house.asp) but do not actually execute the trades themselves. For this, they will have established brokerage relationships with firms catering to large orders from institutional clients.
[CPAs](https://www.investopedia.com/terms/c/cpa.asp), attorneys, and other financial professionals are increasingly being hired by RIAs as they attempt to offer all the services a wealthy client could want. Sometimes a separate fee is charged for one-time services, like a [financial plan](https://www.investopedia.com/terms/f/financial_plan.asp) from a CPA or the establishment of a family trust.
Other times, it is all blended into a single management fee. Being able to offer more services under one umbrella opens the doors to truly lucrative accounts: $10 million or more. Many RIA firms have only two or three clients so large they occupy all the resources of the firm. These firms can do quite well.
## Why Become an RIA?
An RIA firm is a progressive business in today's changing landscape of [money management](https://www.investopedia.com/terms/m/moneymanagement.asp). It is an excellent place to begin a career or to hone in on a particular aspect of the business after cutting your teeth elsewhere for a few years.
Most RIA firms are owned privately, which can allow for greater opportunities for equity in the company. They are poised for fantastic growth as [baby boomers](https://www.investopedia.com/terms/b/baby_boomer.asp) are finishing up their peak earnings years and entering into the highest net-worth phase of their lives.
## What Is the Difference Between a Registered Investment Advisor and a Financial Planner?
A registered investment advisor seeks to grow the wealth of their wealthy clients by making investments. RIAs are primarily concerned with the investment portfolios of high-net-worth individuals. Financial planners, on the other hand, are focused on long-term planning for their clients, touching upon the areas of retirement planning, estate planning, investing, and saving for a child's college education.
## What Do Registered Investment Advisors Do?
Registered investment advisors invest the money of high-net-worth individuals in order to generate profits; the ultimate goal is to increase the wealth of their clients. They are typically financial institutions that create tailored investment strategies for their clients and invest in a multitude of assets.
## How Do Registered Investment Advisors Get Paid?
Because registered investment advisors are held to a fiduciary duty, they do not get paid on commission, which could create a conflict of interest between the advisor and their client. Instead, registered investment advisors get paid based on a feed schedule.
## The Bottom Line
Registered investment advisors manage money for extremely wealthy people as well as for financial institutions. RIAs make investments in many asset classes and work together with their clients in designing unique portfolios. RIAs provide a much more detailed and comprehensive portfolio than financial advisors can, particularly with access to more complex investments.
| What Is a Registered Investment Advisor?
The financial services industry is a rapidly changing professional environment. As the needs and desires of consumers change, firms engaged in managing money are also evolving.
A registered investment advisor (RIA) manages the assets of high-net-worth individuals and institutional investors and sits on the buy-side of the investment field. They must register with the Securities and Exchange Commission (SEC) and any states in which they operate.
Most RIAs are partnerships or corporations, but individuals can also register as RIAs.
Key Takeaways
Registered investment advisors (RIAs) manage the assets of high-net-worth individuals and institutional investors.RIAs can create portfolios with individual stocks, bonds, and mutual funds; they may use a mix of funds and individual issues or only funds to streamline asset allocation and cut down on commission costs.An RIA usually generates revenue through a management fee, which is made up of a percentage of assets held for a client—fees of 0.5% to 2% are not unusual.An RIA must register with the Securities and Exchange Commission (SEC) as well as with any states in which they operate.
Understanding Registered Investment Advisors
Most Americans who participate in the stock market have done so through mutual funds, though crypto has recently been outpacing mutual funds. Exchange traded funds (ETFs) have also become a popular investment class.
As the amount of money that an individual or group has increases, the ability to achieve the best results with mutual funds or ETFs diminishes. This is where RIAs are able to provide additional services mutual funds can't.
What Does an RIA Do?
Paid much like mutual fund managers, RIAs usually earn their revenue through a management fee consisting of a percentage of assets held for a client. Fees fluctuate, some close to 0.5% and others upwards of 2%.
Generally, the more assets a client has, the lower the fee they can negotiate—sometimes as little as 0.35%. This serves to align the best interests of the client with those of the RIA, as the advisor cannot make any more money on the account unless the client increases their asset base.
The most common definition of a high-net-worth investor is someone with a net worth of $1 million or more. Amounts below this tend to be more difficult to manage while still making a profit. If the average management fee is 1% of assets annually, a $100,000 account only earns an RIA $1,000 in annual fees, which is probably less than the costs the firm would incur internally to service the account.
Before hiring a registered investment advisor, make sure they are vetted, which includes opinions from friends and family, have the appropriate credentials, and can demonstrate a track record.
Registered investment advisors can be managing thousands of unique portfolios. This is because high-net-worth individuals and institutional investors are groups with unique needs. The advising firm will work with the clients to design a portfolio that suits their situation.
It could be the client has a large position in one particular stock with a very low cost basis; even though it represents a larger portion of its portfolio than would be ideal for diversification, the tax consequences are too severe to sell the position all at once. Or the client may be drawing down on an account using a combination of interest income and outflows and needs the assistance of a professional to map the asset's life.
An RIA can create portfolios using individual stocks, bonds, and mutual funds. RIA firms can cover the spectrum as far as what goes into their clients' portfolios. They may use a mix of funds and individual issues or only funds as a way to streamline asset allocation and cut down on commission costs.
State of the Industry
The old model of a broker calling wealthy clients with stock ideas is dying. In fact, there has been a mass exodus of client assets leaving this model. There are several reasons for this change, including very high commission fees (the big profit vehicle of the wirehouse firms at the time), and often inadequate diversification.
Many of these brokers were not CFAs or MBAs, just glorified salesmen whose knowledge base was due more to happenstance than true education.
RIAs tend to compete with mutual funds, hedge funds, wirehouse firms—via wrap programs or individual brokers—and do-it-yourselfers for the provision of investment services.
Many clients are looking to have a true "financial quarterback," a resource they can use for solid advice on their total financial picture. A good RIA will speak to the client in terms of their overall goals and objectives and review these with the client at regular intervals.
Clients increasingly want to have more options and easier access to the decision-makers on their accounts. There are no direct access lines to the managers of a mutual fund account. There is no easy way to ask your mutual fund manager questions like, "Why did you choose to buy Walmart?" or "What's a good estimate for what my capital gains could be this year?" Many clients want this either as part of their education or for their own peace of mind.
Mutual fund assets are pooled funds with no tax considerations to any one holder of mutual fund shares. For a wealthy investor, there are simply too many dollars at stake for taxes to not be taken into account.
If the client is a large group and there are many interested parties (such as a nonprofit endowment, pension plan, or court-mandated trust), the extra service of having annual reports and other performance attribution can increase the attractiveness of an investment advisor in comparison to a mutual fund.
What Types of Professionals Work for RIAs?
As they operate in many similar ways, the same types of jobs associated with a mutual fund are also found in an RIA: research analysts, portfolio managers, traders, technical/operational staff, and client service professionals.
The research conducted for an RIA is also similar to what you would find at a mutual fund. The main responsibilities include monitoring existing holdings and searching for suitable candidates for purchase.
The RIA provides an additional responsibility through the holdings brought in by clients and requested not to be sold. Many times a portfolio must be constructed around a large position; in these cases, the portfolio manager must devise ways to mitigate the risk inherent in owning so much of one company.
Wealth managers are seen as financial planners, those that create long-term financial plans for their clients, which is different from a registered investment advisor, who is primarily concerned with growing the wealth of its client through investing.
Most firms handle order creation in-house but do not actually execute the trades themselves. For this, they will have established brokerage relationships with firms catering to large orders from institutional clients.
CPAs, attorneys, and other financial professionals are increasingly being hired by RIAs as they attempt to offer all the services a wealthy client could want. Sometimes a separate fee is charged for one-time services, like a financial plan from a CPA or the establishment of a family trust.
Other times, it is all blended into a single management fee. Being able to offer more services under one umbrella opens the doors to truly lucrative accounts: $10 million or more. Many RIA firms have only two or three clients so large they occupy all the resources of the firm. These firms can do quite well.
Why Become an RIA?
An RIA firm is a progressive business in today's changing landscape of money management. It is an excellent place to begin a career or to hone in on a particular aspect of the business after cutting your teeth elsewhere for a few years.
Most RIA firms are owned privately, which can allow for greater opportunities for equity in the company. They are poised for fantastic growth as baby boomers are finishing up their peak earnings years and entering into the highest net-worth phase of their lives.
What Is the Difference Between a Registered Investment Advisor and a Financial Planner?
A registered investment advisor seeks to grow the wealth of their wealthy clients by making investments. RIAs are primarily concerned with the investment portfolios of high-net-worth individuals. Financial planners, on the other hand, are focused on long-term planning for their clients, touching upon the areas of retirement planning, estate planning, investing, and saving for a child's college education.
What Do Registered Investment Advisors Do?
Registered investment advisors invest the money of high-net-worth individuals in order to generate profits; the ultimate goal is to increase the wealth of their clients. They are typically financial institutions that create tailored investment strategies for their clients and invest in a multitude of assets.
How Do Registered Investment Advisors Get Paid?
Because registered investment advisors are held to a fiduciary duty, they do not get paid on commission, which could create a conflict of interest between the advisor and their client. Instead, registered investment advisors get paid based on a feed schedule.
The Bottom Line
Registered investment advisors manage money for extremely wealthy people as well as for financial institutions. RIAs make investments in many asset classes and work together with their clients in designing unique portfolios. RIAs provide a much more detailed and comprehensive portfolio than financial advisors can, particularly with access to more complex investments.
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"baby boomers",
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]
] |
https://www.investopedia.com/terms/a/assignment_of_trade.asp | Assignment Of Trade (AOT): Meaning, Example, Criticism | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-assignment-of-trade-aot"></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 Assignment of Trade (AOT)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Assignment of trade (AOT) is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp" rel="noopener noreferrer">transaction</a> used primarily in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mbs.asp" rel="noopener noreferrer">mortgage-backed securities (MBSs)</a> <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tba.asp" rel="noopener noreferrer">to be announced (TBA)</a> market, where the obligation to fulfill an existing forward trade is assigned by one of the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/counterparty.asp" rel="noopener noreferrer">counterparties</a> to a <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/third-party.asp" rel="noopener noreferrer">third party</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"> AOTs are frequently used to avoid having to make delivery of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp" rel="noopener noreferrer">securities</a> into, or receive delivery of securities from, a TBA trade—a contract to purchase or sell an MBS, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp" rel="noopener noreferrer">bond</a> that is secured by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage.asp" rel="noopener noreferrer">mortgage</a> <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp" rel="noopener noreferrer">loans</a>, on a specific date.
</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>Assignment of trade (AOT) is a three-party agreement that facilitates the sale of a mortgage-backed security (MBS) pool of loans.</li><li>The mortgage originator sells an MBS to a dealer for future delivery, creating a hedge against some of the risks that come with the loans it has issued. </li><li>The third-party assignee is willing to take on the loans immediately, collecting the income streams from them, and then delivering the MBS to the dealer and fulfilling the responsibilities of the assignor.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-assignment-of-trade-aot-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 Assignment of Trade (AOT) Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> AOT is basically a three-party agreement between an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assignor.asp" rel="noopener noreferrer">assignor</a><strong> </strong>(usually the originator of the underlying mortgages), an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assignee.asp" rel="noopener noreferrer">assignee</a> (the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp" rel="noopener noreferrer">investor</a>), and a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dealer.asp" rel="noopener noreferrer">dealer</a><strong> </strong>or<strong> </strong><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp" rel="noopener noreferrer">broker</a>. The assignor is eager to move the mortgages off the books to remove the threat of factors such as <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestraterisk.asp" rel="noopener noreferrer">interest rate risk</a>, <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prepaymentrisk.asp" rel="noopener noreferrer">prepayment risk</a>, and <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defaultrisk.asp" rel="noopener noreferrer">default risk</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 assignor wants this risk gone sooner rather than later, so a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp" rel="noopener noreferrer">hedge</a> is sold in the form of an MBS on the TBA market. However, the MBS still has to be delivered and the AOT can be the most cost-effective way of making that happen.
</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"> Mortgage originators use AOT to facilitate the pricing and purchase of whole loans by the third party to which the TBA trade is assigned, with the agreement that the third party will then make delivery of an MBS into the original TBA trade, which was taken out by the mortgage originator as a hedge.
</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 other words, an AOT allows a mortgage originator to unwind its hedge position by assigning it to the third party and simultaneously agreeing to sell an equal amount of loans to that third party. The price at which the whole loans are sold to the third party is established by the price of the trade being assigned.
</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-example-of-assignment-of-trade-aot"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> Example of Assignment of Trade (AOT) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The assignor sells an MBS to the dealer for future delivery, creating a hedge against some of the risks that come with the loans it has issued. At this point, the dealer is waiting for the pooled security, and the assignor is obligated to deliver it.
</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"> Enter the third-party assignee who is willing to take on the loans immediately, collecting the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp" rel="noopener noreferrer">income</a> streams from them, and then delivering the MBS to the dealer and fulfilling the responsibilities of the assignor. The assignee now holds the loans, and the dealer has the MBS that the underlying loans feed into.
</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 assignee faces default risks but can still benefit from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp" rel="noopener noreferrer">interest rate</a> shifts that increase the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit.asp" rel="noopener noreferrer">profits</a> from variable loans. The dealer holds the MBS and the prepayment risks that come with them as well as the agreed-upon streams of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp" rel="noopener noreferrer">interest</a> and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp" rel="noopener noreferrer">principal</a>. Meanwhile, the assignor, as the loan originator, has new space on the books to issue new 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"> This approach can reduce some of the expenses that might otherwise come in the form of fees, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp" rel="noopener noreferrer">buybacks</a>, and transfers.
</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-criticism-of-assignment-of-trade-aot"></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"> Criticism of Assignment of Trade (AOT) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Though assignment of trade (AOT) comes with many benefits, it is not always straightforward to execute properly. Critics point out that transactions commonly consist of inputting lots of crucial information from different sources into stacks of paperwork, a labor-intensive process sometimes prone to error, and sending emails that are not always guaranteed to reach all participants.
</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"> Some industry figures have been calling for a more standardized process to be introduced, such as a single electronic platform for trade assignments, in order to make it easier for information to be tracked, logged, and archived.
</p></div> | ## What Is Assignment of Trade (AOT)?
Assignment of trade (AOT) is a [transaction](https://www.investopedia.com/terms/t/transaction.asp) used primarily in the [mortgage-backed securities (MBSs)](https://www.investopedia.com/terms/m/mbs.asp) [to be announced (TBA)](https://www.investopedia.com/terms/t/tba.asp) market, where the obligation to fulfill an existing forward trade is assigned by one of the [counterparties](https://www.investopedia.com/terms/c/counterparty.asp) to a [third party](https://www.investopedia.com/terms/t/third-party.asp).
AOTs are frequently used to avoid having to make delivery of [securities](https://www.investopedia.com/terms/s/security.asp) into, or receive delivery of securities from, a TBA trade—a contract to purchase or sell an MBS, a [bond](https://www.investopedia.com/terms/b/bond.asp) that is secured by [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) [loans](https://www.investopedia.com/terms/l/loan.asp), on a specific date.
### Key Takeaways
* Assignment of trade (AOT) is a three-party agreement that facilitates the sale of a mortgage-backed security (MBS) pool of loans.
* The mortgage originator sells an MBS to a dealer for future delivery, creating a hedge against some of the risks that come with the loans it has issued.
* The third-party assignee is willing to take on the loans immediately, collecting the income streams from them, and then delivering the MBS to the dealer and fulfilling the responsibilities of the assignor.
## How Assignment of Trade (AOT) Works
AOT is basically a three-party agreement between an [assignor](https://www.investopedia.com/terms/a/assignor.asp)(usually the originator of the underlying mortgages), an [assignee](https://www.investopedia.com/terms/a/assignee.asp) (the [investor](https://www.investopedia.com/terms/i/investor.asp)), and a [dealer](https://www.investopedia.com/terms/d/dealer.asp)or[broker](https://www.investopedia.com/terms/b/broker.asp). The assignor is eager to move the mortgages off the books to remove the threat of factors such as [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp), [prepayment risk](https://www.investopedia.com/terms/p/prepaymentrisk.asp), and [default risk](https://www.investopedia.com/terms/d/defaultrisk.asp).
The assignor wants this risk gone sooner rather than later, so a [hedge](https://www.investopedia.com/terms/h/hedge.asp) is sold in the form of an MBS on the TBA market. However, the MBS still has to be delivered and the AOT can be the most cost-effective way of making that happen.
Mortgage originators use AOT to facilitate the pricing and purchase of whole loans by the third party to which the TBA trade is assigned, with the agreement that the third party will then make delivery of an MBS into the original TBA trade, which was taken out by the mortgage originator as a hedge.
In other words, an AOT allows a mortgage originator to unwind its hedge position by assigning it to the third party and simultaneously agreeing to sell an equal amount of loans to that third party. The price at which the whole loans are sold to the third party is established by the price of the trade being assigned.
## Example of Assignment of Trade (AOT)
The assignor sells an MBS to the dealer for future delivery, creating a hedge against some of the risks that come with the loans it has issued. At this point, the dealer is waiting for the pooled security, and the assignor is obligated to deliver it.
Enter the third-party assignee who is willing to take on the loans immediately, collecting the [income](https://www.investopedia.com/terms/i/income.asp) streams from them, and then delivering the MBS to the dealer and fulfilling the responsibilities of the assignor. The assignee now holds the loans, and the dealer has the MBS that the underlying loans feed into.
The assignee faces default risks but can still benefit from [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) shifts that increase the [profits](https://www.investopedia.com/terms/p/profit.asp) from variable loans. The dealer holds the MBS and the prepayment risks that come with them as well as the agreed-upon streams of [interest](https://www.investopedia.com/terms/i/interest.asp) and [principal](https://www.investopedia.com/terms/p/principal.asp). Meanwhile, the assignor, as the loan originator, has new space on the books to issue new loans.
This approach can reduce some of the expenses that might otherwise come in the form of fees, [buybacks](https://www.investopedia.com/terms/b/buyback.asp), and transfers.
## Criticism of Assignment of Trade (AOT)
Though assignment of trade (AOT) comes with many benefits, it is not always straightforward to execute properly. Critics point out that transactions commonly consist of inputting lots of crucial information from different sources into stacks of paperwork, a labor-intensive process sometimes prone to error, and sending emails that are not always guaranteed to reach all participants.
Some industry figures have been calling for a more standardized process to be introduced, such as a single electronic platform for trade assignments, in order to make it easier for information to be tracked, logged, and archived.
| What Is Assignment of Trade (AOT)?
Assignment of trade (AOT) is a transaction used primarily in the mortgage-backed securities (MBSs) to be announced (TBA) market, where the obligation to fulfill an existing forward trade is assigned by one of the counterparties to a third party.
AOTs are frequently used to avoid having to make delivery of securities into, or receive delivery of securities from, a TBA trade—a contract to purchase or sell an MBS, a bond that is secured by mortgage loans, on a specific date.
Key Takeaways
Assignment of trade (AOT) is a three-party agreement that facilitates the sale of a mortgage-backed security (MBS) pool of loans.The mortgage originator sells an MBS to a dealer for future delivery, creating a hedge against some of the risks that come with the loans it has issued. The third-party assignee is willing to take on the loans immediately, collecting the income streams from them, and then delivering the MBS to the dealer and fulfilling the responsibilities of the assignor.
How Assignment of Trade (AOT) Works
AOT is basically a three-party agreement between an assignor (usually the originator of the underlying mortgages), an assignee (the investor), and a dealer or broker. The assignor is eager to move the mortgages off the books to remove the threat of factors such as interest rate risk, prepayment risk, and default risk.
The assignor wants this risk gone sooner rather than later, so a hedge is sold in the form of an MBS on the TBA market. However, the MBS still has to be delivered and the AOT can be the most cost-effective way of making that happen.
Mortgage originators use AOT to facilitate the pricing and purchase of whole loans by the third party to which the TBA trade is assigned, with the agreement that the third party will then make delivery of an MBS into the original TBA trade, which was taken out by the mortgage originator as a hedge.
In other words, an AOT allows a mortgage originator to unwind its hedge position by assigning it to the third party and simultaneously agreeing to sell an equal amount of loans to that third party. The price at which the whole loans are sold to the third party is established by the price of the trade being assigned.
Example of Assignment of Trade (AOT)
The assignor sells an MBS to the dealer for future delivery, creating a hedge against some of the risks that come with the loans it has issued. At this point, the dealer is waiting for the pooled security, and the assignor is obligated to deliver it.
Enter the third-party assignee who is willing to take on the loans immediately, collecting the income streams from them, and then delivering the MBS to the dealer and fulfilling the responsibilities of the assignor. The assignee now holds the loans, and the dealer has the MBS that the underlying loans feed into.
The assignee faces default risks but can still benefit from interest rate shifts that increase the profits from variable loans. The dealer holds the MBS and the prepayment risks that come with them as well as the agreed-upon streams of interest and principal. Meanwhile, the assignor, as the loan originator, has new space on the books to issue new loans.
This approach can reduce some of the expenses that might otherwise come in the form of fees, buybacks, and transfers.
Criticism of Assignment of Trade (AOT)
Though assignment of trade (AOT) comes with many benefits, it is not always straightforward to execute properly. Critics point out that transactions commonly consist of inputting lots of crucial information from different sources into stacks of paperwork, a labor-intensive process sometimes prone to error, and sending emails that are not always guaranteed to reach all participants.
Some industry figures have been calling for a more standardized process to be introduced, such as a single electronic platform for trade assignments, in order to make it easier for information to be tracked, logged, and archived.
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https://www.investopedia.com/articles/personal-finance/111815/8-possible-risks-unsecured-personal-loans.asp | 8 Possible Risks of Unsecured Personal Loans | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> When you need to borrow money, one of the most straightforward ways is with a personal loan, sometimes known as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecuredloan.asp">unsecured loan</a>. You can use this open-ended loan for pretty much any purpose you want, but before signing the agreement, you should consider the risks that accompany certain aspects of these loans. The following are the eight most common risks.
</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>Personal loans can help you pay for several types of large purchases but come with risks.</li><li>Interest rates are based on your credit score.</li><li>There can be a number of different fees attached to a personal loan.</li></ul></div></div></div>
<span class="heading-toc" id="toc-1-the-interest-rate"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> 1. The Interest Rate </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Just because you qualify for a personal loan doesn’t mean you should take it. Some personal loans come with <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> well below 10%, while others may be three or four times higher. The interest rates on these loans depend 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>, but lenders may charge whatever they want, provided the rate falls within certain laws.
</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"> Also, be careful when comparing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rates (APR)</a>. The APR can be manipulated. Instead, look at the total amount you will pay on the loan, including interest, fees, and principal, over the life of the loan. That’s a better measure of the loan’s ultimate cost.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<span class="heading-toc" id="toc-2-early-payoff-penalties"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> 2. Early-Payoff Penalties </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Are you allowed to pay the loan off early or is there a penalty or fee for doing so? Depending on which kind of personal loan you get—from a bank, via <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/peer-to-peer-lending.asp">peer-to-peer (P2P) lending</a>, or by some other means—some lenders will be more favorably disposed to your paying off the loan early than others. If an early payoff is important to you (and it should be), read the fine print closely to make sure that no penalty is involved.
</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-3-big-fees-upfront"></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"> 3. Big Fees Upfront </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> How much will it cost you to get the loan money into your bank account? As with a mortgage, upfront <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination-fee.asp">origination fees</a> for the loan can vary widely.<span class="ql-inline-citation" data-cite="1"></span> You want to ensure that any upfront fees you are paying are fair and in line with market levels. There are many providers out there with varying terms, so don't feel like you have to take the first loan that you are approved for.
</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-4-privacy-concerns"></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"> 4. Privacy Concerns </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Bank and <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> loans will come with strict privacy rules, but other options may be considerably less formal. Although all lenders should respect privacy laws similar to those required for banks, some may not.
</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-5-the-insurance-pitch"></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"> 5. The Insurance Pitch </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Some personal loans will come with a sales pitch for additional insurance to protect the loan in case “life’s unexpected events” get in the way of your ability to repay. If you want insurance for that purpose, call an agent you trust and get a quote on general <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/disability-insurance.asp">disability insurance</a>. It’s probably cheaper and has better coverage.
</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-6-precomputed-interest"></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"> 6. Precomputed Interest </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Basically, precomputed interest uses the original payment schedule to calculate your interest regardless of how much you’ve actually paid on the loan. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/simple_interest.asp">Simple interest</a> looks at what you owe today and computes your interest on that figure. Make sure to ask the lender how the interest is being computed. If you hope to pay off the loan early, you want simple interest.<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>
<span class="heading-toc" id="toc-7-payday-loans"></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"> 7. Payday Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payday-loans.asp">Payday loans</a> are a form of short-term personal loans that financial gurus and government agencies advise consumers to avoid. The interest rates are very high, and the terms often force people into rolling over the loan for additional terms.<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-8-unnecessary-complications"></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"> 8. Unnecessary Complications </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> A loan is a simple product. Someone gives you money and you pay it back with interest. If a company offers you payment holidays, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-back.asp" rel="noopener noreferrer">cash back</a> offers, or other enticements, understand that the company is not going to lose money on the deal. The only possible loser is you. A personal loan should be simple to understand. If it’s not, that’s a red flag.
</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-do-people-use-personal-loans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> 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_32-0"> 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_33-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_34-0"><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_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-can-an-unsecured-personal-loan-impact-my-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can an Unsecured Personal Loan Impact My Credit Score?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes. Most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111615/are-personal-loans-bad-your-credit-score.asp">personal loans</a> require a hard credit check that can lower your credit score by up to five points. In addition to inquiries, failing to pay your loan on time could lower your credit score once the late payment is reported to the three major credit agencies.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-does-disability-insurance-cover-loan-payments"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Disability Insurance Cover Loan Payments?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In many cases, yes. Disability insurance is intended to make payments on your financial commitments in the event that you are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-you-get-a-personal-loan-while-on-disability-8413952">disabled</a>. Potentially covered loans include personal loans, credit cards, auto loans, and lines of credit, but check with your insurance company to see what exactly your plan covers.</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-pay-off-my-personal-loan-early"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Pay Off My Personal Loan Early?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The answer is yes, but some loans may charge early payment penalty fees to make up for the interest that they won't earn when you pay off your loan early. Look at the fine print to see if there are early payoff penalties for your loan.</p></div>
</div>
<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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Loans are almost always stacked in favor of the lender and not the borrower. If you are seeking a loan for a want rather than a need, consider saving for the purchase. If you decide to proceed with a personal loan, be sure you know the risks going in. Additionally, using 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 find the monthly payment, loan term, and interest rate you're comfortable with can help ensure you know exactly what to ask for.
</p></div> | When you need to borrow money, one of the most straightforward ways is with a personal loan, sometimes known as an [unsecured loan](https://www.investopedia.com/terms/u/unsecuredloan.asp). You can use this open-ended loan for pretty much any purpose you want, but before signing the agreement, you should consider the risks that accompany certain aspects of these loans. The following are the eight most common risks.
### Key Takeaways
* Personal loans can help you pay for several types of large purchases but come with risks.
* Interest rates are based on your credit score.
* There can be a number of different fees attached to a personal loan.
## 1. The Interest Rate
Just because you qualify for a personal loan doesn’t mean you should take it. Some personal loans come with [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) well below 10%, while others may be three or four times higher. The interest rates on these loans depend on your [credit score](https://www.investopedia.com/terms/c/credit_score.asp), but lenders may charge whatever they want, provided the rate falls within certain laws.
Also, be careful when comparing [annual percentage rates (APR)](https://www.investopedia.com/terms/a/apr.asp). The APR can be manipulated. Instead, look at the total amount you will pay on the loan, including interest, fees, and principal, over the life of the loan. That’s a better measure of the loan’s ultimate cost.
## 2. Early-Payoff Penalties
Are you allowed to pay the loan off early or is there a penalty or fee for doing so? Depending on which kind of personal loan you get—from a bank, via [peer-to-peer (P2P) lending](https://www.investopedia.com/terms/p/peer-to-peer-lending.asp), or by some other means—some lenders will be more favorably disposed to your paying off the loan early than others. If an early payoff is important to you (and it should be), read the fine print closely to make sure that no penalty is involved.
## 3. Big Fees Upfront
How much will it cost you to get the loan money into your bank account? As with a mortgage, upfront [origination fees](https://www.investopedia.com/terms/o/origination-fee.asp) for the loan can vary widely. You want to ensure that any upfront fees you are paying are fair and in line with market levels. There are many providers out there with varying terms, so don't feel like you have to take the first loan that you are approved for.
## 4. Privacy Concerns
Bank and [credit union](https://www.investopedia.com/terms/c/creditunion.asp) loans will come with strict privacy rules, but other options may be considerably less formal. Although all lenders should respect privacy laws similar to those required for banks, some may not.
## 5. The Insurance Pitch
Some personal loans will come with a sales pitch for additional insurance to protect the loan in case “life’s unexpected events” get in the way of your ability to repay. If you want insurance for that purpose, call an agent you trust and get a quote on general [disability insurance](https://www.investopedia.com/terms/d/disability-insurance.asp). It’s probably cheaper and has better coverage.
## 6. Precomputed Interest
Basically, precomputed interest uses the original payment schedule to calculate your interest regardless of how much you’ve actually paid on the loan. [Simple interest](https://www.investopedia.com/terms/s/simple_interest.asp) looks at what you owe today and computes your interest on that figure. Make sure to ask the lender how the interest is being computed. If you hope to pay off the loan early, you want simple interest.
## 7. Payday Loans
[Payday loans](https://www.investopedia.com/terms/p/payday-loans.asp) are a form of short-term personal loans that financial gurus and government agencies advise consumers to avoid. The interest rates are very high, and the terms often force people into rolling over the loan for additional terms.
## 8. Unnecessary Complications
A loan is a simple product. Someone gives you money and you pay it back with interest. If a company offers you payment holidays, [cash back](https://www.investopedia.com/terms/c/cash-back.asp) offers, or other enticements, understand that the company is not going to lose money on the deal. The only possible loser is you. A personal loan should be simple to understand. If it’s not, that’s a red flag.
## 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.
## Can an Unsecured Personal Loan Impact My Credit Score?
Yes. Most [personal loans](https://www.investopedia.com/ask/answers/111615/are-personal-loans-bad-your-credit-score.asp) require a hard credit check that can lower your credit score by up to five points. In addition to inquiries, failing to pay your loan on time could lower your credit score once the late payment is reported to the three major credit agencies.
## Does Disability Insurance Cover Loan Payments?
In many cases, yes. Disability insurance is intended to make payments on your financial commitments in the event that you are [disabled](https://www.investopedia.com/can-you-get-a-personal-loan-while-on-disability-8413952). Potentially covered loans include personal loans, credit cards, auto loans, and lines of credit, but check with your insurance company to see what exactly your plan covers.
## Can I Pay Off My Personal Loan Early?
The answer is yes, but some loans may charge early payment penalty fees to make up for the interest that they won't earn when you pay off your loan early. Look at the fine print to see if there are early payoff penalties for your loan.
## The Bottom Line
Loans are almost always stacked in favor of the lender and not the borrower. If you are seeking a loan for a want rather than a need, consider saving for the purchase. If you decide to proceed with a personal loan, be sure you know the risks going in. Additionally, using a [personal loan calculator](https://www.investopedia.com/personal-loan-calculator-5082130) to find the monthly payment, loan term, and interest rate you're comfortable with can help ensure you know exactly what to ask for.
| When you need to borrow money, one of the most straightforward ways is with a personal loan, sometimes known as an unsecured loan. You can use this open-ended loan for pretty much any purpose you want, but before signing the agreement, you should consider the risks that accompany certain aspects of these loans. The following are the eight most common risks.
Key Takeaways
Personal loans can help you pay for several types of large purchases but come with risks.Interest rates are based on your credit score.There can be a number of different fees attached to a personal loan.
1. The Interest Rate
Just because you qualify for a personal loan doesn’t mean you should take it. Some personal loans come with interest rates well below 10%, while others may be three or four times higher. The interest rates on these loans depend on your credit score, but lenders may charge whatever they want, provided the rate falls within certain laws.
Also, be careful when comparing annual percentage rates (APR). The APR can be manipulated. Instead, look at the total amount you will pay on the loan, including interest, fees, and principal, over the life of the loan. That’s a better measure of the loan’s ultimate cost.
2. Early-Payoff Penalties
Are you allowed to pay the loan off early or is there a penalty or fee for doing so? Depending on which kind of personal loan you get—from a bank, via peer-to-peer (P2P) lending, or by some other means—some lenders will be more favorably disposed to your paying off the loan early than others. If an early payoff is important to you (and it should be), read the fine print closely to make sure that no penalty is involved.
3. Big Fees Upfront
How much will it cost you to get the loan money into your bank account? As with a mortgage, upfront origination fees for the loan can vary widely. You want to ensure that any upfront fees you are paying are fair and in line with market levels. There are many providers out there with varying terms, so don't feel like you have to take the first loan that you are approved for.
4. Privacy Concerns
Bank and credit union loans will come with strict privacy rules, but other options may be considerably less formal. Although all lenders should respect privacy laws similar to those required for banks, some may not.
5. The Insurance Pitch
Some personal loans will come with a sales pitch for additional insurance to protect the loan in case “life’s unexpected events” get in the way of your ability to repay. If you want insurance for that purpose, call an agent you trust and get a quote on general disability insurance. It’s probably cheaper and has better coverage.
6. Precomputed Interest
Basically, precomputed interest uses the original payment schedule to calculate your interest regardless of how much you’ve actually paid on the loan. Simple interest looks at what you owe today and computes your interest on that figure. Make sure to ask the lender how the interest is being computed. If you hope to pay off the loan early, you want simple interest.
7. Payday Loans
Payday loans are a form of short-term personal loans that financial gurus and government agencies advise consumers to avoid. The interest rates are very high, and the terms often force people into rolling over the loan for additional terms.
8. Unnecessary Complications
A loan is a simple product. Someone gives you money and you pay it back with interest. If a company offers you payment holidays, cash back offers, or other enticements, understand that the company is not going to lose money on the deal. The only possible loser is you. A personal loan should be simple to understand. If it’s not, that’s a red flag.
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.
Can an Unsecured Personal Loan Impact My Credit Score?
Yes. Most personal loans require a hard credit check that can lower your credit score by up to five points. In addition to inquiries, failing to pay your loan on time could lower your credit score once the late payment is reported to the three major credit agencies.
Does Disability Insurance Cover Loan Payments?
In many cases, yes. Disability insurance is intended to make payments on your financial commitments in the event that you are disabled. Potentially covered loans include personal loans, credit cards, auto loans, and lines of credit, but check with your insurance company to see what exactly your plan covers.
Can I Pay Off My Personal Loan Early?
The answer is yes, but some loans may charge early payment penalty fees to make up for the interest that they won't earn when you pay off your loan early. Look at the fine print to see if there are early payoff penalties for your loan.
The Bottom Line
Loans are almost always stacked in favor of the lender and not the borrower. If you are seeking a loan for a want rather than a need, consider saving for the purchase. If you decide to proceed with a personal loan, be sure you know the risks going in. Additionally, using a personal loan calculator to find the monthly payment, loan term, and interest rate you're comfortable with can help ensure you know exactly what to ask for.
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https://www.investopedia.com/student-loans-good-debt-8559798 | Why Are Student Loans Considered Good Debt? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Some loans are better for your finances than others. “Good debt” includes funding that puts you in a better financial situation in the long run, while “bad debt” leads to credit problems. Student loans are typically considered good debt because a higher education can lead to the career or income you want.<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>"Good debt" can include any type of debt that offers a solid return on the investment. </li><li>Student loans are considered good debt due to their potential for long-term benefits, including increased earning potential.</li><li>Other factors of good debt include lower interest rates, flexible repayment options, and potential tax deductions.</li><li>Keep in mind that there are risks associated with student loans, such as earning a degree that doesn't have a good return on investment (ROI).</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-good-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"> Understanding Good Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Good debt can include any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt.asp">debt</a> that pays off in the long run, although the potential benefits that can come from good debt will vary. For example, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage.asp">mortgage</a> used to buy a home is typically considered good debt, since the property itself is an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">asset</a> that can <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciate</a> in value over time.<span class="ql-inline-citation" data-cite="1"></span> <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-small-business-loans-5079093">Small business loans</a> can also be considered good debt when the funds are used to launch a new company or increase profits for an existing business.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> You can determine if the debt you're considering will be good or bad for your financial situation based on whether you can repay it and how it will help you. Some debt may be good for one borrower but damaging for another. For example, a mortgage for a home you cannot afford would not be good debt, nor would a business loan in which you misspent the loan funds.
</p>
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<span class="heading-toc" id="toc-student-loans-as-good-debt"></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"> Student Loans as Good Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/education-loan.asp">Student loans</a> are a type of funding that's used to pay for a higher education at a college, university, trade school, or other institution. The reasons student loans are generally considered good debt can include:
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<li><strong>Higher future earning potential</strong>: Data from the U.S. Bureau of Labor Statistics shows that educational attainment leads to higher earnings. For example, people with a bachelor's degree earned an average of $1,432 per week in 2022, compared to weekly earnings of $853 for those with a high school diploma.<span class="ql-inline-citation" data-cite="2"></span></li>
<li><strong>Lower interest rates</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp">Federal student loans</a> especially come with competitive <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed interest rates</a> that are much lower than other <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/110614/what-are-main-categories-debt.asp">types of debt</a> charge. For example, according to the Federal Reserve, the average credit card interest rate was 22.75% in Q3 of 2023, compared to 5.50% for <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/">direct subsidized loans and direct unsubsidized loans</a>.<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="4"></span></li>
<li><strong>Flexible repayment plans</strong>: Federal student loans can be paid off using several different repayment plans that last anywhere from 10 to 30 years. There are even income-driven repayment (IDR) plans, which require payments for 20 to 25 years before <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-loan-forgiveness.asp">forgiving</a> remaining loan balances.<span class="ql-inline-citation" data-cite="5"></span></li>
<li><strong>Potential for tax deductions</strong>: Student loan interest may be <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deduction.asp">tax deductible</a> if you meet certain requirements, whereas most other types of debt do not have any tax benefits.<span class="ql-inline-citation" data-cite="6"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Potential for loan forgiveness</strong>: In addition to IDR plans for federal student loans that lead to loan forgiveness, there are additional forgiveness plans for federal student loans, including <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp">Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness</a>.<span class="ql-inline-citation" data-cite="7"></span> <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-student-loans-4775346">Private student loan</a> forgiveness is much less common, typically only possible if the borrower becomes permanently disabled or dies.<span class="ql-inline-citation" data-cite="12"></span></li>
</ul>
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<span class="heading-toc" id="toc-risks-and-drawbacks-of-student-loans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Risks and Drawbacks of Student Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-impact-financial-goals-6834232">Student loan debt</a> is typically considered good debt for many reasons, but there are potential downsides as well. They include:
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<li><strong>Choosing the wrong degree</strong>: While many college degrees can pay off in a big way, some college degrees actually have a negative <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">return on investment (ROI)</a> when you factor in the costs of a higher education. For example, a 2022 study from FREOPP showed that 14% of advanced degrees and 40% of master’s degrees had a negative financial return that year.<span class="ql-inline-citation" data-cite="8"></span></li>
<li><strong>Unemployment and underemployment after graduation</strong>: While <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unemploymentrate.asp">unemployment rates</a> are higher for people with lower levels of education, borrowing money with student loans and being unemployed or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underemployment.asp">underemployed</a> can lead to serious <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit.asp">credit</a> issues. If you cannot afford to repay your loans, you can severely damage your credit.</li>
<li><strong>Financial stress caused by debt repayment</strong>: Student loans require monthly payments for years, and your loan obligations can <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-debt-affect-economy-8550501">keep you from reaching other financial goals</a>. This is especially true when you borrow a large amount of money and/or you have a high income that prevents you from benefiting from an IDR plan.</li>
<li><strong>Slim chance at bankruptcy</strong>: Also note that, if you get into financial trouble and have student loans, these loans are nearly impossible to discharge via <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>.<span class="ql-inline-citation" data-cite="9"></span></li>
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<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Student Loans Are Good Debt If:</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Borrowing money gives you the chance to earn a college degree</p></li>
<li><p>Educational attainment leads to much higher earnings</p></li>
<li><p>You qualify for subsidized student loans, which means the government covers interest charges while you're in school</p></li>
<li><p>You shop around to find a degree program with a solid ROI</p></li>
<li><p>You build credit with on-time student loan payments</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">Student Loans Are Bad Debt If:</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>You borrow more than you need to earn a degree</p></li>
<li><p>Your chosen degree has a low ROI</p></li>
<li><p>You struggle to make student loan payments, and your credit is damaged as a result</p></li>
<li><p>The school you attend is overly expensive without any added benefit</p></li>
</ul>
</div>
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<span class="heading-toc" id="toc-tips-and-strategies-for-managing-student-loan-debt"></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"> Tips and Strategies for Managing Student Loan Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> How you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp">manage debt</a> can also impact whether your student loans will be worth it. These tips can help you use debt to your advantage.
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<li><strong>Plan and budget for student loan repayment</strong>: Never borrow for a higher education without having a plan for how much you intend to borrow and understanding what you would owe with different repayment plans. You can use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/loan-simulator/">Loan Simulator</a> from Federal Student Aid to get an idea of what your monthly payment would be based on how much you borrow for school and how long you want to spend paying the money back.</li>
<li><strong>Explore income-driven repayment plans</strong>: Be sure to research IDR plans, particularly the new <a data-component="link" data-ordinal="2" 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>, which only requires you to pay 5% of your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discretionaryincome.asp">discretionary income</a> toward undergraduate student loans each month.<span class="ql-inline-citation" data-cite="10"></span> An IDR plan may result in a lower monthly payment, and borrowers could see their remaining loan balances forgiven after 20 to 25 years.<span class="ql-inline-citation" data-cite="11"></span></li>
<li><strong>Look into loan forgiveness programs</strong>: If you plan to work in public service or teaching, you should also look into loan forgiveness programs like PSLF and Teacher Loan Forgiveness, respectively.</li>
<li><strong>Build credit through responsible loan repayment</strong>: Making on-time payments on your student loans can help you build credit over time, which can help you later in life. For example, good credit can mean qualifying for loans with better <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> and terms in the future, such as the mortgage you might need to <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-affect-buying-house-8598581">purchase a home</a>.</li>
</ul>
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<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-does-paying-student-loans-build-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Paying Student Loans Build Credit?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>On-time payments on student loans help you build credit over time. Meanwhile, late or missed payments can cause damage 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> that could take years to fix.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-what-are-the-long-term-implications-of-student-loan-debt-on-my-finances"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Long-Term Implications of Student Loan Debt on My Finances?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Student loan debt can have many long-term financial consequences that vary from person to person. For example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-too-much-8576649">owing too much on student loans</a> each month can make it more difficult to borrow money for other purposes, such as buying a home or a car. Large student loan payments can also make it difficult for consumers to save for retirement and other future goals.</p></div>
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<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-are-some-examples-of-bad-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Examples of Bad Debt?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Bad debt can include any debt with a high interest rate or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variableinterestrate.asp">variable rate</a>, in addition to debts that are not <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secureddebt.asp">secured</a> by any <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a>. Credit card debt is considered bad debt for both of these reasons.</p></div>
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<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-should-i-pay-off-first-credit-card-or-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Should I Pay off First: Credit Card or Student Loan Debt?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Because interest rates on student loans are much lower on average than you'll pay with credit cards, you should pay off credit card debt first to save more on interest in the long run.<span class="ql-inline-citation" data-cite="3"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-happens-if-you-dont-pay-off-your-student-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens if You Don’t Pay Off Your Student Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If you stop making payments on student loans, your lender will report the missed payments to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/top-three-credit-bureaus/">credit bureaus</a>. Your credit score will suffer as a result, which can make it more difficult to borrow money in the future. If you remain in default on your student loans, the government can eventually garnish your wages, your tax refund, and other government payments you receive.</p></div>
</div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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"> Student loan debt can be good debt when it helps you get where you need to be, either by advancing in your chosen profession, helping you earn more money, or both. Just remember that not all college degrees lead to success, and you should always strive to borrow as little as you can.
</p></div> | Some loans are better for your finances than others. “Good debt” includes funding that puts you in a better financial situation in the long run, while “bad debt” leads to credit problems. Student loans are typically considered good debt because a higher education can lead to the career or income you want.
### Key Takeaways
* "Good debt" can include any type of debt that offers a solid return on the investment.
* Student loans are considered good debt due to their potential for long-term benefits, including increased earning potential.
* Other factors of good debt include lower interest rates, flexible repayment options, and potential tax deductions.
* Keep in mind that there are risks associated with student loans, such as earning a degree that doesn't have a good return on investment (ROI).
## Understanding Good Debt
Good debt can include any [debt](https://www.investopedia.com/terms/d/debt.asp) that pays off in the long run, although the potential benefits that can come from good debt will vary. For example, a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) used to buy a home is typically considered good debt, since the property itself is an [asset](https://www.investopedia.com/terms/a/asset.asp) that can [appreciate](https://www.investopedia.com/terms/a/appreciation.asp) in value over time. [Small business loans](https://www.investopedia.com/best-small-business-loans-5079093) can also be considered good debt when the funds are used to launch a new company or increase profits for an existing business.
You can determine if the debt you're considering will be good or bad for your financial situation based on whether you can repay it and how it will help you. Some debt may be good for one borrower but damaging for another. For example, a mortgage for a home you cannot afford would not be good debt, nor would a business loan in which you misspent the loan funds.
## Student Loans as Good Debt
[Student loans](https://www.investopedia.com/terms/e/education-loan.asp) are a type of funding that's used to pay for a higher education at a college, university, trade school, or other institution. The reasons student loans are generally considered good debt can include:
* **Higher future earning potential**: Data from the U.S. Bureau of Labor Statistics shows that educational attainment leads to higher earnings. For example, people with a bachelor's degree earned an average of $1,432 per week in 2022, compared to weekly earnings of $853 for those with a high school diploma.
* **Lower interest rates**: [Federal student loans](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp) especially come with competitive [fixed interest rates](https://www.investopedia.com/terms/f/fixedinterestrate.asp) that are much lower than other [types of debt](https://www.investopedia.com/ask/answers/110614/what-are-main-categories-debt.asp) charge. For example, according to the Federal Reserve, the average credit card interest rate was 22.75% in Q3 of 2023, compared to 5.50% for [direct subsidized loans and direct unsubsidized loans](https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/).
* **Flexible repayment plans**: Federal student loans can be paid off using several different repayment plans that last anywhere from 10 to 30 years. There are even income-driven repayment (IDR) plans, which require payments for 20 to 25 years before [forgiving](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) remaining loan balances.
* **Potential for tax deductions**: Student loan interest may be [tax deductible](https://www.investopedia.com/terms/t/tax-deduction.asp) if you meet certain requirements, whereas most other types of debt do not have any tax benefits.
* **Potential for loan forgiveness**: In addition to IDR plans for federal student loans that lead to loan forgiveness, there are additional forgiveness plans for federal student loans, including [Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness](https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp). [Private student loan](https://www.investopedia.com/best-student-loans-4775346) forgiveness is much less common, typically only possible if the borrower becomes permanently disabled or dies.
## Risks and Drawbacks of Student Loans
[Student loan debt](https://www.investopedia.com/student-loan-debt-impact-financial-goals-6834232) is typically considered good debt for many reasons, but there are potential downsides as well. They include:
* **Choosing the wrong degree**: While many college degrees can pay off in a big way, some college degrees actually have a negative [return on investment (ROI)](https://www.investopedia.com/terms/r/returnoninvestment.asp) when you factor in the costs of a higher education. For example, a 2022 study from FREOPP showed that 14% of advanced degrees and 40% of master’s degrees had a negative financial return that year.
* **Unemployment and underemployment after graduation**: While [unemployment rates](https://www.investopedia.com/terms/u/unemploymentrate.asp) are higher for people with lower levels of education, borrowing money with student loans and being unemployed or [underemployed](https://www.investopedia.com/terms/u/underemployment.asp) can lead to serious [credit](https://www.investopedia.com/terms/c/credit.asp) issues. If you cannot afford to repay your loans, you can severely damage your credit.
* **Financial stress caused by debt repayment**: Student loans require monthly payments for years, and your loan obligations can [keep you from reaching other financial goals](https://www.investopedia.com/student-debt-affect-economy-8550501). This is especially true when you borrow a large amount of money and/or you have a high income that prevents you from benefiting from an IDR plan.
* **Slim chance at bankruptcy**: Also note that, if you get into financial trouble and have student loans, these loans are nearly impossible to discharge via [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp).
Student Loans Are Good Debt If:
* Borrowing money gives you the chance to earn a college degree
* Educational attainment leads to much higher earnings
* You qualify for subsidized student loans, which means the government covers interest charges while you're in school
* You shop around to find a degree program with a solid ROI
* You build credit with on-time student loan payments
Student Loans Are Bad Debt If:
* You borrow more than you need to earn a degree
* Your chosen degree has a low ROI
* You struggle to make student loan payments, and your credit is damaged as a result
* The school you attend is overly expensive without any added benefit
## Tips and Strategies for Managing Student Loan Debt
How you [manage debt](https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp) can also impact whether your student loans will be worth it. These tips can help you use debt to your advantage.
* **Plan and budget for student loan repayment**: Never borrow for a higher education without having a plan for how much you intend to borrow and understanding what you would owe with different repayment plans. You can use the [Loan Simulator](https://studentaid.gov/loan-simulator/) from Federal Student Aid to get an idea of what your monthly payment would be based on how much you borrow for school and how long you want to spend paying the money back.
* **Explore income-driven repayment plans**: Be sure to research IDR plans, particularly the new [Saving on a Valuable Education (SAVE) plan](https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022), which only requires you to pay 5% of your [discretionary income](https://www.investopedia.com/terms/d/discretionaryincome.asp) toward undergraduate student loans each month. An IDR plan may result in a lower monthly payment, and borrowers could see their remaining loan balances forgiven after 20 to 25 years.
* **Look into loan forgiveness programs**: If you plan to work in public service or teaching, you should also look into loan forgiveness programs like PSLF and Teacher Loan Forgiveness, respectively.
* **Build credit through responsible loan repayment**: Making on-time payments on your student loans can help you build credit over time, which can help you later in life. For example, good credit can mean qualifying for loans with better [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) and terms in the future, such as the mortgage you might need to [purchase a home](https://www.investopedia.com/student-loan-debt-affect-buying-house-8598581).
## Does Paying Student Loans Build Credit?
On-time payments on student loans help you build credit over time. Meanwhile, late or missed payments can cause damage to your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) that could take years to fix.
## What Are the Long-Term Implications of Student Loan Debt on My Finances?
Student loan debt can have many long-term financial consequences that vary from person to person. For example, [owing too much on student loans](https://www.investopedia.com/student-loan-debt-too-much-8576649) each month can make it more difficult to borrow money for other purposes, such as buying a home or a car. Large student loan payments can also make it difficult for consumers to save for retirement and other future goals.
## What Are Some Examples of Bad Debt?
Bad debt can include any debt with a high interest rate or a [variable rate](https://www.investopedia.com/terms/v/variableinterestrate.asp), in addition to debts that are not [secured](https://www.investopedia.com/terms/s/secureddebt.asp) by any [collateral](https://www.investopedia.com/terms/c/collateral.asp). Credit card debt is considered bad debt for both of these reasons.
## What Should I Pay off First: Credit Card or Student Loan Debt?
Because interest rates on student loans are much lower on average than you'll pay with credit cards, you should pay off credit card debt first to save more on interest in the long run.
## What Happens if You Don’t Pay Off Your Student Loans?
If you stop making payments on student loans, your lender will report the missed payments to the [credit bureaus](https://www.investopedia.com/personal-finance/top-three-credit-bureaus/). Your credit score will suffer as a result, which can make it more difficult to borrow money in the future. If you remain in default on your student loans, the government can eventually garnish your wages, your tax refund, and other government payments you receive.
## The Bottom Line
Student loan debt can be good debt when it helps you get where you need to be, either by advancing in your chosen profession, helping you earn more money, or both. Just remember that not all college degrees lead to success, and you should always strive to borrow as little as you can.
| Some loans are better for your finances than others. “Good debt” includes funding that puts you in a better financial situation in the long run, while “bad debt” leads to credit problems. Student loans are typically considered good debt because a higher education can lead to the career or income you want.
Key Takeaways
"Good debt" can include any type of debt that offers a solid return on the investment. Student loans are considered good debt due to their potential for long-term benefits, including increased earning potential.Other factors of good debt include lower interest rates, flexible repayment options, and potential tax deductions.Keep in mind that there are risks associated with student loans, such as earning a degree that doesn't have a good return on investment (ROI).
Understanding Good Debt
Good debt can include any debt that pays off in the long run, although the potential benefits that can come from good debt will vary. For example, a mortgage used to buy a home is typically considered good debt, since the property itself is an asset that can appreciate in value over time. Small business loans can also be considered good debt when the funds are used to launch a new company or increase profits for an existing business.
You can determine if the debt you're considering will be good or bad for your financial situation based on whether you can repay it and how it will help you. Some debt may be good for one borrower but damaging for another. For example, a mortgage for a home you cannot afford would not be good debt, nor would a business loan in which you misspent the loan funds.
Student Loans as Good Debt
Student loans are a type of funding that's used to pay for a higher education at a college, university, trade school, or other institution. The reasons student loans are generally considered good debt can include:
Higher future earning potential: Data from the U.S. Bureau of Labor Statistics shows that educational attainment leads to higher earnings. For example, people with a bachelor's degree earned an average of $1,432 per week in 2022, compared to weekly earnings of $853 for those with a high school diploma.
Lower interest rates: Federal student loans especially come with competitive fixed interest rates that are much lower than other types of debt charge. For example, according to the Federal Reserve, the average credit card interest rate was 22.75% in Q3 of 2023, compared to 5.50% for direct subsidized loans and direct unsubsidized loans.
Flexible repayment plans: Federal student loans can be paid off using several different repayment plans that last anywhere from 10 to 30 years. There are even income-driven repayment (IDR) plans, which require payments for 20 to 25 years before forgiving remaining loan balances.
Potential for tax deductions: Student loan interest may be tax deductible if you meet certain requirements, whereas most other types of debt do not have any tax benefits.
Potential for loan forgiveness: In addition to IDR plans for federal student loans that lead to loan forgiveness, there are additional forgiveness plans for federal student loans, including Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. Private student loan forgiveness is much less common, typically only possible if the borrower becomes permanently disabled or dies.
Risks and Drawbacks of Student Loans
Student loan debt is typically considered good debt for many reasons, but there are potential downsides as well. They include:
Choosing the wrong degree: While many college degrees can pay off in a big way, some college degrees actually have a negative return on investment (ROI) when you factor in the costs of a higher education. For example, a 2022 study from FREOPP showed that 14% of advanced degrees and 40% of master’s degrees had a negative financial return that year.
Unemployment and underemployment after graduation: While unemployment rates are higher for people with lower levels of education, borrowing money with student loans and being unemployed or underemployed can lead to serious credit issues. If you cannot afford to repay your loans, you can severely damage your credit.
Financial stress caused by debt repayment: Student loans require monthly payments for years, and your loan obligations can keep you from reaching other financial goals. This is especially true when you borrow a large amount of money and/or you have a high income that prevents you from benefiting from an IDR plan.
Slim chance at bankruptcy: Also note that, if you get into financial trouble and have student loans, these loans are nearly impossible to discharge via bankruptcy.
Student Loans Are Good Debt If:
Borrowing money gives you the chance to earn a college degree
Educational attainment leads to much higher earnings
You qualify for subsidized student loans, which means the government covers interest charges while you're in school
You shop around to find a degree program with a solid ROI
You build credit with on-time student loan payments
Student Loans Are Bad Debt If:
You borrow more than you need to earn a degree
Your chosen degree has a low ROI
You struggle to make student loan payments, and your credit is damaged as a result
The school you attend is overly expensive without any added benefit
Tips and Strategies for Managing Student Loan Debt
How you manage debt can also impact whether your student loans will be worth it. These tips can help you use debt to your advantage.
Plan and budget for student loan repayment: Never borrow for a higher education without having a plan for how much you intend to borrow and understanding what you would owe with different repayment plans. You can use the Loan Simulator from Federal Student Aid to get an idea of what your monthly payment would be based on how much you borrow for school and how long you want to spend paying the money back.
Explore income-driven repayment plans: Be sure to research IDR plans, particularly the new Saving on a Valuable Education (SAVE) plan, which only requires you to pay 5% of your discretionary income toward undergraduate student loans each month. An IDR plan may result in a lower monthly payment, and borrowers could see their remaining loan balances forgiven after 20 to 25 years.
Look into loan forgiveness programs: If you plan to work in public service or teaching, you should also look into loan forgiveness programs like PSLF and Teacher Loan Forgiveness, respectively.
Build credit through responsible loan repayment: Making on-time payments on your student loans can help you build credit over time, which can help you later in life. For example, good credit can mean qualifying for loans with better interest rates and terms in the future, such as the mortgage you might need to purchase a home.
Does Paying Student Loans Build Credit?
On-time payments on student loans help you build credit over time. Meanwhile, late or missed payments can cause damage to your credit score that could take years to fix.
What Are the Long-Term Implications of Student Loan Debt on My Finances?
Student loan debt can have many long-term financial consequences that vary from person to person. For example, owing too much on student loans each month can make it more difficult to borrow money for other purposes, such as buying a home or a car. Large student loan payments can also make it difficult for consumers to save for retirement and other future goals.
What Are Some Examples of Bad Debt?
Bad debt can include any debt with a high interest rate or a variable rate, in addition to debts that are not secured by any collateral. Credit card debt is considered bad debt for both of these reasons.
What Should I Pay off First: Credit Card or Student Loan Debt?
Because interest rates on student loans are much lower on average than you'll pay with credit cards, you should pay off credit card debt first to save more on interest in the long run.
What Happens if You Don’t Pay Off Your Student Loans?
If you stop making payments on student loans, your lender will report the missed payments to the credit bureaus. Your credit score will suffer as a result, which can make it more difficult to borrow money in the future. If you remain in default on your student loans, the government can eventually garnish your wages, your tax refund, and other government payments you receive.
The Bottom Line
Student loan debt can be good debt when it helps you get where you need to be, either by advancing in your chosen profession, helping you earn more money, or both. Just remember that not all college degrees lead to success, and you should always strive to borrow as little as you can.
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https://www.investopedia.com/terms/a/active_index_fund.asp | Active Index Fund: Meaning, Limitations, Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-active-index-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 an Active Index Fund? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An active index fund consists of a basket of assets that the fund manager constructs from both securities in a benchmark index and securities unrelated to that index. The manager may alter the lineup of index securities that the fund contains by removing certain benchmark index components.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>An active index fund seeks to combine the positive aspects of passive indexing with active portfolio management.</li><li>Examples of active index strategies include a tilt or smart beta approach, the latter of which seeks to exploit pricing inefficiencies while adhering primarily to an index.</li><li>Active index funds may underperform purely passive funds.</li><li>They often charge investors higher management and transaction fees than passive index funds.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-active-index-funds"></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 Active Index Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The goal of the active index fund is to drive portfolio performance higher than that offered by the index. The additional layer of actively managed non-benchmark securities is used to boost returns above a traditional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyandhold.asp">buy and hold</a> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive strategy</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"> By adding individual stocks that aren't included in the broader index or by weighting stocks more heavily than the index, the fund manager can unlock additional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alpha.asp">alpha</a>. Active index funds may employ a <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tiltfund.asp">tilt</a> or use a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smart-beta.asp">smart beta</a> strategy.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-subheading__text"> Active Management </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The active fund manager will add stocks to the fund that they believe will yield returns above and beyond those offered by a passive index fund.
</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"> For example, if the manager believes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/semiconductor.asp">semiconductors</a> will produce strong results for future quarters, more semiconductor stocks would be added to the portfolio.
</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"> Active vs. Passive Management </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> While it is possible for some fund managers to significantly beat the underlying benchmark index with strategies like market timing, this is far from guaranteed.
</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"> Passive funds can be counted on to follow an index faithfully, which allows investors to know the true holdings and risk profile of the fund. This helps investors maintain diversified portfolios and manage expectations.
</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"> Adding an active layer to the <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> makes it difficult for the investing community to anticipate the future makeup of the fund. This can work for investors when the market experiences heavy volatility and the fund requires a trained professional to limit <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/drawdown.asp">drawdowns</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> An active fund manager can shift allocations away from underperforming positions to what they project is a more appropriate sector or more attractive asset classes.
</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"> However, most empirical research finds a simple passive strategy tends to outperform a complicated active management approach.
</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-tilt-funds"></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"> Tilt Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A tilt fund is a type of mutual fund or exchange-traded fund that includes a core holding of stocks that mimic a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a>-type index, to which additional securities are added to help tilt the fund toward a performance that beats the 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"> Sometimes called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/enhanced_index_fund.asp">enhanced index funds</a>, these are active index funds used by major investors to improve overall investment returns.
</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 fund that utilizes a tilt strategy might have the vast majority of capital invested in S&P 500 companies. But it might also allow the manager the flexibility to include other stocks as well.
</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"> Value tilts in a fund may also call for one type of stock over another, such as small-cap stocks that historically have provided higher-than-average returns.
</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-smart-beta-funds"></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"> Smart Beta Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Smart beta strategies seek to passively follow indices and incorporate alternative weighting schemes involving <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a>, liquidity, quality, value, size, and momentum.
</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"> They are implemented like typical index strategies, in that the index rules are set and transparent. However, these funds don’t track standard indexes, such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500 Index</a> or the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq100.asp">Nasdaq 100 Index</a>, but instead, focus on areas of the market that offer an opportunity for exploitation.
</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 single approach to smart beta, as the goals for investors can be different based on their needs. However, some managers are prescriptive in identifying smart beta ideas that create value and are economically intuitive.
</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"> Equity smart beta strategies seeks to address inefficiencies created by market-capitalization-weighted benchmarks. Funds may take a thematic approach to manage this risk by focusing on mispricing created by investors seeking short-term gains.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_45-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_46-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" 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 latest S&P Indices vs. Active study (SPIVA) shows that the majority of active managers of stock funds fail to outperform the indexes associated with their funds. This is especially evident over long periods of time.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<span class="heading-toc" id="toc-limitations-of-active-index-funds"></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"> Limitations of Active Index Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Although an active index fund holds many of the same securities that a traditional index fund holds, it tends to cost more than the index fund.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> An active management style means that the fund must charge higher fees to cover the costs of the manager, research materials, and any other data required to make investment decisions in line with the purpose of a fund.
</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"> These higher <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> put pressure on fund managers to consistently outperform the underlying index.
</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"> As with any actively managed mutual fund, the potential to outperform comes down to the manager. Some have a knack for finding hidden gems. But most fail at selecting winning assets and/or successfully timing the market. This pitfall of active management can limit a fund's performance potential.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<span class="heading-toc" id="toc-example-of-an-active-index-fund"></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"> Example of an Active Index Fund </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> The Flexshares Morningstar U.S. Market Factor Tilt Index Fund is an example of an active index fund. This particular fund seeks to capture investment results that generally track the price and yield performance (before fees and expenses) of the underlying Morningstar US Market Factor Tilt Index.<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_58-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> According to Morningstar, the Flexshares Morningstar U.S. Market Factor Tilt Index "measures the performance of US equity markets with increased exposure toward small-capitalization and value stocks. Stocks that are deemed to be small-capitalization or value will have an overweighting compared to their weight in a corresponding market capitalization-weighted index."<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_60-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Thus the fund's objective is to seek the growth potential of U.S. small cap and value stocks.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div>
<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-are-active-index-funds-a-good-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Active Index Funds a Good Investment?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>That depends on your investment objective and preference for active or passive management. You get a mix of a passive index fund and active management strategies in these funds. So it's important to understand what each involves. Bear in mind that active fund managers normally underperform their benchmark indexes.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_65-0"><span class="heading-toc" id="toc-are-active-index-funds-more-expensive"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Active Index Funds More Expensive?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Usually, they are more expensive than passively managed index funds because of the costs associated with having fund managers actively seek out securities they feel will help their funds outperform corresponding indexes. However, if they succeed at capturing greater returns for investors, the cost may be worth it.</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-does-an-active-index-fund-involve-market-timing"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does an Active Index Fund Involve Market Timing?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Typically, yes. Active management and market timing normally go hand-in-hand. Timing the market is a challenge for all active managers and some are better at it than others.</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"> An active index fund is essentially a fund designed to track a benchmark index and allow for the active buying and selling of securities by managers attempting to beat the benchmark index's returns. Tilt funds and smart beta funds are examples of active index funds.
</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"> Active index funds have higher expense ratios than passive index funds due to the costs associated with active management.
</p></div> | ## What Is an Active Index Fund?
An active index fund consists of a basket of assets that the fund manager constructs from both securities in a benchmark index and securities unrelated to that index. The manager may alter the lineup of index securities that the fund contains by removing certain benchmark index components.
### Key Takeaways
* An active index fund seeks to combine the positive aspects of passive indexing with active portfolio management.
* Examples of active index strategies include a tilt or smart beta approach, the latter of which seeks to exploit pricing inefficiencies while adhering primarily to an index.
* Active index funds may underperform purely passive funds.
* They often charge investors higher management and transaction fees than passive index funds.
## Understanding Active Index Funds
The goal of the active index fund is to drive portfolio performance higher than that offered by the index. The additional layer of actively managed non-benchmark securities is used to boost returns above a traditional [buy and hold](https://www.investopedia.com/terms/b/buyandhold.asp) [passive strategy](https://www.investopedia.com/terms/p/passiveinvesting.asp) .
By adding individual stocks that aren't included in the broader index or by weighting stocks more heavily than the index, the fund manager can unlock additional [alpha](https://www.investopedia.com/terms/a/alpha.asp). Active index funds may employ a [tilt](https://www.investopedia.com/terms/t/tiltfund.asp) or use a [smart beta](https://www.investopedia.com/terms/s/smart-beta.asp) strategy.
### Active Management
The active fund manager will add stocks to the fund that they believe will yield returns above and beyond those offered by a passive index fund.
For example, if the manager believes [semiconductors](https://www.investopedia.com/terms/s/semiconductor.asp) will produce strong results for future quarters, more semiconductor stocks would be added to the portfolio.
### Active vs. Passive Management
While it is possible for some fund managers to significantly beat the underlying benchmark index with strategies like market timing, this is far from guaranteed.
Passive funds can be counted on to follow an index faithfully, which allows investors to know the true holdings and risk profile of the fund. This helps investors maintain diversified portfolios and manage expectations.
Adding an active layer to the [index fund](https://www.investopedia.com/terms/i/indexfund.asp) makes it difficult for the investing community to anticipate the future makeup of the fund. This can work for investors when the market experiences heavy volatility and the fund requires a trained professional to limit [drawdowns](https://www.investopedia.com/terms/d/drawdown.asp).
An active fund manager can shift allocations away from underperforming positions to what they project is a more appropriate sector or more attractive asset classes.
However, most empirical research finds a simple passive strategy tends to outperform a complicated active management approach.
## Tilt Funds
A tilt fund is a type of mutual fund or exchange-traded fund that includes a core holding of stocks that mimic a [benchmark](https://www.investopedia.com/terms/b/benchmark.asp)-type index, to which additional securities are added to help tilt the fund toward a performance that beats the index.
Sometimes called [enhanced index funds](https://www.investopedia.com/terms/e/enhanced_index_fund.asp), these are active index funds used by major investors to improve overall investment returns.
A fund that utilizes a tilt strategy might have the vast majority of capital invested in S&P 500 companies. But it might also allow the manager the flexibility to include other stocks as well.
Value tilts in a fund may also call for one type of stock over another, such as small-cap stocks that historically have provided higher-than-average returns.
## Smart Beta Funds
Smart beta strategies seek to passively follow indices and incorporate alternative weighting schemes involving [volatility](https://www.investopedia.com/terms/v/volatility.asp), liquidity, quality, value, size, and momentum.
They are implemented like typical index strategies, in that the index rules are set and transparent. However, these funds don’t track standard indexes, such as the [S&P 500 Index](https://www.investopedia.com/terms/s/sp500.asp) or the [Nasdaq 100 Index](https://www.investopedia.com/terms/n/nasdaq100.asp), but instead, focus on areas of the market that offer an opportunity for exploitation.
There is no single approach to smart beta, as the goals for investors can be different based on their needs. However, some managers are prescriptive in identifying smart beta ideas that create value and are economically intuitive.
Equity smart beta strategies seeks to address inefficiencies created by market-capitalization-weighted benchmarks. Funds may take a thematic approach to manage this risk by focusing on mispricing created by investors seeking short-term gains.
###
The latest S&P Indices vs. Active study (SPIVA) shows that the majority of active managers of stock funds fail to outperform the indexes associated with their funds. This is especially evident over long periods of time.
## Limitations of Active Index Funds
Although an active index fund holds many of the same securities that a traditional index fund holds, it tends to cost more than the index fund.
An active management style means that the fund must charge higher fees to cover the costs of the manager, research materials, and any other data required to make investment decisions in line with the purpose of a fund.
These higher [expense ratios](https://www.investopedia.com/terms/e/expenseratio.asp) put pressure on fund managers to consistently outperform the underlying index.
As with any actively managed mutual fund, the potential to outperform comes down to the manager. Some have a knack for finding hidden gems. But most fail at selecting winning assets and/or successfully timing the market. This pitfall of active management can limit a fund's performance potential.
## Example of an Active Index Fund
The Flexshares Morningstar U.S. Market Factor Tilt Index Fund is an example of an active index fund. This particular fund seeks to capture investment results that generally track the price and yield performance (before fees and expenses) of the underlying Morningstar US Market Factor Tilt Index.
According to Morningstar, the Flexshares Morningstar U.S. Market Factor Tilt Index "measures the performance of US equity markets with increased exposure toward small-capitalization and value stocks. Stocks that are deemed to be small-capitalization or value will have an overweighting compared to their weight in a corresponding market capitalization-weighted index."
Thus the fund's objective is to seek the growth potential of U.S. small cap and value stocks.
## Are Active Index Funds a Good Investment?
That depends on your investment objective and preference for active or passive management. You get a mix of a passive index fund and active management strategies in these funds. So it's important to understand what each involves. Bear in mind that active fund managers normally underperform their benchmark indexes.
## Are Active Index Funds More Expensive?
Usually, they are more expensive than passively managed index funds because of the costs associated with having fund managers actively seek out securities they feel will help their funds outperform corresponding indexes. However, if they succeed at capturing greater returns for investors, the cost may be worth it.
## Does an Active Index Fund Involve Market Timing?
Typically, yes. Active management and market timing normally go hand-in-hand. Timing the market is a challenge for all active managers and some are better at it than others.
## The Bottom Line
An active index fund is essentially a fund designed to track a benchmark index and allow for the active buying and selling of securities by managers attempting to beat the benchmark index's returns. Tilt funds and smart beta funds are examples of active index funds.
Active index funds have higher expense ratios than passive index funds due to the costs associated with active management.
| What Is an Active Index Fund?
An active index fund consists of a basket of assets that the fund manager constructs from both securities in a benchmark index and securities unrelated to that index. The manager may alter the lineup of index securities that the fund contains by removing certain benchmark index components.
Key Takeaways
An active index fund seeks to combine the positive aspects of passive indexing with active portfolio management.Examples of active index strategies include a tilt or smart beta approach, the latter of which seeks to exploit pricing inefficiencies while adhering primarily to an index.Active index funds may underperform purely passive funds.They often charge investors higher management and transaction fees than passive index funds.
Understanding Active Index Funds
The goal of the active index fund is to drive portfolio performance higher than that offered by the index. The additional layer of actively managed non-benchmark securities is used to boost returns above a traditional buy and hold passive strategy .
By adding individual stocks that aren't included in the broader index or by weighting stocks more heavily than the index, the fund manager can unlock additional alpha. Active index funds may employ a tilt or use a smart beta strategy.
Active Management
The active fund manager will add stocks to the fund that they believe will yield returns above and beyond those offered by a passive index fund.
For example, if the manager believes semiconductors will produce strong results for future quarters, more semiconductor stocks would be added to the portfolio.
Active vs. Passive Management
While it is possible for some fund managers to significantly beat the underlying benchmark index with strategies like market timing, this is far from guaranteed.
Passive funds can be counted on to follow an index faithfully, which allows investors to know the true holdings and risk profile of the fund. This helps investors maintain diversified portfolios and manage expectations.
Adding an active layer to the index fund makes it difficult for the investing community to anticipate the future makeup of the fund. This can work for investors when the market experiences heavy volatility and the fund requires a trained professional to limit drawdowns.
An active fund manager can shift allocations away from underperforming positions to what they project is a more appropriate sector or more attractive asset classes.
However, most empirical research finds a simple passive strategy tends to outperform a complicated active management approach.
Tilt Funds
A tilt fund is a type of mutual fund or exchange-traded fund that includes a core holding of stocks that mimic a benchmark-type index, to which additional securities are added to help tilt the fund toward a performance that beats the index.
Sometimes called enhanced index funds, these are active index funds used by major investors to improve overall investment returns.
A fund that utilizes a tilt strategy might have the vast majority of capital invested in S&P 500 companies. But it might also allow the manager the flexibility to include other stocks as well.
Value tilts in a fund may also call for one type of stock over another, such as small-cap stocks that historically have provided higher-than-average returns.
Smart Beta Funds
Smart beta strategies seek to passively follow indices and incorporate alternative weighting schemes involving volatility, liquidity, quality, value, size, and momentum.
They are implemented like typical index strategies, in that the index rules are set and transparent. However, these funds don’t track standard indexes, such as the S&P 500 Index or the Nasdaq 100 Index, but instead, focus on areas of the market that offer an opportunity for exploitation.
There is no single approach to smart beta, as the goals for investors can be different based on their needs. However, some managers are prescriptive in identifying smart beta ideas that create value and are economically intuitive.
Equity smart beta strategies seeks to address inefficiencies created by market-capitalization-weighted benchmarks. Funds may take a thematic approach to manage this risk by focusing on mispricing created by investors seeking short-term gains.
The latest S&P Indices vs. Active study (SPIVA) shows that the majority of active managers of stock funds fail to outperform the indexes associated with their funds. This is especially evident over long periods of time.
Limitations of Active Index Funds
Although an active index fund holds many of the same securities that a traditional index fund holds, it tends to cost more than the index fund.
An active management style means that the fund must charge higher fees to cover the costs of the manager, research materials, and any other data required to make investment decisions in line with the purpose of a fund.
These higher expense ratios put pressure on fund managers to consistently outperform the underlying index.
As with any actively managed mutual fund, the potential to outperform comes down to the manager. Some have a knack for finding hidden gems. But most fail at selecting winning assets and/or successfully timing the market. This pitfall of active management can limit a fund's performance potential.
Example of an Active Index Fund
The Flexshares Morningstar U.S. Market Factor Tilt Index Fund is an example of an active index fund. This particular fund seeks to capture investment results that generally track the price and yield performance (before fees and expenses) of the underlying Morningstar US Market Factor Tilt Index.
According to Morningstar, the Flexshares Morningstar U.S. Market Factor Tilt Index "measures the performance of US equity markets with increased exposure toward small-capitalization and value stocks. Stocks that are deemed to be small-capitalization or value will have an overweighting compared to their weight in a corresponding market capitalization-weighted index."
Thus the fund's objective is to seek the growth potential of U.S. small cap and value stocks.
Are Active Index Funds a Good Investment?
That depends on your investment objective and preference for active or passive management. You get a mix of a passive index fund and active management strategies in these funds. So it's important to understand what each involves. Bear in mind that active fund managers normally underperform their benchmark indexes.
Are Active Index Funds More Expensive?
Usually, they are more expensive than passively managed index funds because of the costs associated with having fund managers actively seek out securities they feel will help their funds outperform corresponding indexes. However, if they succeed at capturing greater returns for investors, the cost may be worth it.
Does an Active Index Fund Involve Market Timing?
Typically, yes. Active management and market timing normally go hand-in-hand. Timing the market is a challenge for all active managers and some are better at it than others.
The Bottom Line
An active index fund is essentially a fund designed to track a benchmark index and allow for the active buying and selling of securities by managers attempting to beat the benchmark index's returns. Tilt funds and smart beta funds are examples of active index funds.
Active index funds have higher expense ratios than passive index funds due to the costs associated with active management.
| [
[
"buy and hold",
"https://www.investopedia.com/terms/b/buyandhold.asp"
],
[
"passive strategy",
"https://www.investopedia.com/terms/p/passiveinvesting.asp"
],
[
"alpha",
"https://www.investopedia.com/terms/a/alpha.asp"
],
[
"tilt",
"https://www.investopedia.com/terms/t/tiltfund.asp"
],
[
"smart beta",
"https://www.investopedia.com/terms/s/smart-beta.asp"
],
[
"semiconductors",
"https://www.investopedia.com/terms/s/semiconductor.asp"
],
[
"index fund",
"https://www.investopedia.com/terms/i/indexfund.asp"
],
[
"drawdowns",
"https://www.investopedia.com/terms/d/drawdown.asp"
],
[
"benchmark",
"https://www.investopedia.com/terms/b/benchmark.asp"
],
[
"enhanced index funds",
"https://www.investopedia.com/terms/e/enhanced_index_fund.asp"
],
[
"volatility",
"https://www.investopedia.com/terms/v/volatility.asp"
],
[
"S&P 500 Index",
"https://www.investopedia.com/terms/s/sp500.asp"
],
[
"Nasdaq 100 Index",
"https://www.investopedia.com/terms/n/nasdaq100.asp"
],
[
"expense ratios",
"https://www.investopedia.com/terms/e/expenseratio.asp"
]
] |
https://www.investopedia.com/ask/answers/042215/how-can-i-calculate-notional-value-futures-contract.asp | How to Calculate the Notional Value of a Futures Contract | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Notional value is the contract value of a financial instrument trading on an exchange. This value helps you perceive how much a trade is worth vs. how much you would pay for it right now.
</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 notional value of a futures contract is calculated by multiplying the units in one contract by its current price.
</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>Notional value is a theoretical value of a financial instrument trading on an exchange.</li><li>The notional value of a futures contract demonstrates the value of the assets underlying the futures contract.</li><li>To calculate the notional value of a futures contract, the contract size (in units) is multiplied by its current price.</li><li>Notional value helps you understand and plan for the risks of trading futures contracts.</li></ul></div></div></div>
<span class="heading-toc" id="toc-calculating-a-commodity-future-contracts-notional-value"></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"> Calculating a Commodity Future Contract's Notional Value </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> To calculate a future contract's notional value, you need to locate the commodity's specs page. The current price of the unit depends on the commodity's tick value and movement, and the contract unit is how many units are represented by the contract. For example, you might see soybeans trading at $13.07 on the Chicago Mercantile Exchange.<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_9-0"></div>
<blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Notional Value = Contract Unit x Current Price
</blockquote>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> So, if soybeans were trading at $13.07, you would multiply the number of contract units (5,000) by the contract price, $13.07. The notional value of a soybean futures contract at this price would be $65,650 (5,000 x $13.07).<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>
<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>A future contract's price is a reflection of how many 'ticks' it has moved. For example, soybean's minimum price fluctuation is $0.0025 per bushel, so the minimum price tick is $12.50 per contract (5,000 x $0.0025).</p></div></div></div>
<span class="heading-toc" id="toc-why-notional-value-is-important"></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"> Why Notional Value Is Important </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Notional value is key to managing risk. In particular, the notional value can be used to determine the hedge ratio, which lays out the number of contracts needed to hedge market risk. The hedge ratio calculation is as follows:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Hedge ratio = Value at risk ÷ Notional value
</blockquote>
<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"> Value at risk is the amount of an investor’s portfolio at risk—or subject to loss related to a particular market. For example, imagine you have a $5 million position in soybeans you would like to hedge against future losses. You would use a futures contract to do so.
</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"> Continuing with the soybean futures example from above, it would take roughly 76 of the above soybean futures contracts to hedge your position ($5 million divided by $65,650).
</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"> By calculating notional value, you can see what actions you need to take to understand and plan for the risks of trading futures. It may take a small amount of money to buy an option contract thanks to leverage—but movements in the underlying asset price can lead to a large swing in your account.
</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-futures-contracts-and-the-market"></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"> Futures Contracts and the Market </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> There are two main participants in the futures markets. Hedgers seek to manage their price risk for commodities, and speculators want to profit off of price fluctuations for commodities. Speculators provide a great deal of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> to the futures markets. Futures contracts allow speculators to take larger amounts of risk with less capital due to the high degree of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a> involved.
</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"> Futures contracts are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/110614/futures-derivatives-and-liquidity-more-or-less-risky.asp">financial derivatives</a> with values based on an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying-asset.asp">underlying asset</a>. They are traded on centralized exchanges such as the Chicago Mercantile Exchange (CME) Group or the Intercontinental Exchange (ICE).<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_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The futures market began in the 1850s in Chicago with farmers seeking to hedge their crop production. Farmers could sell futures contracts to lock in a price for their crops. This allowed them to be unconcerned about daily price fluctuations. The futures market has since expanded to include other commodities, such as energy futures, interest rate futures, and currency futures.
</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-futures-contracts-length"></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"> Futures Contracts Length </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Unlike stocks that can exist in perpetuity, futures have an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/futureshedge.asp">expiration date</a> and are limited in duration. The front-month futures contract is the contract with the nearest expiration date and is usually the closest in value to the current price.
</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 price of the front-month futures contract may be substantially different than the contract a few months out. This allows the market to attempt to predict <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp">supply and demand</a> for a commodity further out.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-what-is-meant-by-notional-value"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Meant by Notional Value?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Notional value is the current value of a futures contract. Because it uses the contract's current price, it changes over time because the contract's price changes.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-what-is-notional-vs-actual-value"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Notional vs. Actual Value?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If actual value is defined as market value, then notional value is the theoretical value of a position and actual value is how much you'd pay at that moment.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_43-0"><span class="heading-toc" id="toc-what-is-the-concept-of-notional-value"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Concept of Notional Value?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Notional value is the amount a contract is worth at a given moment. It is used to help investors and traders assess risk and manage their positions.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> A future contract's notional value is it's contract size multiplied by it's current price. It indicates the value of the underlying asset based on quantity and how much it is trading for, which helps you make decisions about a position and trade.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> <em>Correction </em>—<em>May 27, 2023:</em> A previous version of this article used the term "spot price" in place of "current price" when referring to calculating notional value.
</p></div> | Notional value is the contract value of a financial instrument trading on an exchange. This value helps you perceive how much a trade is worth vs. how much you would pay for it right now.
The notional value of a futures contract is calculated by multiplying the units in one contract by its current price.
### Key Takeaways
* Notional value is a theoretical value of a financial instrument trading on an exchange.
* The notional value of a futures contract demonstrates the value of the assets underlying the futures contract.
* To calculate the notional value of a futures contract, the contract size (in units) is multiplied by its current price.
* Notional value helps you understand and plan for the risks of trading futures contracts.
## Calculating a Commodity Future Contract's Notional Value
To calculate a future contract's notional value, you need to locate the commodity's specs page. The current price of the unit depends on the commodity's tick value and movement, and the contract unit is how many units are represented by the contract. For example, you might see soybeans trading at $13.07 on the Chicago Mercantile Exchange.
> Notional Value = Contract Unit x Current Price
So, if soybeans were trading at $13.07, you would multiply the number of contract units (5,000) by the contract price, $13.07. The notional value of a soybean futures contract at this price would be $65,650 (5,000 x $13.07).
###
A future contract's price is a reflection of how many 'ticks' it has moved. For example, soybean's minimum price fluctuation is $0.0025 per bushel, so the minimum price tick is $12.50 per contract (5,000 x $0.0025).
## Why Notional Value Is Important
Notional value is key to managing risk. In particular, the notional value can be used to determine the hedge ratio, which lays out the number of contracts needed to hedge market risk. The hedge ratio calculation is as follows:
> Hedge ratio = Value at risk ÷ Notional value
Value at risk is the amount of an investor’s portfolio at risk—or subject to loss related to a particular market. For example, imagine you have a $5 million position in soybeans you would like to hedge against future losses. You would use a futures contract to do so.
Continuing with the soybean futures example from above, it would take roughly 76 of the above soybean futures contracts to hedge your position ($5 million divided by $65,650).
By calculating notional value, you can see what actions you need to take to understand and plan for the risks of trading futures. It may take a small amount of money to buy an option contract thanks to leverage—but movements in the underlying asset price can lead to a large swing in your account.
## Futures Contracts and the Market
There are two main participants in the futures markets. Hedgers seek to manage their price risk for commodities, and speculators want to profit off of price fluctuations for commodities. Speculators provide a great deal of [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) to the futures markets. Futures contracts allow speculators to take larger amounts of risk with less capital due to the high degree of [leverage](https://www.investopedia.com/terms/l/leverage.asp) involved.
Futures contracts are [financial derivatives](https://www.investopedia.com/articles/active-trading/110614/futures-derivatives-and-liquidity-more-or-less-risky.asp) with values based on an [underlying asset](https://www.investopedia.com/terms/u/underlying-asset.asp). They are traded on centralized exchanges such as the Chicago Mercantile Exchange (CME) Group or the Intercontinental Exchange (ICE).
The futures market began in the 1850s in Chicago with farmers seeking to hedge their crop production. Farmers could sell futures contracts to lock in a price for their crops. This allowed them to be unconcerned about daily price fluctuations. The futures market has since expanded to include other commodities, such as energy futures, interest rate futures, and currency futures.
## Futures Contracts Length
Unlike stocks that can exist in perpetuity, futures have an [expiration date](https://www.investopedia.com/ask/answers/06/futureshedge.asp) and are limited in duration. The front-month futures contract is the contract with the nearest expiration date and is usually the closest in value to the current price.
The price of the front-month futures contract may be substantially different than the contract a few months out. This allows the market to attempt to predict [supply and demand](https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp) for a commodity further out.
## What Is Meant by Notional Value?
Notional value is the current value of a futures contract. Because it uses the contract's current price, it changes over time because the contract's price changes.
## What Is Notional vs. Actual Value?
If actual value is defined as market value, then notional value is the theoretical value of a position and actual value is how much you'd pay at that moment.
## What Is the Concept of Notional Value?
Notional value is the amount a contract is worth at a given moment. It is used to help investors and traders assess risk and manage their positions.
## The Bottom Line
A future contract's notional value is it's contract size multiplied by it's current price. It indicates the value of the underlying asset based on quantity and how much it is trading for, which helps you make decisions about a position and trade.
*Correction* —*May 27, 2023:* A previous version of this article used the term "spot price" in place of "current price" when referring to calculating notional value.
| Notional value is the contract value of a financial instrument trading on an exchange. This value helps you perceive how much a trade is worth vs. how much you would pay for it right now.
The notional value of a futures contract is calculated by multiplying the units in one contract by its current price.
Key Takeaways
Notional value is a theoretical value of a financial instrument trading on an exchange.The notional value of a futures contract demonstrates the value of the assets underlying the futures contract.To calculate the notional value of a futures contract, the contract size (in units) is multiplied by its current price.Notional value helps you understand and plan for the risks of trading futures contracts.
Calculating a Commodity Future Contract's Notional Value
To calculate a future contract's notional value, you need to locate the commodity's specs page. The current price of the unit depends on the commodity's tick value and movement, and the contract unit is how many units are represented by the contract. For example, you might see soybeans trading at $13.07 on the Chicago Mercantile Exchange.
Notional Value = Contract Unit x Current Price
So, if soybeans were trading at $13.07, you would multiply the number of contract units (5,000) by the contract price, $13.07. The notional value of a soybean futures contract at this price would be $65,650 (5,000 x $13.07).
A future contract's price is a reflection of how many 'ticks' it has moved. For example, soybean's minimum price fluctuation is $0.0025 per bushel, so the minimum price tick is $12.50 per contract (5,000 x $0.0025).
Why Notional Value Is Important
Notional value is key to managing risk. In particular, the notional value can be used to determine the hedge ratio, which lays out the number of contracts needed to hedge market risk. The hedge ratio calculation is as follows:
Hedge ratio = Value at risk ÷ Notional value
Value at risk is the amount of an investor’s portfolio at risk—or subject to loss related to a particular market. For example, imagine you have a $5 million position in soybeans you would like to hedge against future losses. You would use a futures contract to do so.
Continuing with the soybean futures example from above, it would take roughly 76 of the above soybean futures contracts to hedge your position ($5 million divided by $65,650).
By calculating notional value, you can see what actions you need to take to understand and plan for the risks of trading futures. It may take a small amount of money to buy an option contract thanks to leverage—but movements in the underlying asset price can lead to a large swing in your account.
Futures Contracts and the Market
There are two main participants in the futures markets. Hedgers seek to manage their price risk for commodities, and speculators want to profit off of price fluctuations for commodities. Speculators provide a great deal of liquidity to the futures markets. Futures contracts allow speculators to take larger amounts of risk with less capital due to the high degree of leverage involved.
Futures contracts are financial derivatives with values based on an underlying asset. They are traded on centralized exchanges such as the Chicago Mercantile Exchange (CME) Group or the Intercontinental Exchange (ICE).
The futures market began in the 1850s in Chicago with farmers seeking to hedge their crop production. Farmers could sell futures contracts to lock in a price for their crops. This allowed them to be unconcerned about daily price fluctuations. The futures market has since expanded to include other commodities, such as energy futures, interest rate futures, and currency futures.
Futures Contracts Length
Unlike stocks that can exist in perpetuity, futures have an expiration date and are limited in duration. The front-month futures contract is the contract with the nearest expiration date and is usually the closest in value to the current price.
The price of the front-month futures contract may be substantially different than the contract a few months out. This allows the market to attempt to predict supply and demand for a commodity further out.
What Is Meant by Notional Value?
Notional value is the current value of a futures contract. Because it uses the contract's current price, it changes over time because the contract's price changes.
What Is Notional vs. Actual Value?
If actual value is defined as market value, then notional value is the theoretical value of a position and actual value is how much you'd pay at that moment.
What Is the Concept of Notional Value?
Notional value is the amount a contract is worth at a given moment. It is used to help investors and traders assess risk and manage their positions.
The Bottom Line
A future contract's notional value is it's contract size multiplied by it's current price. It indicates the value of the underlying asset based on quantity and how much it is trading for, which helps you make decisions about a position and trade.
Correction —May 27, 2023: A previous version of this article used the term "spot price" in place of "current price" when referring to calculating notional value.
| [
[
"liquidity",
"https://www.investopedia.com/terms/l/liquidity.asp"
],
[
"leverage",
"https://www.investopedia.com/terms/l/leverage.asp"
],
[
"financial derivatives",
"https://www.investopedia.com/articles/active-trading/110614/futures-derivatives-and-liquidity-more-or-less-risky.asp"
],
[
"underlying asset",
"https://www.investopedia.com/terms/u/underlying-asset.asp"
],
[
"expiration date",
"https://www.investopedia.com/ask/answers/06/futureshedge.asp"
],
[
"supply and demand",
"https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp"
]
] |
https://www.investopedia.com/ask/answers/042715/what-do-creditors-have-report-credit-bureaus.asp | What Do Creditors Have to Report to Credit Bureaus? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Creditors and lenders are not required by law to report to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp">credit bureaus</a>. However, many businesses choose to report on-time payments, late payments, purchases, loan terms, credit limits, and balances owed. Credit bureaus collect this data and create your credit report and credit score.<span class="ql-inline-citation" data-cite="1"></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_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Businesses usually also report significant events such as account closures or charge-offs. For example, if a mortgage is paid off, this information is generally reported to a credit bureau. Learn more about what creditors have to report to credit bureaus and how what they report can affect your finances.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<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 Takeways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Credit bureaus receive information from lenders and creditors, businesses, and government agencies.</li><li>The three largest credit bureaus are Experian, TransUnion, and Equifax.</li><li>Credit reports and credit scores are indicators of how a person handles their debt and credit. </li><li>You can file a dispute against information you believe is incorrect on your credit report.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Governmental organizations that maintain public records don't report to the credit bureaus, but the bureaus usually obtain the documents on their own. For this reason, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a> filings are typically included on credit reports, and can remain there for seven to 10 years.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Another example, if you owe the IRS money, chances are, a public record of a tax lien may land on your credit report, and that can impact your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-improve-your-credit-score-4590097">credit score</a>.
</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-creditors-and-credit-bureaus"></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"> Creditors and Credit Bureaus </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Creditors and lenders such as banks and credit card companies must pay to report information to any of the three major credit-reporting bureaus, which are Experian, Equifax, and TransUnion. Because cost is involved, some creditors and lenders may choose to use only one service instead of all three.
</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 creditors alert only one credit bureau, not all bureaus receive the same information about your payment history. Generally, credit card companies won't report a late payment if you are just a day or two late. Credit bureaus get their information from different sources. So, your credit score may differ depending on which bureau is reporting it.<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_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> When do creditors report to the credit agencies? Some creditors report to the bureaus on a monthly basis, although different businesses file on different days, which means that an your credit report is continually updated. Some lenders and creditors submit information on a quarterly basis.
</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"> Larger companies may provide multiple monthly reports on a rolling basis, with different days for different customers, Smaller companies may report only once per month with all of its customers included.<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_19-0"></div>
<span class="heading-toc" id="toc-negative-impact-to-credit-reports"></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"> Negative Impact to Credit Reports </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Negative information, such as late or missed payments or bankruptcies, can remain on your credit report for seven to 10 years, after which the credit bureaus automatically remove the data.<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_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If you find inaccurate information on your credit report, you can file a dispute with the credit bureau or with the creditor who provided the incorrect data. You can get a free copy of your credit report at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.annualcreditreport.com/index.action" rel="sponsored nofollow">AnnualCreditReport.com</a>.
</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 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>Most claims about inaccurate information on a credit report must be investigated within 30 days. If the claim is substantiated, all credit bureaus must remove the negative report.<span class="ql-inline-citation" data-cite="10"></span></p></div></div></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_27-0"><span class="heading-toc" id="toc-how-do-i-contact-all-3-credit-bureaus"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Contact All 3 Credit Bureaus?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can contact a credit bureau to get a copy of your credit report or to report inaccuracies. Here is the phone number for each of the 3 main credit bureaus:<span class="ql-inline-citation" data-cite="11"></span></p><p><br/></p><ul><li><strong>Equifax</strong>: 1-800-685-1111</li><li><strong>Experian</strong>: 1-888-397-3742</li><li><strong>TransUnion</strong>: 1-888-909-8872</li></ul><p><br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-why-should-i-get-a-copy-of-my-report"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Should I Get a Copy of My Report?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You should get a copy of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/consumer-credit-report/">credit report</a> for several reason. You will understand what factors are affecting your credit score so you can develop a strategy for improving your score. You can also monitor the report for errors. You are entitled to a free copy of your report from each of the main credit bureaus once per year.<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_30-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-how-can-i-improve-my-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Improve My Credit Score?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can improve your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ficoscore.asp">FICO credit score</a> in several ways, including by paying your bills on time, reducing the total amount of debt you owe and avoid opening new credit.<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_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"> Credit bureaus track your credit information that they collect from creditors and lenders and provide that information to lenders who may be considering you for credit. Check your credit reports regularly to ensure the information that the credit bureaus receive is correct.
</p></div> | Creditors and lenders are not required by law to report to [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp). However, many businesses choose to report on-time payments, late payments, purchases, loan terms, credit limits, and balances owed. Credit bureaus collect this data and create your credit report and credit score.
Businesses usually also report significant events such as account closures or charge-offs. For example, if a mortgage is paid off, this information is generally reported to a credit bureau. Learn more about what creditors have to report to credit bureaus and how what they report can affect your finances.
### Key Takeways
* Credit bureaus receive information from lenders and creditors, businesses, and government agencies.
* The three largest credit bureaus are Experian, TransUnion, and Equifax.
* Credit reports and credit scores are indicators of how a person handles their debt and credit.
* You can file a dispute against information you believe is incorrect on your credit report.
Governmental organizations that maintain public records don't report to the credit bureaus, but the bureaus usually obtain the documents on their own. For this reason, [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) filings are typically included on credit reports, and can remain there for seven to 10 years.
Another example, if you owe the IRS money, chances are, a public record of a tax lien may land on your credit report, and that can impact your [credit score](https://www.investopedia.com/how-to-improve-your-credit-score-4590097).
## Creditors and Credit Bureaus
Creditors and lenders such as banks and credit card companies must pay to report information to any of the three major credit-reporting bureaus, which are Experian, Equifax, and TransUnion. Because cost is involved, some creditors and lenders may choose to use only one service instead of all three.
When creditors alert only one credit bureau, not all bureaus receive the same information about your payment history. Generally, credit card companies won't report a late payment if you are just a day or two late. Credit bureaus get their information from different sources. So, your credit score may differ depending on which bureau is reporting it.
When do creditors report to the credit agencies? Some creditors report to the bureaus on a monthly basis, although different businesses file on different days, which means that an your credit report is continually updated. Some lenders and creditors submit information on a quarterly basis.
Larger companies may provide multiple monthly reports on a rolling basis, with different days for different customers, Smaller companies may report only once per month with all of its customers included.
## Negative Impact to Credit Reports
Negative information, such as late or missed payments or bankruptcies, can remain on your credit report for seven to 10 years, after which the credit bureaus automatically remove the data.
If you find inaccurate information on your credit report, you can file a dispute with the credit bureau or with the creditor who provided the incorrect data. You can get a free copy of your credit report at [AnnualCreditReport.com](https://www.annualcreditreport.com/index.action).
###
Most claims about inaccurate information on a credit report must be investigated within 30 days. If the claim is substantiated, all credit bureaus must remove the negative report.
## How Do I Contact All 3 Credit Bureaus?
You can contact a credit bureau to get a copy of your credit report or to report inaccuracies. Here is the phone number for each of the 3 main credit bureaus:
* **Equifax**: 1-800-685-1111
* **Experian**: 1-888-397-3742
* **TransUnion**: 1-888-909-8872
## Why Should I Get a Copy of My Report?
You should get a copy of your [credit report](https://www.investopedia.com/personal-finance/consumer-credit-report/) for several reason. You will understand what factors are affecting your credit score so you can develop a strategy for improving your score. You can also monitor the report for errors. You are entitled to a free copy of your report from each of the main credit bureaus once per year.
## How Can I Improve My Credit Score?
You can improve your [FICO credit score](https://www.investopedia.com/terms/f/ficoscore.asp) in several ways, including by paying your bills on time, reducing the total amount of debt you owe and avoid opening new credit.
## The Bottom Line
Credit bureaus track your credit information that they collect from creditors and lenders and provide that information to lenders who may be considering you for credit. Check your credit reports regularly to ensure the information that the credit bureaus receive is correct.
| Creditors and lenders are not required by law to report to credit bureaus. However, many businesses choose to report on-time payments, late payments, purchases, loan terms, credit limits, and balances owed. Credit bureaus collect this data and create your credit report and credit score.
Businesses usually also report significant events such as account closures or charge-offs. For example, if a mortgage is paid off, this information is generally reported to a credit bureau. Learn more about what creditors have to report to credit bureaus and how what they report can affect your finances.
Key Takeways
Credit bureaus receive information from lenders and creditors, businesses, and government agencies.The three largest credit bureaus are Experian, TransUnion, and Equifax.Credit reports and credit scores are indicators of how a person handles their debt and credit. You can file a dispute against information you believe is incorrect on your credit report.
Governmental organizations that maintain public records don't report to the credit bureaus, but the bureaus usually obtain the documents on their own. For this reason, bankruptcy filings are typically included on credit reports, and can remain there for seven to 10 years.
Another example, if you owe the IRS money, chances are, a public record of a tax lien may land on your credit report, and that can impact your credit score.
Creditors and Credit Bureaus
Creditors and lenders such as banks and credit card companies must pay to report information to any of the three major credit-reporting bureaus, which are Experian, Equifax, and TransUnion. Because cost is involved, some creditors and lenders may choose to use only one service instead of all three.
When creditors alert only one credit bureau, not all bureaus receive the same information about your payment history. Generally, credit card companies won't report a late payment if you are just a day or two late. Credit bureaus get their information from different sources. So, your credit score may differ depending on which bureau is reporting it.
When do creditors report to the credit agencies? Some creditors report to the bureaus on a monthly basis, although different businesses file on different days, which means that an your credit report is continually updated. Some lenders and creditors submit information on a quarterly basis.
Larger companies may provide multiple monthly reports on a rolling basis, with different days for different customers, Smaller companies may report only once per month with all of its customers included.
Negative Impact to Credit Reports
Negative information, such as late or missed payments or bankruptcies, can remain on your credit report for seven to 10 years, after which the credit bureaus automatically remove the data.
If you find inaccurate information on your credit report, you can file a dispute with the credit bureau or with the creditor who provided the incorrect data. You can get a free copy of your credit report at AnnualCreditReport.com.
Most claims about inaccurate information on a credit report must be investigated within 30 days. If the claim is substantiated, all credit bureaus must remove the negative report.
How Do I Contact All 3 Credit Bureaus?
You can contact a credit bureau to get a copy of your credit report or to report inaccuracies. Here is the phone number for each of the 3 main credit bureaus:Equifax: 1-800-685-1111Experian: 1-888-397-3742TransUnion: 1-888-909-8872
Why Should I Get a Copy of My Report?
You should get a copy of your credit report for several reason. You will understand what factors are affecting your credit score so you can develop a strategy for improving your score. You can also monitor the report for errors. You are entitled to a free copy of your report from each of the main credit bureaus once per year.
How Can I Improve My Credit Score?
You can improve your FICO credit score in several ways, including by paying your bills on time, reducing the total amount of debt you owe and avoid opening new credit.
The Bottom Line
Credit bureaus track your credit information that they collect from creditors and lenders and provide that information to lenders who may be considering you for credit. Check your credit reports regularly to ensure the information that the credit bureaus receive is correct.
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https://www.investopedia.com/micron-technology-stock-jumps-after-baird-upgrade-8643986 | Micron Technology Stock Jumps After Baird Upgrade | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Micron Technology shares surged in intraday trading Monday after Baird upgraded the stock and raised its price target.</li><li>Baird Senior Research Analyst Tristan Gerra said Micron has "meaningful upside opportunities ahead."</li><li>Gerra noted that DRAM chip pricing has been rising while supply growth is expected to slow.</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"> 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>) shares surged in intraday trading Monday after Baird upgraded the stock and raised the price target, saying it sees “meaningful upside opportunities ahead” for the semiconductor maker.
</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"> Baird boosted its rating to "outperform" from "neutral," and lifted the price target to $150 per share from $115. It also added Micron to its list of "top semiconductor ideas," which also includes 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>), Broadcom (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AVGO">AVGO</a>), and Semtech (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMTC">SMTC</a>).
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<span class="heading-toc" id="toc-shares-look-attractive-after-pullback"></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"> Shares Look Attractive After Pullback </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Baird Senior Research Analyst Tristan Gerra wrote in a note to clients that Micron shares look attractive after a recent pullback, which came even as demand trends for DRAM chips have accelerated.
</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"> Gerra noted that DRAM chip pricing is stronger than anticipated, “while supply growth is expected to slow industry wide.”
</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-better-late-than-never"></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"> Better Late Than Never </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Gerra admitted the upgrade should have come sooner, saying Baird was “catching the train a bit late.”
</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"> Shares of Micron Technology, which were up 4.8% to $120.18 as of 1:46 p.m. ET Monday, hit an all-time high of $130.54 on April 4 before fading somewhat. They’re up more than 40% this year.<br/>
</p></div> | ### Key Takeaways
* Micron Technology shares surged in intraday trading Monday after Baird upgraded the stock and raised its price target.
* Baird Senior Research Analyst Tristan Gerra said Micron has "meaningful upside opportunities ahead."
* Gerra noted that DRAM chip pricing has been rising while supply growth is expected to slow.
Micron Technology ([MU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MU)) shares surged in intraday trading Monday after Baird upgraded the stock and raised the price target, saying it sees “meaningful upside opportunities ahead” for the semiconductor maker.
Baird boosted its rating to "outperform" from "neutral," and lifted the price target to $150 per share from $115. It also added Micron to its list of "top semiconductor ideas," which also includes Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)), Broadcom ([AVGO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AVGO)), and Semtech ([SMTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMTC)).
## Shares Look Attractive After Pullback
Baird Senior Research Analyst Tristan Gerra wrote in a note to clients that Micron shares look attractive after a recent pullback, which came even as demand trends for DRAM chips have accelerated.
Gerra noted that DRAM chip pricing is stronger than anticipated, “while supply growth is expected to slow industry wide.”
## Better Late Than Never
Gerra admitted the upgrade should have come sooner, saying Baird was “catching the train a bit late.”
Shares of Micron Technology, which were up 4.8% to $120.18 as of 1:46 p.m. ET Monday, hit an all-time high of $130.54 on April 4 before fading somewhat. They’re up more than 40% this year.
| Key Takeaways
Micron Technology shares surged in intraday trading Monday after Baird upgraded the stock and raised its price target.Baird Senior Research Analyst Tristan Gerra said Micron has "meaningful upside opportunities ahead."Gerra noted that DRAM chip pricing has been rising while supply growth is expected to slow.
Micron Technology (MU) shares surged in intraday trading Monday after Baird upgraded the stock and raised the price target, saying it sees “meaningful upside opportunities ahead” for the semiconductor maker.
Baird boosted its rating to "outperform" from "neutral," and lifted the price target to $150 per share from $115. It also added Micron to its list of "top semiconductor ideas," which also includes Nvidia (NVDA), Broadcom (AVGO), and Semtech (SMTC).
Shares Look Attractive After Pullback
Baird Senior Research Analyst Tristan Gerra wrote in a note to clients that Micron shares look attractive after a recent pullback, which came even as demand trends for DRAM chips have accelerated.
Gerra noted that DRAM chip pricing is stronger than anticipated, “while supply growth is expected to slow industry wide.”
Better Late Than Never
Gerra admitted the upgrade should have come sooner, saying Baird was “catching the train a bit late.”
Shares of Micron Technology, which were up 4.8% to $120.18 as of 1:46 p.m. ET Monday, hit an all-time high of $130.54 on April 4 before fading somewhat. They’re up more than 40% this year.
| [
[
"MU",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=MU"
],
[
"NVDA",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA"
],
[
"AVGO",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=AVGO"
],
[
"SMTC",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMTC"
]
] |
https://www.investopedia.com/chase-united-cardholders-can-get-more-miles-on-donations-for-black-history-month-5218676 | Chase United Cardholders Can Get More Miles on Donations for Black History Month | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Chase, United Airlines and Visa have partnered to honor Black History Month by offering bonus rewards to United Airlines cardholders who donate to select organizations that support civil rights initiatives and provide educational opportunities and resources for Black students.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>In celebration of Black History Month, Chase United credit card holders can earn bonus rewards when they make donations to four select organizations.</li><li>Eligible cardholders have until mid-March to make their donations and earn extra United MileagePlus miles.</li><li>Black History Month honors the struggles and celebrates the achievements of African Americans in the U.S.</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"> Support Organizations That Support Black Students and Civil Rights and Earn Bonus Miles </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Through March 15, 2022, Chase United cardholders can earn 5 miles per dollar on up to $1,000 in donations to four different organizations.
</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 organizations, which were chosen by Chase, United Airlines and Visa, are centered on providing educational opportunities for Black students, providing legal defense and supporting civil rights policies.
</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"> “Through our partnership with Chase and Visa, we look forward to giving our valued Cardmembers a unique way to make meaningful contributions to these organizations and be rewarded for their support," said Jessica Kimbrough, chief diversity, equity and inclusion officer at United, in a press release.
</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 list includes the following organizations:
</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>The Thurgood Marshall College Fund</li><li>The Leadership Conference Education Fund</li><li>The NAACP Legal Defense and Education Fund</li><li>United Negro College Fund</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"> The offer to earn 5 miles per dollar on up to $1,000 in donations is available for the following cards:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-gateway-card-review-5083212">United Gateway Visa Card</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-explorer-card-review-4796332">United Explorer Visa Card</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-launches-united-quest-card-with-a-100-000-mile-offer-5176331">United Quest Visa Card</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-club-card-review-4798980">United Club Infinite Visa Card</a></li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-business-card-review-4801527">United Business Visa Card</a></li>
<li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-club-business-card-review-4801522">United Club Business Visa Card</a><span class="ql-inline-citation" data-cite="1"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Black History Month, set in February, can trace its roots back to 1926, when the Association for the Study of African American Life and History sponsored a National Negro History Week. By the end of the 1960s, the week evolved into Black History Month on many college campuses, and it was officially recognized in 1976 by President Gerald Ford.
</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 month is dedicated to celebrating the often neglected accomplishments by Black Americans in their central role in the nation's history and honoring their struggles.<span class="ql-inline-citation" data-cite="2"></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> | Chase, United Airlines and Visa have partnered to honor Black History Month by offering bonus rewards to United Airlines cardholders who donate to select organizations that support civil rights initiatives and provide educational opportunities and resources for Black students.
### Key Takeaways
* In celebration of Black History Month, Chase United credit card holders can earn bonus rewards when they make donations to four select organizations.
* Eligible cardholders have until mid-March to make their donations and earn extra United MileagePlus miles.
* Black History Month honors the struggles and celebrates the achievements of African Americans in the U.S.
### Support Organizations That Support Black Students and Civil Rights and Earn Bonus Miles
Through March 15, 2022, Chase United cardholders can earn 5 miles per dollar on up to $1,000 in donations to four different organizations.
The organizations, which were chosen by Chase, United Airlines and Visa, are centered on providing educational opportunities for Black students, providing legal defense and supporting civil rights policies.
“Through our partnership with Chase and Visa, we look forward to giving our valued Cardmembers a unique way to make meaningful contributions to these organizations and be rewarded for their support," said Jessica Kimbrough, chief diversity, equity and inclusion officer at United, in a press release.
The list includes the following organizations:
* The Thurgood Marshall College Fund
* The Leadership Conference Education Fund
* The NAACP Legal Defense and Education Fund
* United Negro College Fund
The offer to earn 5 miles per dollar on up to $1,000 in donations is available for the following cards:
* [United Gateway Visa Card](https://www.investopedia.com/united-gateway-card-review-5083212)
* [United Explorer Visa Card](https://www.investopedia.com/united-explorer-card-review-4796332)
* [United Quest Visa Card](https://www.investopedia.com/chase-launches-united-quest-card-with-a-100-000-mile-offer-5176331)
* [United Club Infinite Visa Card](https://www.investopedia.com/united-club-card-review-4798980)
* [United Business Visa Card](https://www.investopedia.com/united-business-card-review-4801527)
* [United Club Business Visa Card](https://www.investopedia.com/united-club-business-card-review-4801522)
Black History Month, set in February, can trace its roots back to 1926, when the Association for the Study of African American Life and History sponsored a National Negro History Week. By the end of the 1960s, the week evolved into Black History Month on many college campuses, and it was officially recognized in 1976 by President Gerald Ford.
The month is dedicated to celebrating the often neglected accomplishments by Black Americans in their central role in the nation's history and honoring their struggles.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Chase, United Airlines and Visa have partnered to honor Black History Month by offering bonus rewards to United Airlines cardholders who donate to select organizations that support civil rights initiatives and provide educational opportunities and resources for Black students.
Key Takeaways
In celebration of Black History Month, Chase United credit card holders can earn bonus rewards when they make donations to four select organizations.Eligible cardholders have until mid-March to make their donations and earn extra United MileagePlus miles.Black History Month honors the struggles and celebrates the achievements of African Americans in the U.S.
Support Organizations That Support Black Students and Civil Rights and Earn Bonus Miles
Through March 15, 2022, Chase United cardholders can earn 5 miles per dollar on up to $1,000 in donations to four different organizations.
The organizations, which were chosen by Chase, United Airlines and Visa, are centered on providing educational opportunities for Black students, providing legal defense and supporting civil rights policies.
“Through our partnership with Chase and Visa, we look forward to giving our valued Cardmembers a unique way to make meaningful contributions to these organizations and be rewarded for their support," said Jessica Kimbrough, chief diversity, equity and inclusion officer at United, in a press release.
The list includes the following organizations:
The Thurgood Marshall College FundThe Leadership Conference Education FundThe NAACP Legal Defense and Education FundUnited Negro College Fund
The offer to earn 5 miles per dollar on up to $1,000 in donations is available for the following cards:
United Gateway Visa Card
United Explorer Visa Card
United Quest Visa Card
United Club Infinite Visa Card
United Business Visa Card
United Club Business Visa Card
Black History Month, set in February, can trace its roots back to 1926, when the Association for the Study of African American Life and History sponsored a National Negro History Week. By the end of the 1960s, the week evolved into Black History Month on many college campuses, and it was officially recognized in 1976 by President Gerald Ford.
The month is dedicated to celebrating the often neglected accomplishments by Black Americans in their central role in the nation's history and honoring their struggles.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/microsoft-backed-rubrik-surges-more-than-15-percent-in-its-trading-debut-8638943 | Microsoft-Backed Rubrik Surges More Than 15% in Its Trading Debut | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Shares of Microsoft-backed Rubrik jumped more than 15% to $37 in the cybersecurity company's first day of trading on the New York Stock Exchange Thursday under the ticker "RBRK."</li><li>The company had priced its shares at $32 apiece in its initial public offering (IPO), above its expected range of $28 to $31.</li><li>Rubrik offers secure data for enterprise customers across cloud and Software as a Service (SaaS) applications powered by machine learning (ML) and artificial intelligence (AI).</li><li>The company's customers include AI leaders like Microsoft, Oracle, and Amazon Web Services.</li><li>Rubrik is the latest company to go public amid a flurry of IPOs, including Reddit, Astera Labs, and Ibotta.</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 Rubrik (RBRK), a cybersecurity company backed by 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>), surged more than 15% to $37 in their first day of trading on 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> Thursday. Rubrik is the latest company to go public amid a flurry of new listings, including <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/walmart-backed-ibotta-soars-in-its-trading-debut-8635385">Ibotta</a> (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.tradingview.com/symbols/NYSE-IBTA/" rel="nofollow">IBTA</a>), <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/reddit-posts-45-percent-gain-in-week-since-its-trading-debut-as-us-ipo-market-heats-up-in-q1-8621600">Reddit</a> (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=RDDT">RDDT</a>), and <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/astera-labs-surges-in-first-day-of-trading-8612176">Astera Labs</a> (<a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ALAB">ALAB</a>).<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The company had priced its shares at $32 apiece in its <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>, above its expected range of $28 to $31. Rubrik said it offered 23.5 million shares, up from the 23 million shares it initially estimated would be sold.<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"> An additional 2.33 million shares were offered by existing stockholders including current or former employees, according to a filing with the Securities and Exchange Commission.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The company could be positioned to benefit amid the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a> boom. Rubrik applies AI and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/machine-learning.asp">machine learning (ML)</a> to its enterprise customers' data to identify and understand emergent threats and deliver cyber recovery across cloud and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/software-as-a-service-saas.asp">Software as a Service (SaaS)</a> applications.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Some of the company's notable customers include AI leaders like Microsoft, Oracle (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ORCL">ORCL</a>), and Amazon's (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>) <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/011316/what-amazon-web-services-and-why-it-so-successful.asp">AWS</a>. Rubrik is backed by Microsoft including an equity investment for an undisclosed amount in 2021. The cybersecurity company was named Microsoft's "partner of the year" in 2023.
</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
* Shares of Microsoft-backed Rubrik jumped more than 15% to $37 in the cybersecurity company's first day of trading on the New York Stock Exchange Thursday under the ticker "RBRK."
* The company had priced its shares at $32 apiece in its initial public offering (IPO), above its expected range of $28 to $31.
* Rubrik offers secure data for enterprise customers across cloud and Software as a Service (SaaS) applications powered by machine learning (ML) and artificial intelligence (AI).
* The company's customers include AI leaders like Microsoft, Oracle, and Amazon Web Services.
* Rubrik is the latest company to go public amid a flurry of IPOs, including Reddit, Astera Labs, and Ibotta.
Shares of Rubrik (RBRK), a cybersecurity company backed by Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)), surged more than 15% to $37 in their first day of trading on the [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp) Thursday. Rubrik is the latest company to go public amid a flurry of new listings, including [Ibotta](https://www.investopedia.com/walmart-backed-ibotta-soars-in-its-trading-debut-8635385) ([IBTA](https://www.tradingview.com/symbols/NYSE-IBTA/)), [Reddit](https://www.investopedia.com/reddit-posts-45-percent-gain-in-week-since-its-trading-debut-as-us-ipo-market-heats-up-in-q1-8621600) ([RDDT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=RDDT)), and [Astera Labs](https://www.investopedia.com/astera-labs-surges-in-first-day-of-trading-8612176) ([ALAB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ALAB)).
The company had priced its shares at $32 apiece in its [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp), above its expected range of $28 to $31. Rubrik said it offered 23.5 million shares, up from the 23 million shares it initially estimated would be sold.
An additional 2.33 million shares were offered by existing stockholders including current or former employees, according to a filing with the Securities and Exchange Commission.
The company could be positioned to benefit amid the [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) boom. Rubrik applies AI and [machine learning (ML)](https://www.investopedia.com/terms/m/machine-learning.asp) to its enterprise customers' data to identify and understand emergent threats and deliver cyber recovery across cloud and [Software as a Service (SaaS)](https://www.investopedia.com/terms/s/software-as-a-service-saas.asp) applications.
Some of the company's notable customers include AI leaders like Microsoft, Oracle ([ORCL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ORCL)), and Amazon's ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)) [AWS](https://www.investopedia.com/articles/investing/011316/what-amazon-web-services-and-why-it-so-successful.asp). Rubrik is backed by Microsoft including an equity investment for an undisclosed amount in 2021. The cybersecurity company was named Microsoft's "partner of the year" in 2023.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Shares of Microsoft-backed Rubrik jumped more than 15% to $37 in the cybersecurity company's first day of trading on the New York Stock Exchange Thursday under the ticker "RBRK."The company had priced its shares at $32 apiece in its initial public offering (IPO), above its expected range of $28 to $31.Rubrik offers secure data for enterprise customers across cloud and Software as a Service (SaaS) applications powered by machine learning (ML) and artificial intelligence (AI).The company's customers include AI leaders like Microsoft, Oracle, and Amazon Web Services.Rubrik is the latest company to go public amid a flurry of IPOs, including Reddit, Astera Labs, and Ibotta.
Shares of Rubrik (RBRK), a cybersecurity company backed by Microsoft (MSFT), surged more than 15% to $37 in their first day of trading on the New York Stock Exchange (NYSE) Thursday. Rubrik is the latest company to go public amid a flurry of new listings, including Ibotta (IBTA), Reddit (RDDT), and Astera Labs (ALAB).
The company had priced its shares at $32 apiece in its initial public offering (IPO), above its expected range of $28 to $31. Rubrik said it offered 23.5 million shares, up from the 23 million shares it initially estimated would be sold.
An additional 2.33 million shares were offered by existing stockholders including current or former employees, according to a filing with the Securities and Exchange Commission.
The company could be positioned to benefit amid the artificial intelligence (AI) boom. Rubrik applies AI and machine learning (ML) to its enterprise customers' data to identify and understand emergent threats and deliver cyber recovery across cloud and Software as a Service (SaaS) applications.
Some of the company's notable customers include AI leaders like Microsoft, Oracle (ORCL), and Amazon's (AMZN) AWS. Rubrik is backed by Microsoft including an equity investment for an undisclosed amount in 2021. The cybersecurity company was named Microsoft's "partner of the year" in 2023.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/terms/t/tranches.asp | What Are Tranches? Definition, Meaning, and Examples | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-tranches"></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 Tranches? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Tranches are segments created from a pool of securities—usually debt instruments such as bonds or mortgages—that are divided up by risk, time to maturity, or other characteristics in order to be marketable to different investors. Each portion or tranche of a securitized or structured product is one of several related securities offered at the same time, but with varying risks, rewards, and maturities to appeal to a diverse range of investors.
</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"> Tranche is a French word meaning <em>slice</em> or <em>portion</em>. They are commonly found in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mbs.asp">mortgage-backed securities (MBS)</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset-backedsecurity.asp">asset-backed securities (ABS)</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>Tranches are pieces of a pooled collection of securities, usually debt instruments, that are split up by risk or other characteristics in order to be marketable to different investors.</li><li>Tranches carry different maturities, yields, and degrees of risk—and privileges in repayment in case of default.</li><li>Tranches are common in securitized products like CDOs and CMOs.</li></ul></div></div></div>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jake Shi</p></span>
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<span class="heading-toc" id="toc-understanding-tranches"></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 Tranches </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Tranches in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/structuredfinance.asp">structured finance</a> are a fairly recent development, spurred by the increased use of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securitization.asp">securitization</a> to divide up sometimes-risky financial products with steady cash flows to then sell these divisions to other investors. The discrete tranches of a larger asset pool are usually defined in transaction documentation and assigned different classes of notes, each with a different bond credit rating.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Senior tranches typically contain assets with higher credit ratings than junior tranches. The senior tranches have first lien on the assets—they're in line to be repaid first, in case of default. Junior tranches have a second lien or no lien 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"> Examples of financial products that can be divided into tranches include bonds, loans, insurance policies, mortgages, and other debts.
</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-tranches-in-mortgage-backed-securities"></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"> Tranches in Mortgage-Backed Securities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> A tranche is a common financial structure for securitized debt products, such as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cdo.asp">collateralized debt obligation (CDO)</a>, which pools together a collection of cash flow-generating assets—such as mortgages, bonds, and loans—or a mortgage-backed security.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> An MBS is made of multiple mortgage pools that have a wide variety of loans, from safe loans with lower interest rates to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/b-note.asp">risky loans with higher rates</a>. Each specific mortgage pool has its own time to maturity, which factors into the risk and reward benefits. Therefore, tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> For example, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cmo.asp">collateralized mortgage obligation (CMO)</a> offering a partitioned mortgage-backed securities portfolio might have mortgage tranches with one-year, two-year, five-year, and 20-year maturities, all with varying yields. If an investor wants to buy an MBS, they can choose the tranche type most applicable to their appetite for return and aversion to risk.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/ztranche.asp">Z tranche</a> is the lowest-ranked tranche of a CMO in terms of seniority. Its owners are not entitled to any coupon payments, receiving no cash flow from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying.asp">underlying</a> <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage.asp">mortgages</a> until the more senior tranches are retired, or paid off.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Investors receive monthly cash flow based on the MBS tranche in which they invested. They can either try to sell it and make a quick profit or hold onto it and realize small but long-term gains in the form of interest payments. These monthly payments are bits and pieces of all the interest payments made by homeowners whose mortgage is included in a specific MBS.
</p>
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<span class="heading-toc" id="toc-investment-strategy-in-choosing-tranches"></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"> Investment Strategy in Choosing Tranches </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Investors who desire to have long-term steady cash flow will invest in tranches with a longer time to maturity. Investors who need a more immediate but more lucrative income stream will invest in tranches with less time to maturity.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> All tranches, regardless of interest and maturity, allow investors to customize investment strategies to their specific needs. Conversely, tranches help banks and other financial institutions attract investors across many different profile types.
</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"> Tranches add to the complexity of debt investing and sometimes pose a problem to uninformed investors, who run the risk of choosing tranches unsuitable to their investment goals.
</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"> Tranches can also be miscategorized by credit rating agencies. If they are given a higher rating than deserved, it can cause investors to be exposed to riskier assets than they intended to be. Such mislabeling played a part in the mortgage meltdown of 2007 and the subsequent financial crisis.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Tranches containing junk bonds or sub-prime mortgages (below-investment-grade assets) were labeled AAA or the equivalent, either through incompetence, carelessness, or, as some charged, outright corruption on the agencies' part.
</p>
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<span class="heading-toc" id="toc-tranche-lawsuits-in-the-2007-2009-financial-crisis"></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"> Tranche Lawsuits in the 2007-2009 Financial Crisis </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> After the financial crisis of 2007-09, an explosion of lawsuits occurred against issuers of CMOs, CDOs, and other debt securities—and among investors in the products themselves, all of which was dubbed "tranche warfare" in the press.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> An April 2008 story in the <em>Financial Times </em>noted that investors in the senior tranches of failed CDOs were taking advantage of their priority status to seize control of assets and cut off payments to other debt holders. CDO trustees, such as Deutsche Bank and Wells Fargo, filed suits to ensure all tranche investors continued to receive funds.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> And in 2009, the manager of Greenwich, Conn.-based hedge fund Carrington Investment Partners <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.housingwire.com/articles/tranche-warfare-mbs-investor-sues-american-home-over-reo-sales">filed a lawsuit </a>against the mortgage-servicing company American Home Mortgage Servicing. The hedge fund held junior tranches of mortgage-backed securities that contained loans made on foreclosed properties that American Home was selling for (allegedly) low prices—thus crippling the tranche's yield. Carrington argued in the complaint that its interests as a junior tranche-holder were in line with those of the senior tranche-holders.<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_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-are-the-three-types-of-tranches"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Three Types of Tranches?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Pooled financial securities are generally broken into three tranches: senior, mezzanine, and junior. Each tranche has a different level of risk and, therefore, a different level of return. Senior tranches have the least risk and the lowest returns while junior tranches have the highest risk and the highest returns. Mezzanine tranches sit between the two.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-what-is-an-example-of-a-tranche"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of a Tranche?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>An example of a tranche is as follows. Hundreds of mortgages are pooled into a security: a mortgage-backed security (MBS). The mortgages in this security all have different credit profiles based on the holder of the mortgage. Some have excellent credit profiles and the mortgages, therefore, have low interest rates.</p><p>Some of the borrowers have bad credit profiles and their mortgages have high interest rates. These different mortgages are broken down into tranches. Each tranche represents a different credit profile. The low-risk mortgages go into the senior tranche whereas the high-risk mortgages go into the junior tranche. An investor can choose which tranche they would like to invest in based on their risk profile.</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-is-a-cmo-a-cdo"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a CMO a CDO?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A collateralized mortgage obligation (CMO) is a collateralized debt obligation (CDO) constructed of underlying mortgages. CDOs are a pooled investment security of any fixed-income asset but are most often made up of loans. A CMO is specifically a CDO where the loans are mortgages.</p></div>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-what-is-a-aaa-tranche"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a AAA Tranche?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most pooled fixed-income investments consist of tranches, each assigned with a credit rating. Tranches assigned a AAA rating are of the best quality, meaning they are the least risky but also will have the lowest return. Sometimes a large corporation, project or sovereign government may require large amounts of funds. Banks may work together to offer funds and create <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pro-rata_tranche.asp">pro-rata tranches</a>. Pro-rata tranches will also have a credit rating assigned to it.<br/></p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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"> Tranches allow investors to choose the level of risk and return when investing in pooled securities. Those seeking higher returns will opt for higher-risk tranches, such as those containing below-investment-grade securities. Those seeking safer returns will opt for investment-grade tranches.
</p></div> | ## What Are Tranches?
Tranches are segments created from a pool of securities—usually debt instruments such as bonds or mortgages—that are divided up by risk, time to maturity, or other characteristics in order to be marketable to different investors. Each portion or tranche of a securitized or structured product is one of several related securities offered at the same time, but with varying risks, rewards, and maturities to appeal to a diverse range of investors.
Tranche is a French word meaning *slice* or *portion*. They are commonly found in [mortgage-backed securities (MBS)](https://www.investopedia.com/terms/m/mbs.asp) or [asset-backed securities (ABS)](https://www.investopedia.com/terms/a/asset-backedsecurity.asp).
### Key Takeaways
* Tranches are pieces of a pooled collection of securities, usually debt instruments, that are split up by risk or other characteristics in order to be marketable to different investors.
* Tranches carry different maturities, yields, and degrees of risk—and privileges in repayment in case of default.
* Tranches are common in securitized products like CDOs and CMOs.
![Tranches]()
:max_bytes(150000):strip_icc()/tranches.asp-final-912593623abd4abea1ec1016daee0f37.jpg)
Investopedia / Jake Shi
## Understanding Tranches
Tranches in [structured finance](https://www.investopedia.com/terms/s/structuredfinance.asp) are a fairly recent development, spurred by the increased use of [securitization](https://www.investopedia.com/terms/s/securitization.asp) to divide up sometimes-risky financial products with steady cash flows to then sell these divisions to other investors. The discrete tranches of a larger asset pool are usually defined in transaction documentation and assigned different classes of notes, each with a different bond credit rating.
Senior tranches typically contain assets with higher credit ratings than junior tranches. The senior tranches have first lien on the assets—they're in line to be repaid first, in case of default. Junior tranches have a second lien or no lien at all.
Examples of financial products that can be divided into tranches include bonds, loans, insurance policies, mortgages, and other debts.
## Tranches in Mortgage-Backed Securities
A tranche is a common financial structure for securitized debt products, such as a [collateralized debt obligation (CDO)](https://www.investopedia.com/terms/c/cdo.asp), which pools together a collection of cash flow-generating assets—such as mortgages, bonds, and loans—or a mortgage-backed security.
An MBS is made of multiple mortgage pools that have a wide variety of loans, from safe loans with lower interest rates to [risky loans with higher rates](https://www.investopedia.com/terms/b/b-note.asp). Each specific mortgage pool has its own time to maturity, which factors into the risk and reward benefits. Therefore, tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors.
For example, a [collateralized mortgage obligation (CMO)](https://www.investopedia.com/terms/c/cmo.asp) offering a partitioned mortgage-backed securities portfolio might have mortgage tranches with one-year, two-year, five-year, and 20-year maturities, all with varying yields. If an investor wants to buy an MBS, they can choose the tranche type most applicable to their appetite for return and aversion to risk.
A [Z tranche](https://www.investopedia.com/terms/z/ztranche.asp) is the lowest-ranked tranche of a CMO in terms of seniority. Its owners are not entitled to any coupon payments, receiving no cash flow from [underlying](https://www.investopedia.com/terms/u/underlying.asp) [mortgages](https://www.investopedia.com/terms/m/mortgage.asp) until the more senior tranches are retired, or paid off.
Investors receive monthly cash flow based on the MBS tranche in which they invested. They can either try to sell it and make a quick profit or hold onto it and realize small but long-term gains in the form of interest payments. These monthly payments are bits and pieces of all the interest payments made by homeowners whose mortgage is included in a specific MBS.
## Investment Strategy in Choosing Tranches
Investors who desire to have long-term steady cash flow will invest in tranches with a longer time to maturity. Investors who need a more immediate but more lucrative income stream will invest in tranches with less time to maturity.
All tranches, regardless of interest and maturity, allow investors to customize investment strategies to their specific needs. Conversely, tranches help banks and other financial institutions attract investors across many different profile types.
Tranches add to the complexity of debt investing and sometimes pose a problem to uninformed investors, who run the risk of choosing tranches unsuitable to their investment goals.
Tranches can also be miscategorized by credit rating agencies. If they are given a higher rating than deserved, it can cause investors to be exposed to riskier assets than they intended to be. Such mislabeling played a part in the mortgage meltdown of 2007 and the subsequent financial crisis.
Tranches containing junk bonds or sub-prime mortgages (below-investment-grade assets) were labeled AAA or the equivalent, either through incompetence, carelessness, or, as some charged, outright corruption on the agencies' part.
## Tranche Lawsuits in the 2007-2009 Financial Crisis
After the financial crisis of 2007-09, an explosion of lawsuits occurred against issuers of CMOs, CDOs, and other debt securities—and among investors in the products themselves, all of which was dubbed "tranche warfare" in the press.
An April 2008 story in the *Financial Times* noted that investors in the senior tranches of failed CDOs were taking advantage of their priority status to seize control of assets and cut off payments to other debt holders. CDO trustees, such as Deutsche Bank and Wells Fargo, filed suits to ensure all tranche investors continued to receive funds.
And in 2009, the manager of Greenwich, Conn.-based hedge fund Carrington Investment Partners [filed a lawsuit](https://www.housingwire.com/articles/tranche-warfare-mbs-investor-sues-american-home-over-reo-sales) against the mortgage-servicing company American Home Mortgage Servicing. The hedge fund held junior tranches of mortgage-backed securities that contained loans made on foreclosed properties that American Home was selling for (allegedly) low prices—thus crippling the tranche's yield. Carrington argued in the complaint that its interests as a junior tranche-holder were in line with those of the senior tranche-holders.
## What Are the Three Types of Tranches?
Pooled financial securities are generally broken into three tranches: senior, mezzanine, and junior. Each tranche has a different level of risk and, therefore, a different level of return. Senior tranches have the least risk and the lowest returns while junior tranches have the highest risk and the highest returns. Mezzanine tranches sit between the two.
## What Is an Example of a Tranche?
An example of a tranche is as follows. Hundreds of mortgages are pooled into a security: a mortgage-backed security (MBS). The mortgages in this security all have different credit profiles based on the holder of the mortgage. Some have excellent credit profiles and the mortgages, therefore, have low interest rates.
Some of the borrowers have bad credit profiles and their mortgages have high interest rates. These different mortgages are broken down into tranches. Each tranche represents a different credit profile. The low-risk mortgages go into the senior tranche whereas the high-risk mortgages go into the junior tranche. An investor can choose which tranche they would like to invest in based on their risk profile.
## Is a CMO a CDO?
A collateralized mortgage obligation (CMO) is a collateralized debt obligation (CDO) constructed of underlying mortgages. CDOs are a pooled investment security of any fixed-income asset but are most often made up of loans. A CMO is specifically a CDO where the loans are mortgages.
## What Is a AAA Tranche?
Most pooled fixed-income investments consist of tranches, each assigned with a credit rating. Tranches assigned a AAA rating are of the best quality, meaning they are the least risky but also will have the lowest return. Sometimes a large corporation, project or sovereign government may require large amounts of funds. Banks may work together to offer funds and create [pro-rata tranches](https://www.investopedia.com/terms/p/pro-rata_tranche.asp). Pro-rata tranches will also have a credit rating assigned to it.
## The Bottom Line
Tranches allow investors to choose the level of risk and return when investing in pooled securities. Those seeking higher returns will opt for higher-risk tranches, such as those containing below-investment-grade securities. Those seeking safer returns will opt for investment-grade tranches.
| What Are Tranches?
Tranches are segments created from a pool of securities—usually debt instruments such as bonds or mortgages—that are divided up by risk, time to maturity, or other characteristics in order to be marketable to different investors. Each portion or tranche of a securitized or structured product is one of several related securities offered at the same time, but with varying risks, rewards, and maturities to appeal to a diverse range of investors.
Tranche is a French word meaning slice or portion. They are commonly found in mortgage-backed securities (MBS) or asset-backed securities (ABS).
Key Takeaways
Tranches are pieces of a pooled collection of securities, usually debt instruments, that are split up by risk or other characteristics in order to be marketable to different investors.Tranches carry different maturities, yields, and degrees of risk—and privileges in repayment in case of default.Tranches are common in securitized products like CDOs and CMOs.
Investopedia / Jake Shi
Understanding Tranches
Tranches in structured finance are a fairly recent development, spurred by the increased use of securitization to divide up sometimes-risky financial products with steady cash flows to then sell these divisions to other investors. The discrete tranches of a larger asset pool are usually defined in transaction documentation and assigned different classes of notes, each with a different bond credit rating.
Senior tranches typically contain assets with higher credit ratings than junior tranches. The senior tranches have first lien on the assets—they're in line to be repaid first, in case of default. Junior tranches have a second lien or no lien at all.
Examples of financial products that can be divided into tranches include bonds, loans, insurance policies, mortgages, and other debts.
Tranches in Mortgage-Backed Securities
A tranche is a common financial structure for securitized debt products, such as a collateralized debt obligation (CDO), which pools together a collection of cash flow-generating assets—such as mortgages, bonds, and loans—or a mortgage-backed security.
An MBS is made of multiple mortgage pools that have a wide variety of loans, from safe loans with lower interest rates to risky loans with higher rates. Each specific mortgage pool has its own time to maturity, which factors into the risk and reward benefits. Therefore, tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors.
For example, a collateralized mortgage obligation (CMO) offering a partitioned mortgage-backed securities portfolio might have mortgage tranches with one-year, two-year, five-year, and 20-year maturities, all with varying yields. If an investor wants to buy an MBS, they can choose the tranche type most applicable to their appetite for return and aversion to risk.
A Z tranche is the lowest-ranked tranche of a CMO in terms of seniority. Its owners are not entitled to any coupon payments, receiving no cash flow from underlying mortgages until the more senior tranches are retired, or paid off.
Investors receive monthly cash flow based on the MBS tranche in which they invested. They can either try to sell it and make a quick profit or hold onto it and realize small but long-term gains in the form of interest payments. These monthly payments are bits and pieces of all the interest payments made by homeowners whose mortgage is included in a specific MBS.
Investment Strategy in Choosing Tranches
Investors who desire to have long-term steady cash flow will invest in tranches with a longer time to maturity. Investors who need a more immediate but more lucrative income stream will invest in tranches with less time to maturity.
All tranches, regardless of interest and maturity, allow investors to customize investment strategies to their specific needs. Conversely, tranches help banks and other financial institutions attract investors across many different profile types.
Tranches add to the complexity of debt investing and sometimes pose a problem to uninformed investors, who run the risk of choosing tranches unsuitable to their investment goals.
Tranches can also be miscategorized by credit rating agencies. If they are given a higher rating than deserved, it can cause investors to be exposed to riskier assets than they intended to be. Such mislabeling played a part in the mortgage meltdown of 2007 and the subsequent financial crisis.
Tranches containing junk bonds or sub-prime mortgages (below-investment-grade assets) were labeled AAA or the equivalent, either through incompetence, carelessness, or, as some charged, outright corruption on the agencies' part.
Tranche Lawsuits in the 2007-2009 Financial Crisis
After the financial crisis of 2007-09, an explosion of lawsuits occurred against issuers of CMOs, CDOs, and other debt securities—and among investors in the products themselves, all of which was dubbed "tranche warfare" in the press.
An April 2008 story in the Financial Times noted that investors in the senior tranches of failed CDOs were taking advantage of their priority status to seize control of assets and cut off payments to other debt holders. CDO trustees, such as Deutsche Bank and Wells Fargo, filed suits to ensure all tranche investors continued to receive funds.
And in 2009, the manager of Greenwich, Conn.-based hedge fund Carrington Investment Partners filed a lawsuit against the mortgage-servicing company American Home Mortgage Servicing. The hedge fund held junior tranches of mortgage-backed securities that contained loans made on foreclosed properties that American Home was selling for (allegedly) low prices—thus crippling the tranche's yield. Carrington argued in the complaint that its interests as a junior tranche-holder were in line with those of the senior tranche-holders.
What Are the Three Types of Tranches?
Pooled financial securities are generally broken into three tranches: senior, mezzanine, and junior. Each tranche has a different level of risk and, therefore, a different level of return. Senior tranches have the least risk and the lowest returns while junior tranches have the highest risk and the highest returns. Mezzanine tranches sit between the two.
What Is an Example of a Tranche?
An example of a tranche is as follows. Hundreds of mortgages are pooled into a security: a mortgage-backed security (MBS). The mortgages in this security all have different credit profiles based on the holder of the mortgage. Some have excellent credit profiles and the mortgages, therefore, have low interest rates.Some of the borrowers have bad credit profiles and their mortgages have high interest rates. These different mortgages are broken down into tranches. Each tranche represents a different credit profile. The low-risk mortgages go into the senior tranche whereas the high-risk mortgages go into the junior tranche. An investor can choose which tranche they would like to invest in based on their risk profile.
Is a CMO a CDO?
A collateralized mortgage obligation (CMO) is a collateralized debt obligation (CDO) constructed of underlying mortgages. CDOs are a pooled investment security of any fixed-income asset but are most often made up of loans. A CMO is specifically a CDO where the loans are mortgages.
What Is a AAA Tranche?
Most pooled fixed-income investments consist of tranches, each assigned with a credit rating. Tranches assigned a AAA rating are of the best quality, meaning they are the least risky but also will have the lowest return. Sometimes a large corporation, project or sovereign government may require large amounts of funds. Banks may work together to offer funds and create pro-rata tranches. Pro-rata tranches will also have a credit rating assigned to it.
The Bottom Line
Tranches allow investors to choose the level of risk and return when investing in pooled securities. Those seeking higher returns will opt for higher-risk tranches, such as those containing below-investment-grade securities. Those seeking safer returns will opt for investment-grade tranches.
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https://www.investopedia.com/ask/answers/040315/how-should-i-analyze-companys-financial-statements.asp | How Should I Analyze a Company's Financial Statements? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> It behooves investors to take advantage of the wealth of information provided in a company's financial statements to help them evaluate the company as a potential investment. In terms of overall profitability, the net income is the obvious starting point when analyzing a financial statement. This bottom-line dollar amount on a company's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incomestatement.asp">income statement</a> is an excellent indicator of profitability because it puts a value on the amount a company takes in, once all costs of production, depreciation, tax, interest, and other expenses have been deducted. However, net income shouldn’t be used exclusively when evaluating a company.
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<span class="heading-toc" id="toc-operating-profit-margin"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> Operating Profit Margin </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating_profit.asp">operating profit</a> margin is another important indicator of profitability and efficiency that compares the amount a company earns before interest, and taxes on sales are calculated. The margin helps analysts and potential investors gauge how successful company managers are at controlling expenses and generating revenue. A high operating profit margin strongly indicates that a company is shrewdly managing costs and generating sales.
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<span class="heading-toc" id="toc-assessing-stock-price-and-profitability-for-shareholders"></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"> Assessing Stock Price and Profitability for Shareholders </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Financial statements can be used to assess the company's stock price and profitability for shareholders. A variety of metrics are useful in this process. <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 an indicator of return on investment, showing a company's per-share profitability. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">price-earnings (P/E) ratio</a> uses a stock's EPS, compared to its present share price, for evaluation purposes. The <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-to-bookratio.asp">price to book (P/B) ratio</a> is considered a foundational value metric for investors, as it reveals the market's valuation of the company in relation to its intrinsic value.
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<span class="heading-toc" id="toc-dividend-payout-ratio"></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"> Dividend Payout Ratio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendpayoutratio.asp">dividend payout ratio</a> is another useful metric that measures a company's growth, financial stability, and returns paid to stockholders. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012015/how-do-i-calculate-dividend-payout-ratio-income-statement.asp">The dividend payout ratio calculates</a> the percentage of company earnings paid out to equity investors, in the form of dividends. The higher the ratio value, the more reliable a company’s earnings can sustain dividend payouts, and the more stable a company is considered to be. Retained earnings, the number of profits not paid out to shareholders as dividends, shows what portion of profits a company is reinvesting in expanding its business.
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<span class="heading-toc" id="toc-assets-and-liabilities"></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"> Assets and Liabilities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The breakdown of assets and liabilities contained on a company's balance sheet provides investors with a reliable snapshot of the company's overall financial health, as well as its debt situation. Debt ratios, such as 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>, which can be calculated from the information provided in financial statements, let analysts assess a company's ability to handle outstanding debt. Major <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalexpenditure.asp">capital expenditures</a> can be used in evaluating a company's current financial condition and can telegraph the potential for growth.
</p></div> | It behooves investors to take advantage of the wealth of information provided in a company's financial statements to help them evaluate the company as a potential investment. In terms of overall profitability, the net income is the obvious starting point when analyzing a financial statement. This bottom-line dollar amount on a company's [income statement](https://www.investopedia.com/terms/i/incomestatement.asp) is an excellent indicator of profitability because it puts a value on the amount a company takes in, once all costs of production, depreciation, tax, interest, and other expenses have been deducted. However, net income shouldn’t be used exclusively when evaluating a company.
## Operating Profit Margin
The [operating profit](https://www.investopedia.com/terms/o/operating_profit.asp) margin is another important indicator of profitability and efficiency that compares the amount a company earns before interest, and taxes on sales are calculated. The margin helps analysts and potential investors gauge how successful company managers are at controlling expenses and generating revenue. A high operating profit margin strongly indicates that a company is shrewdly managing costs and generating sales.
## Assessing Stock Price and Profitability for Shareholders
Financial statements can be used to assess the company's stock price and profitability for shareholders. A variety of metrics are useful in this process. [Earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) is an indicator of return on investment, showing a company's per-share profitability. The [price-earnings (P/E) ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp) uses a stock's EPS, compared to its present share price, for evaluation purposes. The [price to book (P/B) ratio](https://www.investopedia.com/terms/p/price-to-bookratio.asp) is considered a foundational value metric for investors, as it reveals the market's valuation of the company in relation to its intrinsic value.
## Dividend Payout Ratio
The [dividend payout ratio](https://www.investopedia.com/terms/d/dividendpayoutratio.asp) is another useful metric that measures a company's growth, financial stability, and returns paid to stockholders. [The dividend payout ratio calculates](https://www.investopedia.com/ask/answers/012015/how-do-i-calculate-dividend-payout-ratio-income-statement.asp) the percentage of company earnings paid out to equity investors, in the form of dividends. The higher the ratio value, the more reliable a company’s earnings can sustain dividend payouts, and the more stable a company is considered to be. Retained earnings, the number of profits not paid out to shareholders as dividends, shows what portion of profits a company is reinvesting in expanding its business.
## Assets and Liabilities
The breakdown of assets and liabilities contained on a company's balance sheet provides investors with a reliable snapshot of the company's overall financial health, as well as its debt situation. Debt ratios, such as the [current ratio](https://www.investopedia.com/terms/c/currentratio.asp), which can be calculated from the information provided in financial statements, let analysts assess a company's ability to handle outstanding debt. Major [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) can be used in evaluating a company's current financial condition and can telegraph the potential for growth.
| It behooves investors to take advantage of the wealth of information provided in a company's financial statements to help them evaluate the company as a potential investment. In terms of overall profitability, the net income is the obvious starting point when analyzing a financial statement. This bottom-line dollar amount on a company's income statement is an excellent indicator of profitability because it puts a value on the amount a company takes in, once all costs of production, depreciation, tax, interest, and other expenses have been deducted. However, net income shouldn’t be used exclusively when evaluating a company.
Operating Profit Margin
The operating profit margin is another important indicator of profitability and efficiency that compares the amount a company earns before interest, and taxes on sales are calculated. The margin helps analysts and potential investors gauge how successful company managers are at controlling expenses and generating revenue. A high operating profit margin strongly indicates that a company is shrewdly managing costs and generating sales.
Assessing Stock Price and Profitability for Shareholders
Financial statements can be used to assess the company's stock price and profitability for shareholders. A variety of metrics are useful in this process. Earnings per share (EPS) is an indicator of return on investment, showing a company's per-share profitability. The price-earnings (P/E) ratio uses a stock's EPS, compared to its present share price, for evaluation purposes. The price to book (P/B) ratio is considered a foundational value metric for investors, as it reveals the market's valuation of the company in relation to its intrinsic value.
Dividend Payout Ratio
The dividend payout ratio is another useful metric that measures a company's growth, financial stability, and returns paid to stockholders. The dividend payout ratio calculates the percentage of company earnings paid out to equity investors, in the form of dividends. The higher the ratio value, the more reliable a company’s earnings can sustain dividend payouts, and the more stable a company is considered to be. Retained earnings, the number of profits not paid out to shareholders as dividends, shows what portion of profits a company is reinvesting in expanding its business.
Assets and Liabilities
The breakdown of assets and liabilities contained on a company's balance sheet provides investors with a reliable snapshot of the company's overall financial health, as well as its debt situation. Debt ratios, such as the current ratio, which can be calculated from the information provided in financial statements, let analysts assess a company's ability to handle outstanding debt. Major capital expenditures can be used in evaluating a company's current financial condition and can telegraph the potential for growth.
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https://www.investopedia.com/sec-action-and-crypto-could-command-etf-space-in-2024-after-etfs-break-records-in-2023-8408415 | Crypto, SEC Action Could Command ETFs in 2024 After Record-Breaking 2023 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>There was a record number of exchange-traded funds (ETFs) created in the U.S. during 2023.</li><li>A rise in active ETFs, the addition of an ETF share class to existing mutual funds, and a shift toward more structured products were hallmarks of the record-setting year for this market.</li><li>One ETF data analyst said he expects crypto and SEC regulation to feature prominently for ETF investors in 2024.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The record number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> created in 2023 indicates that the pooled investment securities have captured the attention of a broad range of investors.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Aniket Ullal, head of ETF data and analytics at CFRA, told Investopedia notable trends in the ETF market in the past year include an increase in active ETFs, the addition of ETF class to existing mutual funds for tax benefits, and a shift toward structured products.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The analyst also shared his expectations for the year ahead, led by <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a> ETFs and likely <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> regulatory action.<br/>
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<span class="heading-toc" id="toc-2023-launches-break-etf-records"></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"> 2023 Launches Break ETF Records </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> ETF inceptions reached an all-time high in 2023.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> By Dec. 15, there were 506 U.S.-domiciled ETF inceptions, surpassing the previous high of 475 set for all of 2021, according to data provided to Investopedia by Morningstar Direct.<span class="ql-inline-citation" data-cite="4"></span>
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<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_14-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/m3uz8/3/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="2023 Launches Set Record for ETF Creation"></iframe></div>
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<span class="heading-toc" id="toc-trends-in-2023-active-mutual-fund-and-structured-etfs"></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"> Trends in 2023: Active, Mutual Fund, and Structured ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Beyond the uptick in ETF creation in 2023, Ullal noted an increase in active ETFs, mutual funds offering an ETF share class, and structured products.<br>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/actively-managed-etf.asp#:~:text=Error%20Code%3A%20100013%29-,What%20Is%20an%20Actively%20Managed%20ETF%3F,to%20a%20passive%20investment%20strategy.">active ETF</a> is one in which a fund manager determines the underlying portfolio allocation, as opposed to using a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive investment</a> strategy, which tracks the performance of 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"> Nearly two-thirds (65.3%) of the listings in 2023 were considered active, or not tied to a specific index, compared with an average of less than a quarter (22.8%) having that characteristic during the period from 2000 to 2022, according to CFRA data.<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_22-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_23-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/TEWLv/4/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Nearly Two-Thirds of ETF Listings in 2023 Were Considered Active"></iframe></div>
<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"> Another notable trend in 2023 was a few large fund managers filing to add an ETF class to their existing mutual funds to help reduce clients' tax bills, as this option became available more widely. In May 2023, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985">Vanguard patent</a> expired that had lowered <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> taxes on its ETFs by structuring them as a distinct share class of mutual funds, so at that point, other brokerage firms could start employing the strategy as well.
</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"> ETF competitors of Vanguard, such as Fidelity and Dimensional Fund Advisors, have begun filing applications with the SEC to issue a class of ETF shares for their existing mutual funds.
</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"> Ullal also highlighted a shift toward a greater number of structured products, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/10/etf-options-v-index-options.asp">options-based ETFs</a> and defined outcome ETFs, during the latest year. For instance, Goldman Sachs launched two ETFs, the S&P 500 Core Premium Income ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPIX">GPIX</a>) and the Nasdaq-100 Core Premium Income ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPIQ">GPIQ</a>).
</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"> These ETFs use the Standard & Poor's 500 and Nasdaq 100 indexes as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a>, tracking companies on the indexes to provide “monthly income distributions at a relatively stable rate,” Goldman said. The firm said these types of structured products are especially attractive to investors experiencing periods of market volatility.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<span class="heading-toc" id="toc-what-to-watch-in-2024-the-sec-and-crypto-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"> What To Watch in 2024: The SEC and Crypto ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> In the new year, SEC actions—specifically those related to the Vanguard-model ETF share class for existing mutual funds and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-8358373">spot bitcoin ETFs</a>—could be hot topics for ETF investors.
</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"> After the Vanguard patent expired earlier in 2023, some competing asset managers filed with the SEC to launch their own ETF class shares for their mutual funds. But there didn't seem to be a rush from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/who-are-the-etf-giants-4691723#:~:text=Key%20Takeaways&text=BlackRock%2C%20Vanguard%2C%20and%20State%20Street,new%20entrants%20in%20the%20market.">ETF giants</a> to implement the mutual fund-ETF hybrid model, which could be attributed to looming concerns about potential regulation because the process affects federal tax revenue.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> It's not clear yet whether the SEC will approve the applications filed by other fund managers, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fidelity-review-4587897">Fidelity</a> and Dimensional Fund Advisors, Ullal said.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Another trend in the field that Ullal expects in 2024 is crypto-focused ETFs.
</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"> From an asset size perspective, crypto is small, but when considering what interests investors, Ullal said crypto is “significant” for the new year because there is a “possibility of a spot bitcoin ETF” launching in 2024.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> In August of 2023, a federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appellate-courts.asp">appeals court</a> ruled in favor of crypto asset management firm<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/court-rules-sec-was-wrong-to-block-bitcoin-etf-7963127"> Grayscale</a>, finding that the SEC didn't provide sufficient reasoning for blocking Grayscale's request to convert its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/">Grayscale Bitcoin Trust (GBTC)</a> into an ETF.<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_45-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-points-to-unregulated-spot-market-in-first-oral-arguments-against-grayscale-7229073">SEC had rejected</a> Grayscale's request for the ETF conversion, citing security concerns about fraudulent and manipulative market activity.<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
* There was a record number of exchange-traded funds (ETFs) created in the U.S. during 2023.
* A rise in active ETFs, the addition of an ETF share class to existing mutual funds, and a shift toward more structured products were hallmarks of the record-setting year for this market.
* One ETF data analyst said he expects crypto and SEC regulation to feature prominently for ETF investors in 2024.
The record number of [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) created in 2023 indicates that the pooled investment securities have captured the attention of a broad range of investors.
Aniket Ullal, head of ETF data and analytics at CFRA, told Investopedia notable trends in the ETF market in the past year include an increase in active ETFs, the addition of ETF class to existing mutual funds for tax benefits, and a shift toward structured products.
The analyst also shared his expectations for the year ahead, led by [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) ETFs and likely [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) regulatory action.
## 2023 Launches Break ETF Records
ETF inceptions reached an all-time high in 2023.
By Dec. 15, there were 506 U.S.-domiciled ETF inceptions, surpassing the previous high of 475 set for all of 2021, according to data provided to Investopedia by Morningstar Direct.
## Trends in 2023: Active, Mutual Fund, and Structured ETFs
Beyond the uptick in ETF creation in 2023, Ullal noted an increase in active ETFs, mutual funds offering an ETF share class, and structured products.
An [active ETF](https://www.investopedia.com/terms/a/actively-managed-etf.asp#:~:text=Error%20Code%3A%20100013%29-,What%20Is%20an%20Actively%20Managed%20ETF%3F,to%20a%20passive%20investment%20strategy.) is one in which a fund manager determines the underlying portfolio allocation, as opposed to using a [passive investment](https://www.investopedia.com/terms/p/passiveinvesting.asp) strategy, which tracks the performance of an index.
Nearly two-thirds (65.3%) of the listings in 2023 were considered active, or not tied to a specific index, compared with an average of less than a quarter (22.8%) having that characteristic during the period from 2000 to 2022, according to CFRA data.
Another notable trend in 2023 was a few large fund managers filing to add an ETF class to their existing mutual funds to help reduce clients' tax bills, as this option became available more widely. In May 2023, a [Vanguard patent](https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985) expired that had lowered [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) taxes on its ETFs by structuring them as a distinct share class of mutual funds, so at that point, other brokerage firms could start employing the strategy as well.
ETF competitors of Vanguard, such as Fidelity and Dimensional Fund Advisors, have begun filing applications with the SEC to issue a class of ETF shares for their existing mutual funds.
Ullal also highlighted a shift toward a greater number of structured products, such as [options-based ETFs](https://www.investopedia.com/articles/optioninvestor/10/etf-options-v-index-options.asp) and defined outcome ETFs, during the latest year. For instance, Goldman Sachs launched two ETFs, the S&P 500 Core Premium Income ETF ([GPIX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPIX)) and the Nasdaq-100 Core Premium Income ETF ([GPIQ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPIQ)).
These ETFs use the Standard & Poor's 500 and Nasdaq 100 indexes as [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp), tracking companies on the indexes to provide “monthly income distributions at a relatively stable rate,” Goldman said. The firm said these types of structured products are especially attractive to investors experiencing periods of market volatility.
## What To Watch in 2024: The SEC and Crypto ETFs
In the new year, SEC actions—specifically those related to the Vanguard-model ETF share class for existing mutual funds and [spot bitcoin ETFs](https://www.investopedia.com/spot-bitcoin-etfs-8358373)—could be hot topics for ETF investors.
After the Vanguard patent expired earlier in 2023, some competing asset managers filed with the SEC to launch their own ETF class shares for their mutual funds. But there didn't seem to be a rush from the [ETF giants](https://www.investopedia.com/who-are-the-etf-giants-4691723#:~:text=Key%20Takeaways&text=BlackRock%2C%20Vanguard%2C%20and%20State%20Street,new%20entrants%20in%20the%20market.) to implement the mutual fund-ETF hybrid model, which could be attributed to looming concerns about potential regulation because the process affects federal tax revenue.
It's not clear yet whether the SEC will approve the applications filed by other fund managers, including [Fidelity](https://www.investopedia.com/fidelity-review-4587897) and Dimensional Fund Advisors, Ullal said.
Another trend in the field that Ullal expects in 2024 is crypto-focused ETFs.
From an asset size perspective, crypto is small, but when considering what interests investors, Ullal said crypto is “significant” for the new year because there is a “possibility of a spot bitcoin ETF” launching in 2024.
In August of 2023, a federal [appeals court](https://www.investopedia.com/terms/a/appellate-courts.asp) ruled in favor of crypto asset management firm [Grayscale](https://www.investopedia.com/court-rules-sec-was-wrong-to-block-bitcoin-etf-7963127), finding that the SEC didn't provide sufficient reasoning for blocking Grayscale's request to convert its [Grayscale Bitcoin Trust (GBTC)](https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/) into an ETF.
The [SEC had rejected](https://www.investopedia.com/sec-points-to-unregulated-spot-market-in-first-oral-arguments-against-grayscale-7229073) Grayscale's request for the ETF conversion, citing security concerns about fraudulent and manipulative market activity.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
There was a record number of exchange-traded funds (ETFs) created in the U.S. during 2023.A rise in active ETFs, the addition of an ETF share class to existing mutual funds, and a shift toward more structured products were hallmarks of the record-setting year for this market.One ETF data analyst said he expects crypto and SEC regulation to feature prominently for ETF investors in 2024.
The record number of exchange-traded funds (ETFs) created in 2023 indicates that the pooled investment securities have captured the attention of a broad range of investors.
Aniket Ullal, head of ETF data and analytics at CFRA, told Investopedia notable trends in the ETF market in the past year include an increase in active ETFs, the addition of ETF class to existing mutual funds for tax benefits, and a shift toward structured products.
The analyst also shared his expectations for the year ahead, led by cryptocurrency ETFs and likely Securities and Exchange Commission (SEC) regulatory action.
2023 Launches Break ETF Records
ETF inceptions reached an all-time high in 2023.
By Dec. 15, there were 506 U.S.-domiciled ETF inceptions, surpassing the previous high of 475 set for all of 2021, according to data provided to Investopedia by Morningstar Direct.
Trends in 2023: Active, Mutual Fund, and Structured ETFs
Beyond the uptick in ETF creation in 2023, Ullal noted an increase in active ETFs, mutual funds offering an ETF share class, and structured products.
An active ETF is one in which a fund manager determines the underlying portfolio allocation, as opposed to using a passive investment strategy, which tracks the performance of an index.
Nearly two-thirds (65.3%) of the listings in 2023 were considered active, or not tied to a specific index, compared with an average of less than a quarter (22.8%) having that characteristic during the period from 2000 to 2022, according to CFRA data.
Another notable trend in 2023 was a few large fund managers filing to add an ETF class to their existing mutual funds to help reduce clients' tax bills, as this option became available more widely. In May 2023, a Vanguard patent expired that had lowered capital gains taxes on its ETFs by structuring them as a distinct share class of mutual funds, so at that point, other brokerage firms could start employing the strategy as well.
ETF competitors of Vanguard, such as Fidelity and Dimensional Fund Advisors, have begun filing applications with the SEC to issue a class of ETF shares for their existing mutual funds.
Ullal also highlighted a shift toward a greater number of structured products, such as options-based ETFs and defined outcome ETFs, during the latest year. For instance, Goldman Sachs launched two ETFs, the S&P 500 Core Premium Income ETF (GPIX) and the Nasdaq-100 Core Premium Income ETF (GPIQ).
These ETFs use the Standard & Poor's 500 and Nasdaq 100 indexes as benchmarks, tracking companies on the indexes to provide “monthly income distributions at a relatively stable rate,” Goldman said. The firm said these types of structured products are especially attractive to investors experiencing periods of market volatility.
What To Watch in 2024: The SEC and Crypto ETFs
In the new year, SEC actions—specifically those related to the Vanguard-model ETF share class for existing mutual funds and spot bitcoin ETFs—could be hot topics for ETF investors.
After the Vanguard patent expired earlier in 2023, some competing asset managers filed with the SEC to launch their own ETF class shares for their mutual funds. But there didn't seem to be a rush from the ETF giants to implement the mutual fund-ETF hybrid model, which could be attributed to looming concerns about potential regulation because the process affects federal tax revenue.
It's not clear yet whether the SEC will approve the applications filed by other fund managers, including Fidelity and Dimensional Fund Advisors, Ullal said.
Another trend in the field that Ullal expects in 2024 is crypto-focused ETFs.
From an asset size perspective, crypto is small, but when considering what interests investors, Ullal said crypto is “significant” for the new year because there is a “possibility of a spot bitcoin ETF” launching in 2024.
In August of 2023, a federal appeals court ruled in favor of crypto asset management firm Grayscale, finding that the SEC didn't provide sufficient reasoning for blocking Grayscale's request to convert its Grayscale Bitcoin Trust (GBTC) into an ETF.
The SEC had rejected Grayscale's request for the ETF conversion, citing security concerns about fraudulent and manipulative market activity.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/what-to-expect-from-bitcoin-and-crypto-markets-in-2024-8404514 | What To Expect From Bitcoin and Crypto Markets In 2024 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">KEY TAKEAWAYS</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The approval of a spot Bitcoin ETF has been the key area of focus for crypto investors, as it could broaden access to Bitcoin.</li><li>Optimism surrounding the possible approval of a spot Bitcoin ETF helped contribute to a rally in the price of Bitcoin.<br/></li><li>2023 was a pivotal year in terms of crypto enforcement actions, with further regulatory clarity expected to arrive in 2024.</li><li>An end of policies focused on monetary tightening from central banks around the world could also lead to a positive outcomes for risk assets like cryptocurrencies.</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 recent rally may have taken it past the $42,000 market and helped put the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-winter-5496605">crypto winter</a> of 2022 far in the distance. However, it was also a year the largest cryptocurrency by <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> started on shaky grounds at a mere $16,500 level.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Here's what you need to know with the crypto markets looking ahead to the next year, standing at the cusp of important events such as the fate of the approval of a spot Bitcoin <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded fund (ETF)</a>, Bitcoin <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-halving-4843769">halving</a>, and developments in crypto regulation.<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-the-spot-bitcoin-etf-could-be-a-game-changer"></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 Spot Bitcoin ETF Could Be a Game Changer </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Ever since 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>) originally <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/blackrock-files-for-a-spot-bitcoin-etf-7547609">filed</a> its spot Bitcoin ETF application with the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">U.S. Securities and Exchange Commission (SEC)</a> in June, the impending approval of such a financial product has been the key area of focus for the crypto market.
</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"> So far, retail investors can only gain cryptocurrency exposure through ETFs that trade in cryptocurrency futures. A spot Bitcoin ETF would allow investors, especially retail investors, to gain access to Bitcoin without needing to hold their investment in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin-wallet.asp">Bitcoin wallet</a>.<br/>
</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"> Analysts expect big money to flow into Bitcoin spot ETFs if the SEC gives its approval, and that optimism has helped boost the price of Bitcoin, with the spot Bitcoin ETF market anticipated to grow to $100 billion over time, according to a report by Bloomberg.<span class="ql-inline-citation" data-cite="1"></span> A report from Galaxy estimates inflows in spot Bitcoin ETF products could rise from $14 billion in the first year to $39 billion within three years.<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"> That said, there remains uncertainty around the SEC's decision. The SEC has reportedly held multiple rounds of talks with prospective ETF issuers, with issuers amending applications to meet regulators' expectations.
</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"> "I'm optimistic, but I think it's quite likely we have another round of rejections before we get the positive news," BitGo CEO Mike Belshe recently told Bloomberg.<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"> Blackrock and others have also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/blackrock-may-be-considering-an-ether-etf-ether-price-jumps-8400047">filed</a> for spot ether ETFs. However, the likelihood of approval for those products based around the alternative crypto asset is similarly unclear.<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-why-the-upcoming-bitcoin-halving-will-be-crucial"></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"> Why The Upcoming Bitcoin Halving Will Be Crucial </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-halving-4843769">Bitcoin halving</a>—or an event that roughly cuts in half rewards to Bitcoin miners for successfully mining the cryptocurrency—is expected to take place in 2024.
</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"> Why is it important? At 21 million, the supply of Bitcoin is finite making it harder to mine as more Bitcoins come into circulation. Bitcoin miners are rewarded for successfully mining a block. And the reward gets diminished with a halving, indirectly also impacting the number of Bitcoins in circulation. And price is inversely proportionate to supply.
</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 crypto market's boom and bust cycles have generally revolved around the Bitcoin halving event, which happens roughly every four years and involves a halving of the amount of new Bitcoin that is issued to miners on the network around every ten minutes.
</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"> According to a report from crypto asset manager Grayscale, there is reason to believe this halving event (and any positive tailwinds from a spot Bitcoin ETF approval) could be more impactful than it was in the past.<span class="ql-inline-citation" data-cite="4"></span> This is due to the current distribution of the Bitcoin supply, which is largely held by entities that tend to hold for long periods of time.
</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"> "If these trends continue, the Grayscale Research team anticipates that the dynamics of Bitcoin’s ownership could increasingly amplify the impact of macro events, like evolving global policies and regulation (e.g., approval of US spot Bitcoin ETF), as well as crypto market developments, like the 2024 Bitcoin halving," said Grayscale Analyst Will Ogden Moore in the report.
</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"> Despite the Bitcoin-denominated cut for miners related to the halving event, Sabre56 CEO Phil Harvey says the mining industry will be fine, even in a scenario where a spot Bitcoin ETF is not approved. "In the absence of an ETF launch, the mining sector is likely to maintain its current state of health," Harvey told Investopedia. "Present revenue metrics for miners with direct access to power and equipped with state-of-the-art power generation reveal a robust economic landscape. The current economics are expected to endure, ensuring sustained and healthy profit margins post-halving."
</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-clarity-on-crypto-regulation-in-the-cards"></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"> Clarity On Crypto Regulation In The Cards? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> 2023 has been a massive year for crypto enforcement actions, with many of the biggest names in the industry, from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/binance-facing-possible-charges-6890718">Binance</a> to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669">Coinbase</a>, facing lawsuits from the SEC or even the Department of Justice. Former FTX CEO Sam Bankman-Fried was found <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/former-ftx-ceo-was-found-guilty-of-fraud-here-are-4-things-you-should-know-8386915">guilty</a> of fraud and former Binance CEO Changpeng Zhao is facing charges of violating the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank_secrecy_act.asp">Bank Secrecy Act</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"> After these recent events, it's becoming clear that the Wild West years of the crypto industry may be coming to an end. U.S. Senator Cynthia Lummis (R-WY) recently shared her optimism that regulatory clarity may finally arrive in early 2024 due to the move of traditional financial titans into the crypto 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_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Additionally, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cftc.asp">U.S. Commodity Futures Trading Commission (CFTC)</a> Chair Rostin Behnam has <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cftc-chair-nothing-has-changed-to-prevent-another-ftx-8402194">pointed</a> to Congress's increased concerns regarding crypto's potential use in illicit finance as a reason behind the legislative body's renewed interest in the subject.
</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 terms of other areas of regulation and policy that could affect the crypto market in 2024, TradeStation Head of Brokerage Solutions Anthony Rousseau pointed to the Financial Account Standards Board's (FASB) rule change for valuing crypto assets and a potential end to the Federal Reserve and other central banks' policies of monetary tightening.
</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 FASB rule change "opens the door for corporates now to have a path to add Bitcoin to the balance sheet as a reserve asset, as MicroStrategy has adopted," Rousseau told Investopedia. "It’s plausible to believe we have reached the heights of this [central bank] tightening cycle. For <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-asset.asp">risk assets</a> to get a sustained bid we will need to see a path forward with lower rates and an end to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/quantitative-tightening-6361478">Quantitative Tightening</a>."<br/>
</p>
<div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div>
<a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 approval of a spot Bitcoin ETF has been the key area of focus for crypto investors, as it could broaden access to Bitcoin.
* Optimism surrounding the possible approval of a spot Bitcoin ETF helped contribute to a rally in the price of Bitcoin.
* 2023 was a pivotal year in terms of crypto enforcement actions, with further regulatory clarity expected to arrive in 2024.
* An end of policies focused on monetary tightening from central banks around the world could also lead to a positive outcomes for risk assets like cryptocurrencies.
Bitcoin's recent rally may have taken it past the $42,000 market and helped put the [crypto winter](https://www.investopedia.com/crypto-winter-5496605) of 2022 far in the distance. However, it was also a year the largest cryptocurrency by [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) started on shaky grounds at a mere $16,500 level.
Here's what you need to know with the crypto markets looking ahead to the next year, standing at the cusp of important events such as the fate of the approval of a spot Bitcoin [exchange-traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp), Bitcoin [halving](https://www.investopedia.com/bitcoin-halving-4843769), and developments in crypto regulation.
## The Spot Bitcoin ETF Could Be a Game Changer
Ever since Blackrock ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK)) originally [filed](https://www.investopedia.com/blackrock-files-for-a-spot-bitcoin-etf-7547609) its spot Bitcoin ETF application with the [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) in June, the impending approval of such a financial product has been the key area of focus for the crypto market.
So far, retail investors can only gain cryptocurrency exposure through ETFs that trade in cryptocurrency futures. A spot Bitcoin ETF would allow investors, especially retail investors, to gain access to Bitcoin without needing to hold their investment in a [Bitcoin wallet](https://www.investopedia.com/terms/b/bitcoin-wallet.asp).
Analysts expect big money to flow into Bitcoin spot ETFs if the SEC gives its approval, and that optimism has helped boost the price of Bitcoin, with the spot Bitcoin ETF market anticipated to grow to $100 billion over time, according to a report by Bloomberg. A report from Galaxy estimates inflows in spot Bitcoin ETF products could rise from $14 billion in the first year to $39 billion within three years.
That said, there remains uncertainty around the SEC's decision. The SEC has reportedly held multiple rounds of talks with prospective ETF issuers, with issuers amending applications to meet regulators' expectations.
"I'm optimistic, but I think it's quite likely we have another round of rejections before we get the positive news," BitGo CEO Mike Belshe recently told Bloomberg.
Blackrock and others have also [filed](https://www.investopedia.com/blackrock-may-be-considering-an-ether-etf-ether-price-jumps-8400047) for spot ether ETFs. However, the likelihood of approval for those products based around the alternative crypto asset is similarly unclear.
## Why The Upcoming Bitcoin Halving Will Be Crucial
[Bitcoin halving](https://www.investopedia.com/bitcoin-halving-4843769)—or an event that roughly cuts in half rewards to Bitcoin miners for successfully mining the cryptocurrency—is expected to take place in 2024.
Why is it important? At 21 million, the supply of Bitcoin is finite making it harder to mine as more Bitcoins come into circulation. Bitcoin miners are rewarded for successfully mining a block. And the reward gets diminished with a halving, indirectly also impacting the number of Bitcoins in circulation. And price is inversely proportionate to supply.
The crypto market's boom and bust cycles have generally revolved around the Bitcoin halving event, which happens roughly every four years and involves a halving of the amount of new Bitcoin that is issued to miners on the network around every ten minutes.
According to a report from crypto asset manager Grayscale, there is reason to believe this halving event (and any positive tailwinds from a spot Bitcoin ETF approval) could be more impactful than it was in the past. This is due to the current distribution of the Bitcoin supply, which is largely held by entities that tend to hold for long periods of time.
"If these trends continue, the Grayscale Research team anticipates that the dynamics of Bitcoin’s ownership could increasingly amplify the impact of macro events, like evolving global policies and regulation (e.g., approval of US spot Bitcoin ETF), as well as crypto market developments, like the 2024 Bitcoin halving," said Grayscale Analyst Will Ogden Moore in the report.
Despite the Bitcoin-denominated cut for miners related to the halving event, Sabre56 CEO Phil Harvey says the mining industry will be fine, even in a scenario where a spot Bitcoin ETF is not approved. "In the absence of an ETF launch, the mining sector is likely to maintain its current state of health," Harvey told Investopedia. "Present revenue metrics for miners with direct access to power and equipped with state-of-the-art power generation reveal a robust economic landscape. The current economics are expected to endure, ensuring sustained and healthy profit margins post-halving."
## Clarity On Crypto Regulation In The Cards?
2023 has been a massive year for crypto enforcement actions, with many of the biggest names in the industry, from [Binance](https://www.investopedia.com/binance-facing-possible-charges-6890718) to [Coinbase](https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669), facing lawsuits from the SEC or even the Department of Justice. Former FTX CEO Sam Bankman-Fried was found [guilty](https://www.investopedia.com/former-ftx-ceo-was-found-guilty-of-fraud-here-are-4-things-you-should-know-8386915) of fraud and former Binance CEO Changpeng Zhao is facing charges of violating the [Bank Secrecy Act](https://www.investopedia.com/terms/b/bank_secrecy_act.asp).
After these recent events, it's becoming clear that the Wild West years of the crypto industry may be coming to an end. U.S. Senator Cynthia Lummis (R-WY) recently shared her optimism that regulatory clarity may finally arrive in early 2024 due to the move of traditional financial titans into the crypto market.
Additionally, [U.S. Commodity Futures Trading Commission (CFTC)](https://www.investopedia.com/terms/c/cftc.asp) Chair Rostin Behnam has [pointed](https://www.investopedia.com/cftc-chair-nothing-has-changed-to-prevent-another-ftx-8402194) to Congress's increased concerns regarding crypto's potential use in illicit finance as a reason behind the legislative body's renewed interest in the subject.
In terms of other areas of regulation and policy that could affect the crypto market in 2024, TradeStation Head of Brokerage Solutions Anthony Rousseau pointed to the Financial Account Standards Board's (FASB) rule change for valuing crypto assets and a potential end to the Federal Reserve and other central banks' policies of monetary tightening.
The FASB rule change "opens the door for corporates now to have a path to add Bitcoin to the balance sheet as a reserve asset, as MicroStrategy has adopted," Rousseau told Investopedia. "It’s plausible to believe we have reached the heights of this [central bank] tightening cycle. For [risk assets](https://www.investopedia.com/terms/r/risk-asset.asp) to get a sustained bid we will need to see a path forward with lower rates and an end to [Quantitative Tightening](https://www.investopedia.com/quantitative-tightening-6361478)."
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | KEY TAKEAWAYS
The approval of a spot Bitcoin ETF has been the key area of focus for crypto investors, as it could broaden access to Bitcoin.Optimism surrounding the possible approval of a spot Bitcoin ETF helped contribute to a rally in the price of Bitcoin.2023 was a pivotal year in terms of crypto enforcement actions, with further regulatory clarity expected to arrive in 2024.An end of policies focused on monetary tightening from central banks around the world could also lead to a positive outcomes for risk assets like cryptocurrencies.
Bitcoin's recent rally may have taken it past the $42,000 market and helped put the crypto winter of 2022 far in the distance. However, it was also a year the largest cryptocurrency by market capitalization started on shaky grounds at a mere $16,500 level.
Here's what you need to know with the crypto markets looking ahead to the next year, standing at the cusp of important events such as the fate of the approval of a spot Bitcoin exchange-traded fund (ETF), Bitcoin halving, and developments in crypto regulation.
The Spot Bitcoin ETF Could Be a Game Changer
Ever since Blackrock (BLK) originally filed its spot Bitcoin ETF application with the U.S. Securities and Exchange Commission (SEC) in June, the impending approval of such a financial product has been the key area of focus for the crypto market.
So far, retail investors can only gain cryptocurrency exposure through ETFs that trade in cryptocurrency futures. A spot Bitcoin ETF would allow investors, especially retail investors, to gain access to Bitcoin without needing to hold their investment in a Bitcoin wallet.
Analysts expect big money to flow into Bitcoin spot ETFs if the SEC gives its approval, and that optimism has helped boost the price of Bitcoin, with the spot Bitcoin ETF market anticipated to grow to $100 billion over time, according to a report by Bloomberg. A report from Galaxy estimates inflows in spot Bitcoin ETF products could rise from $14 billion in the first year to $39 billion within three years.
That said, there remains uncertainty around the SEC's decision. The SEC has reportedly held multiple rounds of talks with prospective ETF issuers, with issuers amending applications to meet regulators' expectations.
"I'm optimistic, but I think it's quite likely we have another round of rejections before we get the positive news," BitGo CEO Mike Belshe recently told Bloomberg.
Blackrock and others have also filed for spot ether ETFs. However, the likelihood of approval for those products based around the alternative crypto asset is similarly unclear.
Why The Upcoming Bitcoin Halving Will Be Crucial
Bitcoin halving—or an event that roughly cuts in half rewards to Bitcoin miners for successfully mining the cryptocurrency—is expected to take place in 2024.
Why is it important? At 21 million, the supply of Bitcoin is finite making it harder to mine as more Bitcoins come into circulation. Bitcoin miners are rewarded for successfully mining a block. And the reward gets diminished with a halving, indirectly also impacting the number of Bitcoins in circulation. And price is inversely proportionate to supply.
The crypto market's boom and bust cycles have generally revolved around the Bitcoin halving event, which happens roughly every four years and involves a halving of the amount of new Bitcoin that is issued to miners on the network around every ten minutes.
According to a report from crypto asset manager Grayscale, there is reason to believe this halving event (and any positive tailwinds from a spot Bitcoin ETF approval) could be more impactful than it was in the past. This is due to the current distribution of the Bitcoin supply, which is largely held by entities that tend to hold for long periods of time.
"If these trends continue, the Grayscale Research team anticipates that the dynamics of Bitcoin’s ownership could increasingly amplify the impact of macro events, like evolving global policies and regulation (e.g., approval of US spot Bitcoin ETF), as well as crypto market developments, like the 2024 Bitcoin halving," said Grayscale Analyst Will Ogden Moore in the report.
Despite the Bitcoin-denominated cut for miners related to the halving event, Sabre56 CEO Phil Harvey says the mining industry will be fine, even in a scenario where a spot Bitcoin ETF is not approved. "In the absence of an ETF launch, the mining sector is likely to maintain its current state of health," Harvey told Investopedia. "Present revenue metrics for miners with direct access to power and equipped with state-of-the-art power generation reveal a robust economic landscape. The current economics are expected to endure, ensuring sustained and healthy profit margins post-halving."
Clarity On Crypto Regulation In The Cards?
2023 has been a massive year for crypto enforcement actions, with many of the biggest names in the industry, from Binance to Coinbase, facing lawsuits from the SEC or even the Department of Justice. Former FTX CEO Sam Bankman-Fried was found guilty of fraud and former Binance CEO Changpeng Zhao is facing charges of violating the Bank Secrecy Act.
After these recent events, it's becoming clear that the Wild West years of the crypto industry may be coming to an end. U.S. Senator Cynthia Lummis (R-WY) recently shared her optimism that regulatory clarity may finally arrive in early 2024 due to the move of traditional financial titans into the crypto market.
Additionally, U.S. Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam has pointed to Congress's increased concerns regarding crypto's potential use in illicit finance as a reason behind the legislative body's renewed interest in the subject.
In terms of other areas of regulation and policy that could affect the crypto market in 2024, TradeStation Head of Brokerage Solutions Anthony Rousseau pointed to the Financial Account Standards Board's (FASB) rule change for valuing crypto assets and a potential end to the Federal Reserve and other central banks' policies of monetary tightening.
The FASB rule change "opens the door for corporates now to have a path to add Bitcoin to the balance sheet as a reserve asset, as MicroStrategy has adopted," Rousseau told Investopedia. "It’s plausible to believe we have reached the heights of this [central bank] tightening cycle. For risk assets to get a sustained bid we will need to see a path forward with lower rates and an end to Quantitative Tightening."
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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"https://www.investopedia.com/quantitative-tightening-6361478"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/how-to-make-estimated-tax-payments-5271455 | How to Make Estimated Tax Payments | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Self-employed people often face the challenge of accurately tracking and remitting their taxes throughout the year. While self-employment offers a number of benefits, such as flexible schedules, and the ability to create jobs, it also presents unique challenges. Mastering the process of making estimated tax payments is important to managing these challenges and maintaining good standing with your tax obligations.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Learning how to make <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estimated-tax.asp">estimated tax</a> payments can make one of those challenges much more manageable and help you stay on top of your taxes.
</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 Takaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>An important skill for self-employed people is knowing how to estimate and remit your taxes throughout the year.</li><li>The Internal Revenue Service (IRS) requires estimated taxes to be paid quarterly, but you have the flexibility to make these payments more frequently—weekly, bi-weekly, or monthly—as long as the total amount due is paid by the end of each quarter.<span class="ql-inline-citation" data-cite="7"></span></li><li>Failure to meet these requirements and deadlines can result in penalties and interest charges. Also, the requirement to make estimated payments can also apply to individuals who are not self-employed.<span class="ql-inline-citation" data-cite="8"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-why-you-should-make-estimated-tax-payments"></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 You Should Make Estimated Tax Payments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> While tax returns are filed annually, taxes on income must be paid throughout the year. Employees typically meet this requirement through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/withholdingtax.asp">tax withholdings</a> by their employers. However, self-employed individuals, and others who earn income not subject to withholding such as interest, dividends, and taxable alimony, must make estimated tax payments if they expect to owe at least $1,000 in taxes for the year.<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_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Neglecting to make your required estimated tax payments can lead to a big tax bill when filing your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax return</a>, potentially causing financial hardship or even bankruptcy. You can avoid any penalties if your withholdings and payments equal at least 90% of this year's total tax or 100% of last year's tax (110% if your adjusted gross income exceeds $75,000 for singles or $150,000 for joint filers).<span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> To prevent negative outcomes, the government requires that individuals with non-withheld income estimate and pay their taxes periodically throughout the year. The IRS provides resources and guidelines to assist in calculating and submitting these payments.
</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>If you delay your first estimated tax payment beyond the typical April 15 deadline, you should make payments as soon as possible to minimize penalties.<span class="ql-inline-citation" data-cite="12"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-to-make-estimated-tax-payments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> How to Make Estimated Tax Payments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> To make estimated tax payments, you must first determine your anticipated tax liability, using your prior year's income as a reference point and adjusting based on current earnings and any relevant <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxcredit.asp">credits</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deduction.asp">deductions</a> that might apply. After all, your income could rise or fall during the remainder of the year.
</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"> For example, if a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gig-economy.asp">gig worker</a> typically works four hours a day doing deliveries, can estimate their tax based on that workload, adjusting their future payments if their hours change. If they decide later to work less hours, they would then update their estimate the next time they file.
</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 schedule of when you file your estimated tax payments is set out by 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>.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Here are the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/020316/estimated-tax-deadlines-2016.asp">deadlines for 2024 estimated taxes</a>:<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_25-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="2">When to Make Estimated Tax Payments</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Payment Due Date</b> </td>
<td><b>For Income Earned During...</b></td>
</tr>
<tr>
<td>April 15</td>
<td>Jan. 1 through March 31</td>
</tr>
<tr>
<td>June 17</td>
<td>April 1 through May 31</td>
</tr>
<tr>
<td>Sept. 16</td>
<td>June 1 through Aug. 31</td>
</tr>
<tr>
<td>Jan. 15 of next year</td>
<td>Sept. 1 through Dec. 31</td>
</tr>
</tbody>
</table>
<figcaption>The schedule is updated each year by the IRS.</figcaption>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> While estimated tax payments are termed "quarterly," the periods they cover are not equal. For example, the period for the payment due on June 17 spans only two months, while the one due on April 15 covers three months. It's crucial to refer to the IRS-specified payment dates rather than relying on a general calendar. Also note that if a payment date falls on a weekend or holiday, the deadline shifts to the next business day.<br>
</br></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 procedure for actually calculating your taxes is described in Form 1040-ES, Estimated Tax for Individuals.<span class="ql-inline-citation" data-cite="2"></span> As the name implies, this form is designed specifically for self-employed individuals, offering a guide to estimate taxes accurately. It includes important details such as payment deadlines, access to government support hotlines, and information on special exemptions. Also, there is an included worksheet that allows for a detailed calculation of taxes, considering any relevant income tax deductions or credits.<span class="ql-inline-citation" data-cite="13"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Calculating your taxes is usually straightforward if you maintain accurate records of your income and expenses, potentially with the help of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accounting-software.asp">accounting software</a>. On the other hand, if your records are disorganized, you might need to hire an accountant or bookkeeper to ensure your income is calculated correctly. If you require professional help, plan ahead to avoid missing any filing deadlines.
</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"> Once you have determined your income and estimated your tax liability, there are many ways for you to pay. The IRS provides several payment methods, which are printed on Form 1040-ES. These methods include online payments through your IRS Online Account, by check, over the phone, via credit card, and through online banking portals.<span class="ql-inline-citation" data-cite="4"></span> There is even a mobile application called IRS2Go with its own payment options.<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>
<span class="heading-toc" id="toc-what-happens-if-you-cant-afford-to-pay-the-estimated-amount"></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"> What Happens If You Can’t Afford to Pay the Estimated Amount? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> It's a good idea to pay as much as you can towards your estimated taxes throughout the year to prevent facing a large <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lump-sum-payment.asp">lump-sum</a> tax bill. If you struggle to make payments, the IRS offers options like payment plans, extensions, or potentially even tax forgiveness.
</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"> While approval isn't guaranteed, consistently making payments can improve your chances of favorable consideration from the IRS.<span class="ql-inline-citation" data-cite="5"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_40-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_41-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You may have to pay a penalty if you don’t pay enough tax through withholding and estimated tax payments. Additionally, late estimated tax payments can result in penalties, even if you ultimately receive a refund when you file your tax return.<span class="ql-inline-citation" data-cite="14"></span></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_42-0"> <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_43-0"> In addition to managing estimated tax payments, self-employed individuals should also plan for other financial commitments. Although individual circumstances will vary, it may be wise to allocate a portion of your income each month to retirement savings, life insurance, or longer-term financial goals such as buying a house or paying for college. In doing so, there are many resources that can be helpful, ranging from free online educational resources to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/updates/find-financial-advisor-planner/">professional financial planners</a>.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-how-do-i-calculate-estimated-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Calculate Estimated Taxes?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>To calculate your estimated taxes, begin with your total tax liability from the previous year as a baseline. Adjust this amount based on changes in your income and any new tax credits you qualify for. Other factors, such as whether you qualify for new tax credits, also would need to be considered. The IRS Form 1040-ES includes a comprehensive worksheet to guide you through this process. You can also use tax preparation software or seek professional help to ensure accuracy in your calculations.</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-happens-if-my-income-changes-during-the-year"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens if My Income Changes During the Year?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If your income changes during the year and you realize that your previous estimates may have been inaccurate, you can simply adjust your estimate in the next quarter to compensate for any underpayment or overpayment. For example, if you underestimated in the first quarter, you can increase your payment in the second quarter to cover the shortfall. Since estimated taxes often differ from your actual tax liability, making such adjustments throughout the year is a common and expected practice.<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-are-estimated-tax-payments-only-relevant-if-youre-self-employed"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Estimated Tax Payments Only Relevant if You're Self-Employed?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No, you may still need to make estimated tax payments even if you are not self-employed. This can occur in cases where you receive a relatively large portion of your total income from sources that are not subject to withholding taxes, such as dividends or interest income. Form 1040-ES provides full and up-to-date guidelines that you can use to determine whether or not you are required to pay estimated taxes.</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"> Being self-employed offers both personal and financial rewards, despite the initial learning curve involved. By following structured guidelines and using helpful resources like IRS Form 1040-ES, self-employed workers can accurately estimate and pay their taxes, ensuring they meet tax requirements. Seeking advice from a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxadvisor.asp">tax advisor</a> when necessary can ensure that you keep your finances healthy and stay compliant with tax laws.
</p></div> | Self-employed people often face the challenge of accurately tracking and remitting their taxes throughout the year. While self-employment offers a number of benefits, such as flexible schedules, and the ability to create jobs, it also presents unique challenges. Mastering the process of making estimated tax payments is important to managing these challenges and maintaining good standing with your tax obligations.
Learning how to make [estimated tax](https://www.investopedia.com/terms/e/estimated-tax.asp) payments can make one of those challenges much more manageable and help you stay on top of your taxes.
### Key Takaways
* An important skill for self-employed people is knowing how to estimate and remit your taxes throughout the year.
* The Internal Revenue Service (IRS) requires estimated taxes to be paid quarterly, but you have the flexibility to make these payments more frequently—weekly, bi-weekly, or monthly—as long as the total amount due is paid by the end of each quarter.
* Failure to meet these requirements and deadlines can result in penalties and interest charges. Also, the requirement to make estimated payments can also apply to individuals who are not self-employed.
## Why You Should Make Estimated Tax Payments
While tax returns are filed annually, taxes on income must be paid throughout the year. Employees typically meet this requirement through [tax withholdings](https://www.investopedia.com/terms/w/withholdingtax.asp) by their employers. However, self-employed individuals, and others who earn income not subject to withholding such as interest, dividends, and taxable alimony, must make estimated tax payments if they expect to owe at least $1,000 in taxes for the year.
Neglecting to make your required estimated tax payments can lead to a big tax bill when filing your [tax return](https://www.investopedia.com/terms/t/taxreturn.asp), potentially causing financial hardship or even bankruptcy. You can avoid any penalties if your withholdings and payments equal at least 90% of this year's total tax or 100% of last year's tax (110% if your adjusted gross income exceeds $75,000 for singles or $150,000 for joint filers).
To prevent negative outcomes, the government requires that individuals with non-withheld income estimate and pay their taxes periodically throughout the year. The IRS provides resources and guidelines to assist in calculating and submitting these payments.
###
If you delay your first estimated tax payment beyond the typical April 15 deadline, you should make payments as soon as possible to minimize penalties.
## How to Make Estimated Tax Payments
To make estimated tax payments, you must first determine your anticipated tax liability, using your prior year's income as a reference point and adjusting based on current earnings and any relevant [credits](https://www.investopedia.com/terms/t/taxcredit.asp) or [deductions](https://www.investopedia.com/terms/t/tax-deduction.asp) that might apply. After all, your income could rise or fall during the remainder of the year.
For example, if a [gig worker](https://www.investopedia.com/terms/g/gig-economy.asp) typically works four hours a day doing deliveries, can estimate their tax based on that workload, adjusting their future payments if their hours change. If they decide later to work less hours, they would then update their estimate the next time they file.
The schedule of when you file your estimated tax payments is set out by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp).
Here are the [deadlines for 2024 estimated taxes](https://www.investopedia.com/articles/personal-finance/020316/estimated-tax-deadlines-2016.asp):
| When to Make Estimated Tax Payments | |
| --- | --- |
| **Payment Due Date** | **For Income Earned During...** |
| April 15 | Jan. 1 through March 31 |
| June 17 | April 1 through May 31 |
| Sept. 16 | June 1 through Aug. 31 |
| Jan. 15 of next year | Sept. 1 through Dec. 31 |
The schedule is updated each year by the IRS.
While estimated tax payments are termed "quarterly," the periods they cover are not equal. For example, the period for the payment due on June 17 spans only two months, while the one due on April 15 covers three months. It's crucial to refer to the IRS-specified payment dates rather than relying on a general calendar. Also note that if a payment date falls on a weekend or holiday, the deadline shifts to the next business day.
The procedure for actually calculating your taxes is described in Form 1040-ES, Estimated Tax for Individuals. As the name implies, this form is designed specifically for self-employed individuals, offering a guide to estimate taxes accurately. It includes important details such as payment deadlines, access to government support hotlines, and information on special exemptions. Also, there is an included worksheet that allows for a detailed calculation of taxes, considering any relevant income tax deductions or credits.
Calculating your taxes is usually straightforward if you maintain accurate records of your income and expenses, potentially with the help of [accounting software](https://www.investopedia.com/terms/a/accounting-software.asp). On the other hand, if your records are disorganized, you might need to hire an accountant or bookkeeper to ensure your income is calculated correctly. If you require professional help, plan ahead to avoid missing any filing deadlines.
Once you have determined your income and estimated your tax liability, there are many ways for you to pay. The IRS provides several payment methods, which are printed on Form 1040-ES. These methods include online payments through your IRS Online Account, by check, over the phone, via credit card, and through online banking portals. There is even a mobile application called IRS2Go with its own payment options.
## What Happens If You Can’t Afford to Pay the Estimated Amount?
It's a good idea to pay as much as you can towards your estimated taxes throughout the year to prevent facing a large [lump-sum](https://www.investopedia.com/terms/l/lump-sum-payment.asp) tax bill. If you struggle to make payments, the IRS offers options like payment plans, extensions, or potentially even tax forgiveness.
While approval isn't guaranteed, consistently making payments can improve your chances of favorable consideration from the IRS.
###
You may have to pay a penalty if you don’t pay enough tax through withholding and estimated tax payments. Additionally, late estimated tax payments can result in penalties, even if you ultimately receive a refund when you file your tax return.
## Special Considerations
In addition to managing estimated tax payments, self-employed individuals should also plan for other financial commitments. Although individual circumstances will vary, it may be wise to allocate a portion of your income each month to retirement savings, life insurance, or longer-term financial goals such as buying a house or paying for college. In doing so, there are many resources that can be helpful, ranging from free online educational resources to [professional financial planners](https://www.investopedia.com/updates/find-financial-advisor-planner/).
## How Do I Calculate Estimated Taxes?
To calculate your estimated taxes, begin with your total tax liability from the previous year as a baseline. Adjust this amount based on changes in your income and any new tax credits you qualify for. Other factors, such as whether you qualify for new tax credits, also would need to be considered. The IRS Form 1040-ES includes a comprehensive worksheet to guide you through this process. You can also use tax preparation software or seek professional help to ensure accuracy in your calculations.
## What Happens if My Income Changes During the Year?
If your income changes during the year and you realize that your previous estimates may have been inaccurate, you can simply adjust your estimate in the next quarter to compensate for any underpayment or overpayment. For example, if you underestimated in the first quarter, you can increase your payment in the second quarter to cover the shortfall. Since estimated taxes often differ from your actual tax liability, making such adjustments throughout the year is a common and expected practice.
## Are Estimated Tax Payments Only Relevant if You're Self-Employed?
No, you may still need to make estimated tax payments even if you are not self-employed. This can occur in cases where you receive a relatively large portion of your total income from sources that are not subject to withholding taxes, such as dividends or interest income. Form 1040-ES provides full and up-to-date guidelines that you can use to determine whether or not you are required to pay estimated taxes.
## The Bottom Line
Being self-employed offers both personal and financial rewards, despite the initial learning curve involved. By following structured guidelines and using helpful resources like IRS Form 1040-ES, self-employed workers can accurately estimate and pay their taxes, ensuring they meet tax requirements. Seeking advice from a [tax advisor](https://www.investopedia.com/terms/t/taxadvisor.asp) when necessary can ensure that you keep your finances healthy and stay compliant with tax laws.
| Self-employed people often face the challenge of accurately tracking and remitting their taxes throughout the year. While self-employment offers a number of benefits, such as flexible schedules, and the ability to create jobs, it also presents unique challenges. Mastering the process of making estimated tax payments is important to managing these challenges and maintaining good standing with your tax obligations.
Learning how to make estimated tax payments can make one of those challenges much more manageable and help you stay on top of your taxes.
Key Takaways
An important skill for self-employed people is knowing how to estimate and remit your taxes throughout the year.The Internal Revenue Service (IRS) requires estimated taxes to be paid quarterly, but you have the flexibility to make these payments more frequently—weekly, bi-weekly, or monthly—as long as the total amount due is paid by the end of each quarter.Failure to meet these requirements and deadlines can result in penalties and interest charges. Also, the requirement to make estimated payments can also apply to individuals who are not self-employed.
Why You Should Make Estimated Tax Payments
While tax returns are filed annually, taxes on income must be paid throughout the year. Employees typically meet this requirement through tax withholdings by their employers. However, self-employed individuals, and others who earn income not subject to withholding such as interest, dividends, and taxable alimony, must make estimated tax payments if they expect to owe at least $1,000 in taxes for the year.
Neglecting to make your required estimated tax payments can lead to a big tax bill when filing your tax return, potentially causing financial hardship or even bankruptcy. You can avoid any penalties if your withholdings and payments equal at least 90% of this year's total tax or 100% of last year's tax (110% if your adjusted gross income exceeds $75,000 for singles or $150,000 for joint filers).
To prevent negative outcomes, the government requires that individuals with non-withheld income estimate and pay their taxes periodically throughout the year. The IRS provides resources and guidelines to assist in calculating and submitting these payments.
If you delay your first estimated tax payment beyond the typical April 15 deadline, you should make payments as soon as possible to minimize penalties.
How to Make Estimated Tax Payments
To make estimated tax payments, you must first determine your anticipated tax liability, using your prior year's income as a reference point and adjusting based on current earnings and any relevant credits or deductions that might apply. After all, your income could rise or fall during the remainder of the year.
For example, if a gig worker typically works four hours a day doing deliveries, can estimate their tax based on that workload, adjusting their future payments if their hours change. If they decide later to work less hours, they would then update their estimate the next time they file.
The schedule of when you file your estimated tax payments is set out by the Internal Revenue Service (IRS).
Here are the deadlines for 2024 estimated taxes:
When to Make Estimated Tax Payments
Payment Due Date
For Income Earned During...
April 15
Jan. 1 through March 31
June 17
April 1 through May 31
Sept. 16
June 1 through Aug. 31
Jan. 15 of next year
Sept. 1 through Dec. 31
The schedule is updated each year by the IRS.
While estimated tax payments are termed "quarterly," the periods they cover are not equal. For example, the period for the payment due on June 17 spans only two months, while the one due on April 15 covers three months. It's crucial to refer to the IRS-specified payment dates rather than relying on a general calendar. Also note that if a payment date falls on a weekend or holiday, the deadline shifts to the next business day.
The procedure for actually calculating your taxes is described in Form 1040-ES, Estimated Tax for Individuals. As the name implies, this form is designed specifically for self-employed individuals, offering a guide to estimate taxes accurately. It includes important details such as payment deadlines, access to government support hotlines, and information on special exemptions. Also, there is an included worksheet that allows for a detailed calculation of taxes, considering any relevant income tax deductions or credits.
Calculating your taxes is usually straightforward if you maintain accurate records of your income and expenses, potentially with the help of accounting software. On the other hand, if your records are disorganized, you might need to hire an accountant or bookkeeper to ensure your income is calculated correctly. If you require professional help, plan ahead to avoid missing any filing deadlines.
Once you have determined your income and estimated your tax liability, there are many ways for you to pay. The IRS provides several payment methods, which are printed on Form 1040-ES. These methods include online payments through your IRS Online Account, by check, over the phone, via credit card, and through online banking portals. There is even a mobile application called IRS2Go with its own payment options.
What Happens If You Can’t Afford to Pay the Estimated Amount?
It's a good idea to pay as much as you can towards your estimated taxes throughout the year to prevent facing a large lump-sum tax bill. If you struggle to make payments, the IRS offers options like payment plans, extensions, or potentially even tax forgiveness.
While approval isn't guaranteed, consistently making payments can improve your chances of favorable consideration from the IRS.
You may have to pay a penalty if you don’t pay enough tax through withholding and estimated tax payments. Additionally, late estimated tax payments can result in penalties, even if you ultimately receive a refund when you file your tax return.
Special Considerations
In addition to managing estimated tax payments, self-employed individuals should also plan for other financial commitments. Although individual circumstances will vary, it may be wise to allocate a portion of your income each month to retirement savings, life insurance, or longer-term financial goals such as buying a house or paying for college. In doing so, there are many resources that can be helpful, ranging from free online educational resources to professional financial planners.
How Do I Calculate Estimated Taxes?
To calculate your estimated taxes, begin with your total tax liability from the previous year as a baseline. Adjust this amount based on changes in your income and any new tax credits you qualify for. Other factors, such as whether you qualify for new tax credits, also would need to be considered. The IRS Form 1040-ES includes a comprehensive worksheet to guide you through this process. You can also use tax preparation software or seek professional help to ensure accuracy in your calculations.
What Happens if My Income Changes During the Year?
If your income changes during the year and you realize that your previous estimates may have been inaccurate, you can simply adjust your estimate in the next quarter to compensate for any underpayment or overpayment. For example, if you underestimated in the first quarter, you can increase your payment in the second quarter to cover the shortfall. Since estimated taxes often differ from your actual tax liability, making such adjustments throughout the year is a common and expected practice.
Are Estimated Tax Payments Only Relevant if You're Self-Employed?
No, you may still need to make estimated tax payments even if you are not self-employed. This can occur in cases where you receive a relatively large portion of your total income from sources that are not subject to withholding taxes, such as dividends or interest income. Form 1040-ES provides full and up-to-date guidelines that you can use to determine whether or not you are required to pay estimated taxes.
The Bottom Line
Being self-employed offers both personal and financial rewards, despite the initial learning curve involved. By following structured guidelines and using helpful resources like IRS Form 1040-ES, self-employed workers can accurately estimate and pay their taxes, ensuring they meet tax requirements. Seeking advice from a tax advisor when necessary can ensure that you keep your finances healthy and stay compliant with tax laws.
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https://www.investopedia.com/framing-effect-7371439 | Framing Effect: What It Is 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"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Framing effect proposes that individuals make decisions based on how<strong> </strong>an issue is presented, or “framed,” rather than on the facts presented. It is a cognitive default to choose an option that is more positively presented, or framed.
</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"> Framing effect, sometimes called framing bias, is apparent across most every field of human endeavor, when people are faced with making a decision based on facts presented in a particular way. Ultimately, framing bias is a powerful component of our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investing.asp">investing</a>, presentations, communications, and shopping, among other activities.
</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>Framing effect is a powerful communication tool used to convince people to take an action based on their emotional response, rather than on the facts of the proposal.</li><li>Framing effect is used in every form of communication, from visual to written content, and is influenced by body language to color choices.</li><li>For investors, framing effect plays off our instinctual predispositions to avoid loss and maximize gains.</li><li>To avoid framing effect, investors need to look beyond the surface proposition and instead focus on concrete data points to best determine if an investment is favorable.</li></ul></div></div></div>
<span class="heading-toc" id="toc-framing-effect-explained"></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"> Framing Effect Explained </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Because the framing-bias theory arises from individual reactions to a two-way proposition, it is important to note two other cognitive biases that most people exhibit subconsciously with framing choices:
</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"> First among cognitive biases is that the fear of loss<strong> </strong>is greater than the prospect of winning, even though the odds may be identical.<span class="ql-inline-citation" data-cite="4"></span> People will almost always choose an option that maximizes the prospect of a positive outcome, while avoiding responses that entail a risk of loss. For instance, your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/managing-wealth/when-should-you-hire-financial-advisor/">financial advisor</a> may present two options for your 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>:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li class="ql-indent-1">A well-diversified portfolio that has a 70% chance of producing positive results</li><li class="ql-indent-1">A well-diversified portfolio that has a 30% chance of losing money</li>
</ol>
<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"> Clearly, most people would respond more favorably to the first option because it emphasizes gains, while the second option focuses on potential losses—even though the results are actually the same.
</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"> Second, people tend to favor larger<strong> </strong>numbers over smaller ones when making decisions. This cognitive reflex stems from people’s impression that something with a larger number behind it is more persuasive.<span class="ql-inline-citation" data-cite="5"></span> For example, let’s say you’re a car dealer looking to get the best response to an ad campaign and you come up with the following two options, both of which will result in the same price:
</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 class="ql-indent-1">Get $1,000 cash back when you buy the car</li><li class="ql-indent-1">Get 5% off the selling price of the car</li>
</ol>
<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"> Given the two options, most people would take the first because it involves a very large number plus cash being transferred to the buyer. The second choice involves the buyer calculating how much the 5% discount is relative to the $1,000 offer, which is likely to put off potential buyers.
</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’s another simple example related to investment options:
</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"> With an <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> pending, your investment advisor lays out two possible outcomes for the investment:
</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>There is a 70% chance of success, and the shares are expected to go up by 45% on the first trading day.</li><li>There is only a 30% chance of failure, but if the IPO succeeds, then the stock price may scale up by almost 45%.</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"> Both propositions represent the same potential outcome, but <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a> are most likely to choose the first option because it is framed positively, while the second option is framed negatively.
</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-framing-effect-and-investing-decisions"></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"> Framing Effect and Investing Decisions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> With framing effect used in every field of communication, we must be prepared for it to appear in financial and investing materials and advertisements. Here, investors are frequently given two choices for how to invest their money, phrased, or framed, with two biases—both with the same ultimate outcome. When the same piece of information is presented in different ways, the response varies.
</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>In financial decision making, framing effect can lead to serious consequences. This is apparent and should be acknowledged when an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/investing-strategies/">investment</a> is pitched to investors or a product is introduced to potential clients or buyers.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> For example, suppose an investor is presented with the two following investment options regarding a 10-year U.S. Treasury bond:
</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>The bond offers a 10% fixed return every year.</li><li>The investor’s money will double in 10 years. </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"> The first option is phrased positively for those who are seeking a secure, steady stream of income, while the second option may have negative connotations if the investor is reluctant to lock up their money for a full 10 years.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Other investment decisions, such as picking which <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual fund</a> to invest in, are ripe for the framing effect. For instance, consider the following choices:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0">
<li>Option A: A mutual fund that has beat the market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> by 5% in the last year</li>
<li>Option B: A mutual fund that has beat the benchmark by 2% each year over the last three years</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> It might seem clear that most investors would probably choose Option A, as it shows the highest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rate of return</a> over the immediate past year, while Option B shows a lower rate of return over several years. However, this scenario represents a false dichotomy—both outcomes are unknown. For example, both funds might lose significantly compared with the benchmark in the upcoming year, so investors can’t make a definitive choice based on the data presented.
</p>
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<span class="heading-toc" id="toc-four-types-of-framing-effect"></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"> Four Types of Framing Effect </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/b/behavioralfinance.asp">Behavioral finance</a> studies have broken down the types of framing effect into four main categories. They all contribute to a framing effect in their respective example presentations, which most people never even notice.
</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"> Auditory Framing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Auditory framing occurs when there is a spoken proposition that can be delivered in different tones and manners. Studies have shown that how a proposition is presented is more important than what is actually communicated.
</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"> For example, when visiting a car dealership, customers are more likely to do business with a salesperson who delivers a sales pitch in a confident and compelling tone of voice, while a more timid and quiet salesperson is not likely to get customers’ attention.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-subheading__text"> Visual Framing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Visual framing involves everything that is communicated in a visual manner, such as colors, font, type size, and body language. An example of a visual framing presentation could involve font size and style. A type style that’s clear and distinct, making it a positive candidate for advertising copy, would likely be the best choice, in recognition of the framing effect.<br/>
</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"> Body Language </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Studies have shown that body language accounts for 55% of the material being communicated.<span class="ql-inline-citation" data-cite="1"></span> Again, this is an innate component of our natural means of absorbing information, of which we are all too often unaware. For example, we are more likely to be receptive to a speaker who has a commanding voice, solid body language (face forward, arms open in a welcoming gesture, etc.), and a fluid speech cadence.
</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"> On the other hand, we are unlikely to be attracted to or listen to a speaker who shows poor body posture, speaks in a weak voice, and generally comes across as nervous or unsure.
</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"> Value Propositions </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Value propositions are based on the technique of making us feel like we are getting more for less. For example, say a computer shop is selling Apple Macs for $1,000 and is looking for the best way to market a special sale that it’s running. Which should it feature?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> <li>Option 1: $200 off a new Apple Mac</li><li>Option 2: 20% off a new Apple Mac</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Because of the phrasing used, the $200-off deal appears to be the best to most consumers, even though the ultimate price is the same in this case. This illustrates two facets of the value proposition:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <li>The rule of relatively large numbers discussed above</li><li>The phenomenon in which the price of a particular good is seen to be better with a dollar-based discount—in this case, $200 vs. 20%</li>
</ol>
<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-positive-and-negative-themes"></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"> Positive and Negative Themes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> As shown, the phrasing we encounter can have a significant psychological impact on our decision making.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_75-0"><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_76-0"><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 general, we seek the lowest risk available and are prone to favor large numbers vs. small numbers, even if the result is the same.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> A negative ploy frequently used by retailers is language along the lines of “don’t miss out on our great sale” or “last chance to get this deal.” Both frame the proposition in negative terms, meaning we are being told to take action to avoid a loss. By virtue of its prevalence, the negative framing effect must be successful, perhaps because it matches with our instinct to avoid a loss or find a better deal.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div>
<span class="heading-toc" id="toc-how-to-avoid-the-financial-pitfalls-of-framing-effect"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_79-0"> <span class="mntl-sc-block-heading__text"> How to Avoid the Financial Pitfalls of Framing Effect </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Most importantly, investors need to be aware that framing effect exists in the financial sphere, as with many other kinds of decision making, and so is likely to appear prominently in financial companies’ advertising and promotional materials.<span class="ql-inline-citation" data-cite="3"></span> Simply embracing that truism can help investors be more conscious of framed choices when they are presented.<span class="ql-inline-citation" data-cite="2"></span> Remember, if it sounds too good to be true, it probably is.
</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"> Other steps to take to avoid the negative consequences of framing effect are:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0">
<li><strong>Act rationally</strong> in your investment decisions. Do the homework that goes beyond the framing effect’s lure. Analyze your investment options with an open mind, and have a solid foundation (such as <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>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irr.asp">internal rate of return [IRR]</a>, or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pegratio.asp">price/earnings to growth [PEG]</a>) on which to base your investing decisions.</li>
<li><strong>Do a gut-check</strong> analysis of any investment. Don’t fall for results based on past performance, as they have no impact on future performance. If it feels right, maybe you have something good on hand; if it doesn’t feel right (or your research finds holes in the investment), let it pass. The next solid investment opportunity will be right around the corner.</li>
<li><strong>Keep a long-term perspective</strong> in your investing, and avoid promises of get-rich-quick schemes. Stay focused on the long-term horizon and the accumulation of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wealth.asp">wealth</a> over time (also referred to as <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a>).</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_86-0"><span class="heading-toc" id="toc-what-is-an-example-of-framing-effect-being-used-to-influence-behavior"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is an example of framing effect being used to influence behavior?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Framing effect is frequently used in sales rhetoric, including for investment products, to play on our innate instincts to seek the best deal possible or to spend as little as possible. Advertisers are expert in using framing effect to boost sales and establish customer loyalty. In that sense, sell-side companies or organizations have a high degree of interest in maximizing the effect of their advertisements or brand promotion, by framing their products or services in ways that can steer us toward making the desired choice.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_88-0"><span class="heading-toc" id="toc-is-everything-i-read-or-see-framed-for-me"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is everything I read or see ‘framed’ for me?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most likely, yes. If the message giver is adept at all at delivering a compelling message to its audience, it will review its communications to find better, more compelling ways to address the subject at hand, whether it’s a sales campaign or a mutual fund launch.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_90-0"><span class="heading-toc" id="toc-how-can-i-avoid-being-misled-by-framing-effect"></span> <h2 class="mntl-sc-block-questionandanswer__question">How can I avoid being misled by framing effect?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Focus on the facts presented in the “framed” argument to see what the message is really saying. Sometimes it will be easy to spot a framed message, and other times it will be more complicated, depending on the nature of the issue. But by being aware of the various instinctual responses and biases we exhibit in our decision making, we can get closer to the truth of the messaging and be less subject to manipulation by the way the message is framed.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_92-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> Investors need to be aware of framing effect to avoid being taken in by a get-rich-quick scheme or any other dubious investments. The first step to combat framing effect is to recognize it exists and may influence our decisions. This makes it incumbent on individual investors to do their own investment <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/research-report.asp">research</a>, seeking out key metrics such as EPS, PEG, or IRR, before committing capital.
</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"> While framing effect can be useful in giving investors a starting point from which to compare alternative investments, it’s still up to the investor to make the call. Always remember that past performance isn’t indicative of future performance, and that if an investment sounds too good to be true, it probably is. Finally, rely on your gut instinct to see through the framing effect and conduct your own independent investment analysis before making decisions.<br/>
</p></div> | Framing effect proposes that individuals make decisions based on howan issue is presented, or “framed,” rather than on the facts presented. It is a cognitive default to choose an option that is more positively presented, or framed.
Framing effect, sometimes called framing bias, is apparent across most every field of human endeavor, when people are faced with making a decision based on facts presented in a particular way. Ultimately, framing bias is a powerful component of our [investing](https://www.investopedia.com/terms/i/investing.asp), presentations, communications, and shopping, among other activities.
### Key Takeaways
* Framing effect is a powerful communication tool used to convince people to take an action based on their emotional response, rather than on the facts of the proposal.
* Framing effect is used in every form of communication, from visual to written content, and is influenced by body language to color choices.
* For investors, framing effect plays off our instinctual predispositions to avoid loss and maximize gains.
* To avoid framing effect, investors need to look beyond the surface proposition and instead focus on concrete data points to best determine if an investment is favorable.
## Framing Effect Explained
Because the framing-bias theory arises from individual reactions to a two-way proposition, it is important to note two other cognitive biases that most people exhibit subconsciously with framing choices:
First among cognitive biases is that the fear of lossis greater than the prospect of winning, even though the odds may be identical. People will almost always choose an option that maximizes the prospect of a positive outcome, while avoiding responses that entail a risk of loss. For instance, your [financial advisor](https://www.investopedia.com/managing-wealth/when-should-you-hire-financial-advisor/) may present two options for your investment [portfolio](https://www.investopedia.com/terms/p/portfolio.asp):
1. A well-diversified portfolio that has a 70% chance of producing positive results
2. A well-diversified portfolio that has a 30% chance of losing money
Clearly, most people would respond more favorably to the first option because it emphasizes gains, while the second option focuses on potential losses—even though the results are actually the same.
Second, people tend to favor largernumbers over smaller ones when making decisions. This cognitive reflex stems from people’s impression that something with a larger number behind it is more persuasive. For example, let’s say you’re a car dealer looking to get the best response to an ad campaign and you come up with the following two options, both of which will result in the same price:
1. Get $1,000 cash back when you buy the car
2. Get 5% off the selling price of the car
Given the two options, most people would take the first because it involves a very large number plus cash being transferred to the buyer. The second choice involves the buyer calculating how much the 5% discount is relative to the $1,000 offer, which is likely to put off potential buyers.
Here’s another simple example related to investment options:
With an [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) pending, your investment advisor lays out two possible outcomes for the investment:
1. There is a 70% chance of success, and the shares are expected to go up by 45% on the first trading day.
2. There is only a 30% chance of failure, but if the IPO succeeds, then the stock price may scale up by almost 45%.
Both propositions represent the same potential outcome, but [investors](https://www.investopedia.com/terms/i/investor.asp) are most likely to choose the first option because it is framed positively, while the second option is framed negatively.
## Framing Effect and Investing Decisions
With framing effect used in every field of communication, we must be prepared for it to appear in financial and investing materials and advertisements. Here, investors are frequently given two choices for how to invest their money, phrased, or framed, with two biases—both with the same ultimate outcome. When the same piece of information is presented in different ways, the response varies.
###
In financial decision making, framing effect can lead to serious consequences. This is apparent and should be acknowledged when an [investment](https://www.investopedia.com/investing/investing-strategies/) is pitched to investors or a product is introduced to potential clients or buyers.
For example, suppose an investor is presented with the two following investment options regarding a 10-year U.S. Treasury bond:
1. The bond offers a 10% fixed return every year.
2. The investor’s money will double in 10 years.
The first option is phrased positively for those who are seeking a secure, steady stream of income, while the second option may have negative connotations if the investor is reluctant to lock up their money for a full 10 years.
Other investment decisions, such as picking which [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) to invest in, are ripe for the framing effect. For instance, consider the following choices:
* Option A: A mutual fund that has beat the market [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) by 5% in the last year
* Option B: A mutual fund that has beat the benchmark by 2% each year over the last three years
It might seem clear that most investors would probably choose Option A, as it shows the highest [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) over the immediate past year, while Option B shows a lower rate of return over several years. However, this scenario represents a false dichotomy—both outcomes are unknown. For example, both funds might lose significantly compared with the benchmark in the upcoming year, so investors can’t make a definitive choice based on the data presented.
## Four Types of Framing Effect
[Behavioral finance](https://www.investopedia.com/terms/b/behavioralfinance.asp) studies have broken down the types of framing effect into four main categories. They all contribute to a framing effect in their respective example presentations, which most people never even notice.
### Auditory Framing
Auditory framing occurs when there is a spoken proposition that can be delivered in different tones and manners. Studies have shown that how a proposition is presented is more important than what is actually communicated.
For example, when visiting a car dealership, customers are more likely to do business with a salesperson who delivers a sales pitch in a confident and compelling tone of voice, while a more timid and quiet salesperson is not likely to get customers’ attention.
### Visual Framing
Visual framing involves everything that is communicated in a visual manner, such as colors, font, type size, and body language. An example of a visual framing presentation could involve font size and style. A type style that’s clear and distinct, making it a positive candidate for advertising copy, would likely be the best choice, in recognition of the framing effect.
### Body Language
Studies have shown that body language accounts for 55% of the material being communicated. Again, this is an innate component of our natural means of absorbing information, of which we are all too often unaware. For example, we are more likely to be receptive to a speaker who has a commanding voice, solid body language (face forward, arms open in a welcoming gesture, etc.), and a fluid speech cadence.
On the other hand, we are unlikely to be attracted to or listen to a speaker who shows poor body posture, speaks in a weak voice, and generally comes across as nervous or unsure.
### Value Propositions
Value propositions are based on the technique of making us feel like we are getting more for less. For example, say a computer shop is selling Apple Macs for $1,000 and is looking for the best way to market a special sale that it’s running. Which should it feature?
* Option 1: $200 off a new Apple Mac
* Option 2: 20% off a new Apple Mac
Because of the phrasing used, the $200-off deal appears to be the best to most consumers, even though the ultimate price is the same in this case. This illustrates two facets of the value proposition:
1. The rule of relatively large numbers discussed above
2. The phenomenon in which the price of a particular good is seen to be better with a dollar-based discount—in this case, $200 vs. 20%
## Positive and Negative Themes
As shown, the phrasing we encounter can have a significant psychological impact on our decision making.
###
In general, we seek the lowest risk available and are prone to favor large numbers vs. small numbers, even if the result is the same.
A negative ploy frequently used by retailers is language along the lines of “don’t miss out on our great sale” or “last chance to get this deal.” Both frame the proposition in negative terms, meaning we are being told to take action to avoid a loss. By virtue of its prevalence, the negative framing effect must be successful, perhaps because it matches with our instinct to avoid a loss or find a better deal.
## How to Avoid the Financial Pitfalls of Framing Effect
Most importantly, investors need to be aware that framing effect exists in the financial sphere, as with many other kinds of decision making, and so is likely to appear prominently in financial companies’ advertising and promotional materials. Simply embracing that truism can help investors be more conscious of framed choices when they are presented. Remember, if it sounds too good to be true, it probably is.
Other steps to take to avoid the negative consequences of framing effect are:
* **Act rationally** in your investment decisions. Do the homework that goes beyond the framing effect’s lure. Analyze your investment options with an open mind, and have a solid foundation (such as [earnings per share [EPS]](https://www.investopedia.com/terms/e/eps.asp), [internal rate of return [IRR]](https://www.investopedia.com/terms/i/irr.asp), or [price/earnings to growth [PEG]](https://www.investopedia.com/terms/p/pegratio.asp)) on which to base your investing decisions.
* **Do a gut-check** analysis of any investment. Don’t fall for results based on past performance, as they have no impact on future performance. If it feels right, maybe you have something good on hand; if it doesn’t feel right (or your research finds holes in the investment), let it pass. The next solid investment opportunity will be right around the corner.
* **Keep a long-term perspective** in your investing, and avoid promises of get-rich-quick schemes. Stay focused on the long-term horizon and the accumulation of [wealth](https://www.investopedia.com/terms/w/wealth.asp) over time (also referred to as [compounding](https://www.investopedia.com/terms/c/compounding.asp)).
## What is an example of framing effect being used to influence behavior?
Framing effect is frequently used in sales rhetoric, including for investment products, to play on our innate instincts to seek the best deal possible or to spend as little as possible. Advertisers are expert in using framing effect to boost sales and establish customer loyalty. In that sense, sell-side companies or organizations have a high degree of interest in maximizing the effect of their advertisements or brand promotion, by framing their products or services in ways that can steer us toward making the desired choice.
## Is everything I read or see ‘framed’ for me?
Most likely, yes. If the message giver is adept at all at delivering a compelling message to its audience, it will review its communications to find better, more compelling ways to address the subject at hand, whether it’s a sales campaign or a mutual fund launch.
## How can I avoid being misled by framing effect?
Focus on the facts presented in the “framed” argument to see what the message is really saying. Sometimes it will be easy to spot a framed message, and other times it will be more complicated, depending on the nature of the issue. But by being aware of the various instinctual responses and biases we exhibit in our decision making, we can get closer to the truth of the messaging and be less subject to manipulation by the way the message is framed.
## The Bottom Line
Investors need to be aware of framing effect to avoid being taken in by a get-rich-quick scheme or any other dubious investments. The first step to combat framing effect is to recognize it exists and may influence our decisions. This makes it incumbent on individual investors to do their own investment [research](https://www.investopedia.com/terms/r/research-report.asp), seeking out key metrics such as EPS, PEG, or IRR, before committing capital.
While framing effect can be useful in giving investors a starting point from which to compare alternative investments, it’s still up to the investor to make the call. Always remember that past performance isn’t indicative of future performance, and that if an investment sounds too good to be true, it probably is. Finally, rely on your gut instinct to see through the framing effect and conduct your own independent investment analysis before making decisions.
| Framing effect proposes that individuals make decisions based on how an issue is presented, or “framed,” rather than on the facts presented. It is a cognitive default to choose an option that is more positively presented, or framed.
Framing effect, sometimes called framing bias, is apparent across most every field of human endeavor, when people are faced with making a decision based on facts presented in a particular way. Ultimately, framing bias is a powerful component of our investing, presentations, communications, and shopping, among other activities.
Key Takeaways
Framing effect is a powerful communication tool used to convince people to take an action based on their emotional response, rather than on the facts of the proposal.Framing effect is used in every form of communication, from visual to written content, and is influenced by body language to color choices.For investors, framing effect plays off our instinctual predispositions to avoid loss and maximize gains.To avoid framing effect, investors need to look beyond the surface proposition and instead focus on concrete data points to best determine if an investment is favorable.
Framing Effect Explained
Because the framing-bias theory arises from individual reactions to a two-way proposition, it is important to note two other cognitive biases that most people exhibit subconsciously with framing choices:
First among cognitive biases is that the fear of loss is greater than the prospect of winning, even though the odds may be identical. People will almost always choose an option that maximizes the prospect of a positive outcome, while avoiding responses that entail a risk of loss. For instance, your financial advisor may present two options for your investment portfolio:
A well-diversified portfolio that has a 70% chance of producing positive resultsA well-diversified portfolio that has a 30% chance of losing money
Clearly, most people would respond more favorably to the first option because it emphasizes gains, while the second option focuses on potential losses—even though the results are actually the same.
Second, people tend to favor larger numbers over smaller ones when making decisions. This cognitive reflex stems from people’s impression that something with a larger number behind it is more persuasive. For example, let’s say you’re a car dealer looking to get the best response to an ad campaign and you come up with the following two options, both of which will result in the same price:
Get $1,000 cash back when you buy the carGet 5% off the selling price of the car
Given the two options, most people would take the first because it involves a very large number plus cash being transferred to the buyer. The second choice involves the buyer calculating how much the 5% discount is relative to the $1,000 offer, which is likely to put off potential buyers.
Here’s another simple example related to investment options:
With an initial public offering (IPO) pending, your investment advisor lays out two possible outcomes for the investment:
There is a 70% chance of success, and the shares are expected to go up by 45% on the first trading day.There is only a 30% chance of failure, but if the IPO succeeds, then the stock price may scale up by almost 45%.
Both propositions represent the same potential outcome, but investors are most likely to choose the first option because it is framed positively, while the second option is framed negatively.
Framing Effect and Investing Decisions
With framing effect used in every field of communication, we must be prepared for it to appear in financial and investing materials and advertisements. Here, investors are frequently given two choices for how to invest their money, phrased, or framed, with two biases—both with the same ultimate outcome. When the same piece of information is presented in different ways, the response varies.
In financial decision making, framing effect can lead to serious consequences. This is apparent and should be acknowledged when an investment is pitched to investors or a product is introduced to potential clients or buyers.
For example, suppose an investor is presented with the two following investment options regarding a 10-year U.S. Treasury bond:
The bond offers a 10% fixed return every year.The investor’s money will double in 10 years.
The first option is phrased positively for those who are seeking a secure, steady stream of income, while the second option may have negative connotations if the investor is reluctant to lock up their money for a full 10 years.
Other investment decisions, such as picking which mutual fund to invest in, are ripe for the framing effect. For instance, consider the following choices:
Option A: A mutual fund that has beat the market benchmark by 5% in the last year
Option B: A mutual fund that has beat the benchmark by 2% each year over the last three years
It might seem clear that most investors would probably choose Option A, as it shows the highest rate of return over the immediate past year, while Option B shows a lower rate of return over several years. However, this scenario represents a false dichotomy—both outcomes are unknown. For example, both funds might lose significantly compared with the benchmark in the upcoming year, so investors can’t make a definitive choice based on the data presented.
Four Types of Framing Effect
Behavioral finance studies have broken down the types of framing effect into four main categories. They all contribute to a framing effect in their respective example presentations, which most people never even notice.
Auditory Framing
Auditory framing occurs when there is a spoken proposition that can be delivered in different tones and manners. Studies have shown that how a proposition is presented is more important than what is actually communicated.
For example, when visiting a car dealership, customers are more likely to do business with a salesperson who delivers a sales pitch in a confident and compelling tone of voice, while a more timid and quiet salesperson is not likely to get customers’ attention.
Visual Framing
Visual framing involves everything that is communicated in a visual manner, such as colors, font, type size, and body language. An example of a visual framing presentation could involve font size and style. A type style that’s clear and distinct, making it a positive candidate for advertising copy, would likely be the best choice, in recognition of the framing effect.
Body Language
Studies have shown that body language accounts for 55% of the material being communicated. Again, this is an innate component of our natural means of absorbing information, of which we are all too often unaware. For example, we are more likely to be receptive to a speaker who has a commanding voice, solid body language (face forward, arms open in a welcoming gesture, etc.), and a fluid speech cadence.
On the other hand, we are unlikely to be attracted to or listen to a speaker who shows poor body posture, speaks in a weak voice, and generally comes across as nervous or unsure.
Value Propositions
Value propositions are based on the technique of making us feel like we are getting more for less. For example, say a computer shop is selling Apple Macs for $1,000 and is looking for the best way to market a special sale that it’s running. Which should it feature?
Option 1: $200 off a new Apple MacOption 2: 20% off a new Apple Mac
Because of the phrasing used, the $200-off deal appears to be the best to most consumers, even though the ultimate price is the same in this case. This illustrates two facets of the value proposition:
The rule of relatively large numbers discussed aboveThe phenomenon in which the price of a particular good is seen to be better with a dollar-based discount—in this case, $200 vs. 20%
Positive and Negative Themes
As shown, the phrasing we encounter can have a significant psychological impact on our decision making.
In general, we seek the lowest risk available and are prone to favor large numbers vs. small numbers, even if the result is the same.
A negative ploy frequently used by retailers is language along the lines of “don’t miss out on our great sale” or “last chance to get this deal.” Both frame the proposition in negative terms, meaning we are being told to take action to avoid a loss. By virtue of its prevalence, the negative framing effect must be successful, perhaps because it matches with our instinct to avoid a loss or find a better deal.
How to Avoid the Financial Pitfalls of Framing Effect
Most importantly, investors need to be aware that framing effect exists in the financial sphere, as with many other kinds of decision making, and so is likely to appear prominently in financial companies’ advertising and promotional materials. Simply embracing that truism can help investors be more conscious of framed choices when they are presented. Remember, if it sounds too good to be true, it probably is.
Other steps to take to avoid the negative consequences of framing effect are:
Act rationally in your investment decisions. Do the homework that goes beyond the framing effect’s lure. Analyze your investment options with an open mind, and have a solid foundation (such as earnings per share [EPS], internal rate of return [IRR], or price/earnings to growth [PEG]) on which to base your investing decisions.
Do a gut-check analysis of any investment. Don’t fall for results based on past performance, as they have no impact on future performance. If it feels right, maybe you have something good on hand; if it doesn’t feel right (or your research finds holes in the investment), let it pass. The next solid investment opportunity will be right around the corner.
Keep a long-term perspective in your investing, and avoid promises of get-rich-quick schemes. Stay focused on the long-term horizon and the accumulation of wealth over time (also referred to as compounding).
What is an example of framing effect being used to influence behavior?
Framing effect is frequently used in sales rhetoric, including for investment products, to play on our innate instincts to seek the best deal possible or to spend as little as possible. Advertisers are expert in using framing effect to boost sales and establish customer loyalty. In that sense, sell-side companies or organizations have a high degree of interest in maximizing the effect of their advertisements or brand promotion, by framing their products or services in ways that can steer us toward making the desired choice.
Is everything I read or see ‘framed’ for me?
Most likely, yes. If the message giver is adept at all at delivering a compelling message to its audience, it will review its communications to find better, more compelling ways to address the subject at hand, whether it’s a sales campaign or a mutual fund launch.
How can I avoid being misled by framing effect?
Focus on the facts presented in the “framed” argument to see what the message is really saying. Sometimes it will be easy to spot a framed message, and other times it will be more complicated, depending on the nature of the issue. But by being aware of the various instinctual responses and biases we exhibit in our decision making, we can get closer to the truth of the messaging and be less subject to manipulation by the way the message is framed.
The Bottom Line
Investors need to be aware of framing effect to avoid being taken in by a get-rich-quick scheme or any other dubious investments. The first step to combat framing effect is to recognize it exists and may influence our decisions. This makes it incumbent on individual investors to do their own investment research, seeking out key metrics such as EPS, PEG, or IRR, before committing capital.
While framing effect can be useful in giving investors a starting point from which to compare alternative investments, it’s still up to the investor to make the call. Always remember that past performance isn’t indicative of future performance, and that if an investment sounds too good to be true, it probably is. Finally, rely on your gut instinct to see through the framing effect and conduct your own independent investment analysis before making decisions.
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https://www.investopedia.com/ask/answers/060116/are-money-market-accounts-considered-checking-or-savings.asp | How Do Money Market Accounts Work? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A money market account (MMA) is a neither a checking nor a savings account, but as a hybrid of the two it has certain similar characteristics of both. It lets account holders make withdrawals, transfers, and debit-card transactions as they would with a regular checking account, while often offering higher interest rates than traditional savings accounts.
</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"> Find out more about what money market accounts are and how they work.
</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 money market account is neither a checking nor a savings account but has certain characteristics similar to both.</li>
<li>Like regular checking accounts, money market accounts allow account holders to make withdrawals and transfers, and write checks. They may also allow debit-card transactions and online bill pay. </li>
<li>Many MMAs offer unlimited ATM withdrawals, but place limits on other types of withdrawals and transfers. </li>
<li>MMAs on average tend to offer higher interest rates than traditional savings accounts, but often require higher minimum daily balances.</li>
<li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings account rates</a> may beat the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">best money market account rates</a>.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-a-short-history-of-money-market-accounts"></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"> A Short History of Money Market Accounts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Banks created hybrid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market accounts (MMAs)</a> to offer more competitive interest rates than those offered by traditional <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings accounts</a>. But that doesn't come without a cost. The tradeoff for higher rates is often a higher minimum deposit requirement.
</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"> With many MMAs, the account has to maintain a minimum daily balance (typically $1,000 and up) to receive the highest available interest rate. Many MMAs have tiered savings levels that offer higher interest rates for higher levels of savings.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> MMAs became popular during the 1980s, when interest rates rose into the double digits, giving depositors an opportunity to generate high, risk-free returns. Deposits for MMAs are often invested in vehicles such as <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>, government securities, and <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> that offer higher yields than are generally found in savings accounts.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<span class="heading-toc" id="toc-checking-or-savings"></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"> Checking or Savings? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> There tends to be some confusion about what a money market account actually is. An MMA is neither a checking nor a savings account. But it does have certain characteristics that are similar to both. Money market accounts usually offer higher yields than traditional savings accounts.
</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"> They are able to offer a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">more attractive interest rate</a> by setting higher minimum balance requirements, and through possible restrictions on the number of withdrawals that can be made over a given period of time.
</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"> Prior to April 24, 2020, as stipulated by the Federal Reserve's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/this-government-regulation-restricts-how-often-you-can-move-money-out-of-your-savings-account-4589978">Regulation D</a>, MMA and savings account holders were limited to six withdrawals or transfers per month.<span class="ql-inline-citation" data-cite="2"></span> If more than six withdrawals were made, an account could be charged a penalty. This limitation has been removed, but some banks still place limits on withdrawals and charge fees if you go over the number of transactions allowed.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The purpose of Regulation D in limiting withdrawal transactions was to help banks meet their reserve requirements.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div>
<span class="heading-toc" id="toc-similarities-to-checking-accounts"></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"> Similarities to Checking Accounts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> MMAs are deposit accounts insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp. (FDIC)</a>.<span class="ql-inline-citation" data-cite="4"></span> They are offered by banks, credit unions, and other financial institutions like those that operate online. An MMA has several benefits that resemble a checking 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"> For example, many money market accounts offer debit cards and checks. This allows account holders to make cash withdrawals or purchases at retailers using the card. If the institution offers online banking privileges, customers can also make transfers and pay bills the same way they would with a checking account.<span class="ql-inline-citation" data-cite="6"></span> And many MMAs allow unlimited ATM withdrawals and in-person debits at a bank branch. But the number of other types of withdrawals you're allowed every month may be limited.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_28-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">Comparison of Checking, Savings, and Money Market Accounts</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td></td>
<td><b> Checking Account</b></td>
<td><b>Savings Account</b> </td>
<td><b>Money Market Account</b> </td>
</tr>
<tr>
<td><b>Federally Insured Deposit Account</b></td>
<td>Yes</td>
<td>Yes</td>
<td>Yes</td>
</tr>
<tr>
<td><b>Withdrawals, Transfers Allowed</b></td>
<td> Yes</td>
<td>Yes, but their number may be limited</td>
<td>Yes, but their number may be limited</td>
</tr>
<tr>
<td><b>Allows Debit-Card Transactions</b></td>
<td> Yes</td>
<td>Sometimes</td>
<td>Sometimes</td>
</tr>
<tr>
<td><b>Minimum Daily Balance Requirement</b></td>
<td>Sometimes</td>
<td>Sometimes</td>
<td>Often</td>
</tr>
<tr>
<td><b>Interest Rate Paid</b></td>
<td>Sometimes, but rates are the lowest of the three kinds of accounts</td>
<td>Yes, but lower rates than money markets usually</td>
<td>Yes, typically higher than a regular savings account</td>
</tr>
</tbody>
</table>
</div></figure>
<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-savings-element"></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"> Savings Element </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> While it has some elements of a checking account, the main point of an MMA is the savings portion. This means the account balance earns interest, and the interest rate paid is usually higher than what a traditional savings account earns.<span class="ql-inline-citation" data-cite="6"></span> Many <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">MMAs offer interest based</a> on a tiered balance; lower balances get a lower rate, while higher balances are rewarded with more interest.
</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"> Institutions can justify the higher interest rate by setting a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-balance.asp">minimum balance</a> requirement. If your balance goes below this amount, the bank may be able to cut the high interest rate down. Banks can also charge fees for not meeting the minimum balance.<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_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_3-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>While MMAs in general offer higher rates than traditional savings accounts, that relationship is often flipped if you're looking at the very highest rates available. Investopedia's research shows 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">top high-yield savings account rates</a> often beat out the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">top MMA rates</a>.</p></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_37-0"> <div class="figure-media">
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<img alt="How Do Money Market Accounts Work?" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/yZWjzDupCgTv2snMMFmmEPnCJVA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/are-money-market-accounts-considered-checking-or-savings.asp-final-cdfb86cadd614436badd72168a285667.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/yZWjzDupCgTv2snMMFmmEPnCJVA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/are-money-market-accounts-considered-checking-or-savings.asp-final-cdfb86cadd614436badd72168a285667.png" data-srcset="https://www.investopedia.com/thmb/lFVQmPfNsMPeNy2iyxj43OCHYg8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/are-money-market-accounts-considered-checking-or-savings.asp-final-cdfb86cadd614436badd72168a285667.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Zoe Hansen</p></span>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-can-you-lose-money-in-a-money-market-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Lose Money in a Money Market Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can't lose money in your money market account unless you deposit more than the federally insured amount of $250,000 and the institution fails. Money market accounts at banks are insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp. (FDIC)</a> and by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua.asp">National Credit Union Administration (NCUA)</a>, if the account is at a credit union.<span class="ql-inline-citation" data-cite="4"></span><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_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-is-it-worth-it-to-put-money-in-a-money-market-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is It Worth It To Put Money in a Money Market Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Whether it's worth putting money into a money market account <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012615/why-would-you-keep-funds-money-market-account-and-not-savings-account.asp">depends on the needs of each individual</a>. A money market account may come with a higher interest rate than a traditional savings account, allowing the account holder to earn more money on their deposits. Money market accounts have easier access than traditional savings accounts and are also protected by either the FDIC or NCUA.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="5"></span> But money market accounts do tend have higher minimum balance requirements that need to be maintained.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-is-the-difference-between-a-cd-and-a-money-market-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between a CD and a Money Market Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A money market account offers the benefits of both a checking account and a savings account: easy access to funds and higher interest earned on deposits. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificate of deposit (CD)</a>, on the other hand, ties up cash for a certain period of time, making the money inaccessible to the account holder.</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"> Money market accounts are suitable for people who can meet minimum balance requirements that might be higher than a traditional savings account requires, in return for a higher interest rate on their savings when compared with traditional savings accounts. Money market accounts usually allow account holders to make withdrawals and transfers, and may allow debit-card transactions and online bill pay like regular checking accounts. But be aware that there may be limits on how frequently you can make withdrawals or transfers from a money market account.
</p></div> | A money market account (MMA) is a neither a checking nor a savings account, but as a hybrid of the two it has certain similar characteristics of both. It lets account holders make withdrawals, transfers, and debit-card transactions as they would with a regular checking account, while often offering higher interest rates than traditional savings accounts.
Find out more about what money market accounts are and how they work.
### Key Takeaways
* A money market account is neither a checking nor a savings account but has certain characteristics similar to both.
* Like regular checking accounts, money market accounts allow account holders to make withdrawals and transfers, and write checks. They may also allow debit-card transactions and online bill pay.
* Many MMAs offer unlimited ATM withdrawals, but place limits on other types of withdrawals and transfers.
* MMAs on average tend to offer higher interest rates than traditional savings accounts, but often require higher minimum daily balances.
* The [best high-yield savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) may beat the [best money market account rates](https://www.investopedia.com/best-money-market-accounts-5096917).
## A Short History of Money Market Accounts
Banks created hybrid [money market accounts (MMAs)](https://www.investopedia.com/terms/m/moneymarketaccount.asp) to offer more competitive interest rates than those offered by traditional [savings accounts](https://www.investopedia.com/terms/s/savingsaccount.asp). But that doesn't come without a cost. The tradeoff for higher rates is often a higher minimum deposit requirement.
With many MMAs, the account has to maintain a minimum daily balance (typically $1,000 and up) to receive the highest available interest rate. Many MMAs have tiered savings levels that offer higher interest rates for higher levels of savings.
MMAs became popular during the 1980s, when interest rates rose into the double digits, giving depositors an opportunity to generate high, risk-free returns. Deposits for MMAs are often invested in vehicles such as [certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp), government securities, and [commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp) that offer higher yields than are generally found in savings accounts.
## Checking or Savings?
There tends to be some confusion about what a money market account actually is. An MMA is neither a checking nor a savings account. But it does have certain characteristics that are similar to both. Money market accounts usually offer higher yields than traditional savings accounts.
They are able to offer a [more attractive interest rate](https://www.investopedia.com/best-money-market-accounts-5096917) by setting higher minimum balance requirements, and through possible restrictions on the number of withdrawals that can be made over a given period of time.
Prior to April 24, 2020, as stipulated by the Federal Reserve's [Regulation D](https://www.investopedia.com/this-government-regulation-restricts-how-often-you-can-move-money-out-of-your-savings-account-4589978), MMA and savings account holders were limited to six withdrawals or transfers per month. If more than six withdrawals were made, an account could be charged a penalty. This limitation has been removed, but some banks still place limits on withdrawals and charge fees if you go over the number of transactions allowed.
### Note
The purpose of Regulation D in limiting withdrawal transactions was to help banks meet their reserve requirements.
## Similarities to Checking Accounts
MMAs are deposit accounts insured by the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). They are offered by banks, credit unions, and other financial institutions like those that operate online. An MMA has several benefits that resemble a checking account.
For example, many money market accounts offer debit cards and checks. This allows account holders to make cash withdrawals or purchases at retailers using the card. If the institution offers online banking privileges, customers can also make transfers and pay bills the same way they would with a checking account. And many MMAs allow unlimited ATM withdrawals and in-person debits at a bank branch. But the number of other types of withdrawals you're allowed every month may be limited.
| Comparison of Checking, Savings, and Money Market Accounts | | | |
| --- | --- | --- | --- |
| | **Checking Account** | **Savings Account** | **Money Market Account** |
| **Federally Insured Deposit Account** | Yes | Yes | Yes |
| **Withdrawals, Transfers Allowed** | Yes | Yes, but their number may be limited | Yes, but their number may be limited |
| **Allows Debit-Card Transactions** | Yes | Sometimes | Sometimes |
| **Minimum Daily Balance Requirement** | Sometimes | Sometimes | Often |
| **Interest Rate Paid** | Sometimes, but rates are the lowest of the three kinds of accounts | Yes, but lower rates than money markets usually | Yes, typically higher than a regular savings account |
## Savings Element
While it has some elements of a checking account, the main point of an MMA is the savings portion. This means the account balance earns interest, and the interest rate paid is usually higher than what a traditional savings account earns. Many [MMAs offer interest based](https://www.investopedia.com/articles/personal-finance/042716/money-market-account-vs-highinterest-checking-account-which-better.asp) on a tiered balance; lower balances get a lower rate, while higher balances are rewarded with more interest.
Institutions can justify the higher interest rate by setting a [minimum balance](https://www.investopedia.com/terms/m/minimum-balance.asp) requirement. If your balance goes below this amount, the bank may be able to cut the high interest rate down. Banks can also charge fees for not meeting the minimum balance.
### Tip
While MMAs in general offer higher rates than traditional savings accounts, that relationship is often flipped if you're looking at the very highest rates available. Investopedia's research shows the [top high-yield savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) often beat out the [top MMA rates](https://www.investopedia.com/best-money-market-accounts-5096917).
![How Do Money Market Accounts Work?]()
:max_bytes(150000):strip_icc()/are-money-market-accounts-considered-checking-or-savings.asp-final-cdfb86cadd614436badd72168a285667.png)
Investopedia / Zoe Hansen
## Can You Lose Money in a Money Market Account?
You can't lose money in your money market account unless you deposit more than the federally insured amount of $250,000 and the institution fails. Money market accounts at banks are insured by the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) and by the [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp), if the account is at a credit union.
## Is It Worth It To Put Money in a Money Market Account?
Whether it's worth putting money into a money market account [depends on the needs of each individual](https://www.investopedia.com/ask/answers/012615/why-would-you-keep-funds-money-market-account-and-not-savings-account.asp). A money market account may come with a higher interest rate than a traditional savings account, allowing the account holder to earn more money on their deposits. Money market accounts have easier access than traditional savings accounts and are also protected by either the FDIC or NCUA. But money market accounts do tend have higher minimum balance requirements that need to be maintained.
## What Is the Difference Between a CD and a Money Market Account?
A money market account offers the benefits of both a checking account and a savings account: easy access to funds and higher interest earned on deposits. A [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp), on the other hand, ties up cash for a certain period of time, making the money inaccessible to the account holder.
## The Bottom Line
Money market accounts are suitable for people who can meet minimum balance requirements that might be higher than a traditional savings account requires, in return for a higher interest rate on their savings when compared with traditional savings accounts. Money market accounts usually allow account holders to make withdrawals and transfers, and may allow debit-card transactions and online bill pay like regular checking accounts. But be aware that there may be limits on how frequently you can make withdrawals or transfers from a money market account.
| A money market account (MMA) is a neither a checking nor a savings account, but as a hybrid of the two it has certain similar characteristics of both. It lets account holders make withdrawals, transfers, and debit-card transactions as they would with a regular checking account, while often offering higher interest rates than traditional savings accounts.
Find out more about what money market accounts are and how they work.
Key Takeaways
A money market account is neither a checking nor a savings account but has certain characteristics similar to both.
Like regular checking accounts, money market accounts allow account holders to make withdrawals and transfers, and write checks. They may also allow debit-card transactions and online bill pay.
Many MMAs offer unlimited ATM withdrawals, but place limits on other types of withdrawals and transfers.
MMAs on average tend to offer higher interest rates than traditional savings accounts, but often require higher minimum daily balances.
The best high-yield savings account rates may beat the best money market account rates.
A Short History of Money Market Accounts
Banks created hybrid money market accounts (MMAs) to offer more competitive interest rates than those offered by traditional savings accounts. But that doesn't come without a cost. The tradeoff for higher rates is often a higher minimum deposit requirement.
With many MMAs, the account has to maintain a minimum daily balance (typically $1,000 and up) to receive the highest available interest rate. Many MMAs have tiered savings levels that offer higher interest rates for higher levels of savings.
MMAs became popular during the 1980s, when interest rates rose into the double digits, giving depositors an opportunity to generate high, risk-free returns. Deposits for MMAs are often invested in vehicles such as certificates of deposit (CDs), government securities, and commercial paper that offer higher yields than are generally found in savings accounts.
Checking or Savings?
There tends to be some confusion about what a money market account actually is. An MMA is neither a checking nor a savings account. But it does have certain characteristics that are similar to both. Money market accounts usually offer higher yields than traditional savings accounts.
They are able to offer a more attractive interest rate by setting higher minimum balance requirements, and through possible restrictions on the number of withdrawals that can be made over a given period of time.
Prior to April 24, 2020, as stipulated by the Federal Reserve's Regulation D, MMA and savings account holders were limited to six withdrawals or transfers per month. If more than six withdrawals were made, an account could be charged a penalty. This limitation has been removed, but some banks still place limits on withdrawals and charge fees if you go over the number of transactions allowed.
Note
The purpose of Regulation D in limiting withdrawal transactions was to help banks meet their reserve requirements.
Similarities to Checking Accounts
MMAs are deposit accounts insured by the Federal Deposit Insurance Corp. (FDIC). They are offered by banks, credit unions, and other financial institutions like those that operate online. An MMA has several benefits that resemble a checking account.
For example, many money market accounts offer debit cards and checks. This allows account holders to make cash withdrawals or purchases at retailers using the card. If the institution offers online banking privileges, customers can also make transfers and pay bills the same way they would with a checking account. And many MMAs allow unlimited ATM withdrawals and in-person debits at a bank branch. But the number of other types of withdrawals you're allowed every month may be limited.
Comparison of Checking, Savings, and Money Market Accounts
Checking Account
Savings Account
Money Market Account
Federally Insured Deposit Account
Yes
Yes
Yes
Withdrawals, Transfers Allowed
Yes
Yes, but their number may be limited
Yes, but their number may be limited
Allows Debit-Card Transactions
Yes
Sometimes
Sometimes
Minimum Daily Balance Requirement
Sometimes
Sometimes
Often
Interest Rate Paid
Sometimes, but rates are the lowest of the three kinds of accounts
Yes, but lower rates than money markets usually
Yes, typically higher than a regular savings account
Savings Element
While it has some elements of a checking account, the main point of an MMA is the savings portion. This means the account balance earns interest, and the interest rate paid is usually higher than what a traditional savings account earns. Many MMAs offer interest based on a tiered balance; lower balances get a lower rate, while higher balances are rewarded with more interest.
Institutions can justify the higher interest rate by setting a minimum balance requirement. If your balance goes below this amount, the bank may be able to cut the high interest rate down. Banks can also charge fees for not meeting the minimum balance.
Tip
While MMAs in general offer higher rates than traditional savings accounts, that relationship is often flipped if you're looking at the very highest rates available. Investopedia's research shows the top high-yield savings account rates often beat out the top MMA rates.
Investopedia / Zoe Hansen
Can You Lose Money in a Money Market Account?
You can't lose money in your money market account unless you deposit more than the federally insured amount of $250,000 and the institution fails. Money market accounts at banks are insured by the Federal Deposit Insurance Corp. (FDIC) and by the National Credit Union Administration (NCUA), if the account is at a credit union.
Is It Worth It To Put Money in a Money Market Account?
Whether it's worth putting money into a money market account depends on the needs of each individual. A money market account may come with a higher interest rate than a traditional savings account, allowing the account holder to earn more money on their deposits. Money market accounts have easier access than traditional savings accounts and are also protected by either the FDIC or NCUA. But money market accounts do tend have higher minimum balance requirements that need to be maintained.
What Is the Difference Between a CD and a Money Market Account?
A money market account offers the benefits of both a checking account and a savings account: easy access to funds and higher interest earned on deposits. A certificate of deposit (CD), on the other hand, ties up cash for a certain period of time, making the money inaccessible to the account holder.
The Bottom Line
Money market accounts are suitable for people who can meet minimum balance requirements that might be higher than a traditional savings account requires, in return for a higher interest rate on their savings when compared with traditional savings accounts. Money market accounts usually allow account holders to make withdrawals and transfers, and may allow debit-card transactions and online bill pay like regular checking accounts. But be aware that there may be limits on how frequently you can make withdrawals or transfers from a money market account.
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https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp | The S&P 500: The Index You Need to Know | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you had to use a single financial barometer to indicate the strength of the economy, what would it be? 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> is paramount among indexes and the daily de facto numerical indicator of the U.S. economy. Even though the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average (DJIA)</a> is the best-known and most-quoted stock index in the world, it’s so selective as to be misleading. Comprised of only 30 stocks, the Dow is less representative of the economy as a whole than the S&P 500.<span class="ql-inline-citation" data-cite="1"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The S&P 500 is an equity index made up of 500 of the largest companies traded on either the NYSE, Nasdaq, or CBOE.<span class="ql-inline-citation" data-cite="3"></span><br/></li><li>The S&P 500 is calculated by adding each company's float-adjusted market capitalization.<span class="ql-inline-citation" data-cite="15"></span></li><li>In order to be included in the S&P 500, a company must meet certain requirements, including achieving a specific market cap (at least $14.5 billion), having a majority of its shares in public hands, and being a public company for at least a year.<span class="ql-inline-citation" data-cite="4"></span><br/></li><li>Investors who want to invest in the S&P 500 index can purchase an index fund or exchange-traded fund that seeks to match the performance of the S&P 500.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-how-the-sp-500-works"></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 the S&P 500 Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> First, the etymology of the term: S&P stands for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp.asp">Standard and Poor’s</a>. Henry Poor was a 19th-century financial analyst who compiled an annual book that listed <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/publiccompany.asp">publicly held</a> railroad companies. His publication merged with those of the Standard<strong> </strong>Statistics Company in 1941. And 500<strong> </strong>is the number of stocks that comprise the index.<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_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> That’s it. The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">New York Stock Exchange (NYSE)</a>, Nasdaq, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cboe.asp">Chicago Board Options Exchange (CBOE)</a>. Like popes and Oscar winners, the components of the S&P 500 are selected by a committee. And, like the College of Cardinals and the Academy of Motion Picture Arts & Sciences, the S&P 500 committee operates within specific criteria. To qualify for the index, a company must have:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0">
<li>A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market cap</a> of a certain size</li>
<li>The value of its market <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalization.asp">capitalization</a> traded annually</li>
<li>At least a quarter-million of its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/how-can-i-buy-sp-500-fund/">shares</a> traded in each of the previous six months</li>
<li>Most of its shares in the public’s hands</li>
<li>Had its <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering (IPO)</a> at least one year earlier</li>
<li>Have a positive sum of the previous four quarters of earnings, as well as the most recent quarter<span class="ql-inline-citation" data-cite="24"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Between them, the NYSE, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq</a>, and CBOE list several thousand companies. But the first criterion alone reduces that number to less than a thousand. Add a few more <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a>, and it’s easy to see how the S&P can get down to 500 large-cap stocks suitable for inclusion.<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_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 with-title" id="mntl-sc-block-callout-heading_2-0">$14.5 billion</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The minimum market cap a company must have to be included in the S&P 500 index.<span class="ql-inline-citation" data-cite="4"></span></p><p><br/></p></div></div></div>
<span class="heading-toc" id="toc-how-the-sp-500-is-calculated"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> How the S&P 500 Is Calculated </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Unlike the Dow, which you calculate by just adding up the prices of the component stocks and multiplying by a constant, the S&P 500 is more complex. Several factors influence the index's value besides a company's share price. Instead of adding the constituents' stock prices, the S&P 500 adds the companies’ <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freefloatmethodology.asp">float-adjusted market capitalization</a>. Also, the index does <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040915/does-sp-500-index-include-dividends.asp">not include gains from cash dividends</a> paid by the companies that comprise the index.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Float-adjusted means counting only the shares available to the public, excluding those held by management, governments, and other companies. There are hundreds of ostensibly publicly traded companies that keep most of their shares <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/in-house.asp">in-house</a>.<span class="ql-inline-citation" data-cite="15"></span>
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<span class="heading-toc" id="toc-stocks-removed-from-the-sp-500"></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"> Stocks Removed From the S&P 500 </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> With so many components and such stringent criteria, the S&P 500 is dynamic. S&P Dow Jones Indices, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subsidiary.asp">subsidiary</a> of S&P Global that determines the components of the index, has little patience for slackers.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Case in point: United States Steel (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=x">X</a>), one of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stalwart.asp">stalwarts</a> of the 20th-century industry, was listed on the S&P 500 since its inception. In fact, at one point, the company was the largest company in the world. When it fell below the $4 billion threshold in 2013, the index gave it the boot and made room for Martin Marietta Materials (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=mlm">MLM</a>), a construction aggregate producer.<span class="ql-inline-citation" data-cite="17"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Only on <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> does the Iron Age give way to the Stone Age.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_29-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The S&P 500's most recent rebalancing was announced on Sep. 1, 2023, and took effect before markets opened on Sept. 18, 2023. Blackstone Inc. and Airbnb Inc. replaced Lincoln National Corp. and Newell Brands Inc., respectively.<span class="ql-inline-citation" data-cite="27"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> But even technologically adept companies have to meet the S&P 500’s list of requirements. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/turnover.asp">Turnover</a> in the S&P 500 has been lower than you might think, but the length of time companies stay on the list is shrinking.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> According to a study by McKinsey, the average lifespan of a company on the S&P 500 was 61 years in 1958. As of 2021, it was 16 years. The study also states that by 2027, 75% of the companies currently listed on the index will disappear.<span class="ql-inline-citation" data-cite="21"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Sometimes a company buys a company it replaces on the index or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spinning.asp">spins</a> off a large chunk of itself. Other companies leave the list when they can no longer reach the market cap requirement. Typically, when that happens, the company is relegated to the index from which its replacement was promoted.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Is there a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/survivorshipbias.asp">survivorship bias</a> here? Sure, but there’s also a survivorship bias in the economy at large. The remaining stocks flourish by virtue of remaining. One study even claims that over the decades, stocks removed from the S&P 500 have ended up outperforming their replacements.<span class="ql-inline-citation" data-cite="18"></span>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-who-keeps-track-of-the-sp-500-constituents"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Keeps Track of the S&P 500 Constituents?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The S&P Dow Jones Indices, a subsidiary of S&P Global determines which companies get added to the index. It sets the requirements and monitors the constituents' adherence to those requirements.<span class="ql-inline-citation" data-cite="25"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-how-does-a-company-get-added-to-the-sp-500"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a Company Get Added to the S&P 500?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least $14.5 billion, be highly liquid, and have a public float of at least 10% of its shares outstanding. The company must also be profitable in its most recent quarter’s earnings, and the sum of its trailing four consecutive quarters’ earnings must be positive.<span class="ql-inline-citation" data-cite="4"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-does-the-sp-500-lnclude-nasdaq-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the S&P 500 lnclude Nasdaq Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, the S&P 500 is composed of 500 of the largest companies traded on the NYSE, Nasdaq, and CBOE.<span class="ql-inline-citation" data-cite="26"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-are-the-10-biggest-stocks-in-the-sp-500"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the 10 Biggest Stocks in the S&P 500?</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/top-10-s-and-p-500-stocks-by-index-weight-4843111">10 largest components of the S&P 500</a>, as of Aug. 31, 2023, are:</p><ul><li>Apple (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>)</li><li>Microsoft (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>)</li><li>Amazon (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>)</li><li>Nvidia (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>)</li><li>Alphabet Class A (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>)</li><li>Alphabet Class C (<a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG">GOOG</a>)</li><li>Tesla (<a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>)</li><li>Meta Class A (<a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=META">META</a>)</li><li>Berkshire Hathaway Class B (<a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B">BRK.B</a>)<br/></li><li>Exxon Mobil (<a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM">XOM</a>)<span class="ql-inline-citation" data-cite="16"></span><br/></li></ul></div>
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<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-just-invest-in-the-sp-500"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Just Invest in the S&P 500?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If you want to invest in the S&P 500 as a whole, you don't need to purchase all 500 stocks individually. Several <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> 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> are available to investors. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp">These funds are designed</a> to track the performance of the S&P 500 index.</p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> For the most part, the S&P 500 doesn’t convey information that differs drastically from comparable indices (or vice versa). It broadly matches the more exclusive Dow and the more inclusive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell_1000index.asp">Russell 1000</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Even so, the S&P 500 represents a happy medium of sorts: comprehensive enough to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp">indicate the relative strength or weakness</a> of the larger economy but not so exhaustive as to include too much noise with the signal. Overall, the S&P 500 is the index of indices—the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bellwether.asp">bellwether</a> adopted by analysts, policymakers, and ordinary market participants alike.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> <em><strong>Correction—Nov. 16, 2023</strong>: </em>This article has been corrected to state that the S&P 500 is comparable to the Russell 1000 index.<br/>
</p></div> | If you had to use a single financial barometer to indicate the strength of the economy, what would it be? The [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) is paramount among indexes and the daily de facto numerical indicator of the U.S. economy. Even though the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) is the best-known and most-quoted stock index in the world, it’s so selective as to be misleading. Comprised of only 30 stocks, the Dow is less representative of the economy as a whole than the S&P 500.
### Key Takeaways
* The S&P 500 is an equity index made up of 500 of the largest companies traded on either the NYSE, Nasdaq, or CBOE.
* The S&P 500 is calculated by adding each company's float-adjusted market capitalization.
* In order to be included in the S&P 500, a company must meet certain requirements, including achieving a specific market cap (at least $14.5 billion), having a majority of its shares in public hands, and being a public company for at least a year.
* Investors who want to invest in the S&P 500 index can purchase an index fund or exchange-traded fund that seeks to match the performance of the S&P 500.
## How the S&P 500 Works
First, the etymology of the term: S&P stands for [Standard and Poor’s](https://www.investopedia.com/terms/s/sp.asp). Henry Poor was a 19th-century financial analyst who compiled an annual book that listed [publicly held](https://www.investopedia.com/terms/p/publiccompany.asp) railroad companies. His publication merged with those of the StandardStatistics Company in 1941. And 500is the number of stocks that comprise the index.
That’s it. The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on the [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp), Nasdaq, or [Chicago Board Options Exchange (CBOE)](https://www.investopedia.com/terms/c/cboe.asp). Like popes and Oscar winners, the components of the S&P 500 are selected by a committee. And, like the College of Cardinals and the Academy of Motion Picture Arts & Sciences, the S&P 500 committee operates within specific criteria. To qualify for the index, a company must have:
* A [market cap](https://www.investopedia.com/terms/m/marketcapitalization.asp) of a certain size
* The value of its market [capitalization](https://www.investopedia.com/terms/c/capitalization.asp) traded annually
* At least a quarter-million of its [shares](https://www.investopedia.com/ask/answers/how-can-i-buy-sp-500-fund/) traded in each of the previous six months
* Most of its shares in the public’s hands
* Had its [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) at least one year earlier
* Have a positive sum of the previous four quarters of earnings, as well as the most recent quarter
Between them, the NYSE, [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp), and CBOE list several thousand companies. But the first criterion alone reduces that number to less than a thousand. Add a few more [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp), and it’s easy to see how the S&P can get down to 500 large-cap stocks suitable for inclusion.
### $14.5 billion
The minimum market cap a company must have to be included in the S&P 500 index.
## How the S&P 500 Is Calculated
Unlike the Dow, which you calculate by just adding up the prices of the component stocks and multiplying by a constant, the S&P 500 is more complex. Several factors influence the index's value besides a company's share price. Instead of adding the constituents' stock prices, the S&P 500 adds the companies’ [float-adjusted market capitalization](https://www.investopedia.com/terms/f/freefloatmethodology.asp). Also, the index does [not include gains from cash dividends](https://www.investopedia.com/ask/answers/040915/does-sp-500-index-include-dividends.asp) paid by the companies that comprise the index.
Float-adjusted means counting only the shares available to the public, excluding those held by management, governments, and other companies. There are hundreds of ostensibly publicly traded companies that keep most of their shares [in-house](https://www.investopedia.com/terms/i/in-house.asp).
## Stocks Removed From the S&P 500
With so many components and such stringent criteria, the S&P 500 is dynamic. S&P Dow Jones Indices, the [subsidiary](https://www.investopedia.com/terms/s/subsidiary.asp) of S&P Global that determines the components of the index, has little patience for slackers.
Case in point: United States Steel ([X](https://www.investopedia.com/markets/quote?tvwidgetsymbol=x)), one of the [stalwarts](https://www.investopedia.com/terms/s/stalwart.asp) of the 20th-century industry, was listed on the S&P 500 since its inception. In fact, at one point, the company was the largest company in the world. When it fell below the $4 billion threshold in 2013, the index gave it the boot and made room for Martin Marietta Materials ([MLM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=mlm)), a construction aggregate producer.
Only on [Wall Street](https://www.investopedia.com/terms/w/wallstreet.asp) does the Iron Age give way to the Stone Age.
###
The S&P 500's most recent rebalancing was announced on Sep. 1, 2023, and took effect before markets opened on Sept. 18, 2023. Blackstone Inc. and Airbnb Inc. replaced Lincoln National Corp. and Newell Brands Inc., respectively.
But even technologically adept companies have to meet the S&P 500’s list of requirements. [Turnover](https://www.investopedia.com/terms/t/turnover.asp) in the S&P 500 has been lower than you might think, but the length of time companies stay on the list is shrinking.
According to a study by McKinsey, the average lifespan of a company on the S&P 500 was 61 years in 1958. As of 2021, it was 16 years. The study also states that by 2027, 75% of the companies currently listed on the index will disappear.
Sometimes a company buys a company it replaces on the index or [spins](https://www.investopedia.com/terms/s/spinning.asp) off a large chunk of itself. Other companies leave the list when they can no longer reach the market cap requirement. Typically, when that happens, the company is relegated to the index from which its replacement was promoted.
Is there a [survivorship bias](https://www.investopedia.com/terms/s/survivorshipbias.asp) here? Sure, but there’s also a survivorship bias in the economy at large. The remaining stocks flourish by virtue of remaining. One study even claims that over the decades, stocks removed from the S&P 500 have ended up outperforming their replacements.
## Who Keeps Track of the S&P 500 Constituents?
The S&P Dow Jones Indices, a subsidiary of S&P Global determines which companies get added to the index. It sets the requirements and monitors the constituents' adherence to those requirements.
## How Does a Company Get Added to the S&P 500?
To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least $14.5 billion, be highly liquid, and have a public float of at least 10% of its shares outstanding. The company must also be profitable in its most recent quarter’s earnings, and the sum of its trailing four consecutive quarters’ earnings must be positive.
## Does the S&P 500 lnclude Nasdaq Stocks?
Yes, the S&P 500 is composed of 500 of the largest companies traded on the NYSE, Nasdaq, and CBOE.
## What Are the 10 Biggest Stocks in the S&P 500?
The [10 largest components of the S&P 500](https://www.investopedia.com/top-10-s-and-p-500-stocks-by-index-weight-4843111), as of Aug. 31, 2023, are:
* Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL))
* Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT))
* Amazon ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN))
* Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA))
* Alphabet Class A ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL))
* Alphabet Class C ([GOOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG))
* Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA))
* Meta Class A ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META))
* Berkshire Hathaway Class B ([BRK.B](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B))
* Exxon Mobil ([XOM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM))
## Can You Just Invest in the S&P 500?
If you want to invest in the S&P 500 as a whole, you don't need to purchase all 500 stocks individually. Several [index funds](https://www.investopedia.com/terms/i/indexfund.asp) and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) are available to investors. [These funds are designed](https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp) to track the performance of the S&P 500 index.
## The Bottom Line
For the most part, the S&P 500 doesn’t convey information that differs drastically from comparable indices (or vice versa). It broadly matches the more exclusive Dow and the more inclusive [Russell 1000](https://www.investopedia.com/terms/r/russell_1000index.asp).
Even so, the S&P 500 represents a happy medium of sorts: comprehensive enough to [indicate the relative strength or weakness](https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp) of the larger economy but not so exhaustive as to include too much noise with the signal. Overall, the S&P 500 is the index of indices—the [bellwether](https://www.investopedia.com/terms/b/bellwether.asp) adopted by analysts, policymakers, and ordinary market participants alike.
***Correction—Nov. 16, 2023**:* This article has been corrected to state that the S&P 500 is comparable to the Russell 1000 index.
| If you had to use a single financial barometer to indicate the strength of the economy, what would it be? The S&P 500 is paramount among indexes and the daily de facto numerical indicator of the U.S. economy. Even though the Dow Jones Industrial Average (DJIA) is the best-known and most-quoted stock index in the world, it’s so selective as to be misleading. Comprised of only 30 stocks, the Dow is less representative of the economy as a whole than the S&P 500.
Key Takeaways
The S&P 500 is an equity index made up of 500 of the largest companies traded on either the NYSE, Nasdaq, or CBOE.The S&P 500 is calculated by adding each company's float-adjusted market capitalization.In order to be included in the S&P 500, a company must meet certain requirements, including achieving a specific market cap (at least $14.5 billion), having a majority of its shares in public hands, and being a public company for at least a year.Investors who want to invest in the S&P 500 index can purchase an index fund or exchange-traded fund that seeks to match the performance of the S&P 500.
How the S&P 500 Works
First, the etymology of the term: S&P stands for Standard and Poor’s. Henry Poor was a 19th-century financial analyst who compiled an annual book that listed publicly held railroad companies. His publication merged with those of the Standard Statistics Company in 1941. And 500 is the number of stocks that comprise the index.
That’s it. The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on the New York Stock Exchange (NYSE), Nasdaq, or Chicago Board Options Exchange (CBOE). Like popes and Oscar winners, the components of the S&P 500 are selected by a committee. And, like the College of Cardinals and the Academy of Motion Picture Arts & Sciences, the S&P 500 committee operates within specific criteria. To qualify for the index, a company must have:
A market cap of a certain size
The value of its market capitalization traded annually
At least a quarter-million of its shares traded in each of the previous six months
Most of its shares in the public’s hands
Had its initial public offering (IPO) at least one year earlier
Have a positive sum of the previous four quarters of earnings, as well as the most recent quarter
Between them, the NYSE, Nasdaq, and CBOE list several thousand companies. But the first criterion alone reduces that number to less than a thousand. Add a few more benchmarks, and it’s easy to see how the S&P can get down to 500 large-cap stocks suitable for inclusion.
$14.5 billion
The minimum market cap a company must have to be included in the S&P 500 index.
How the S&P 500 Is Calculated
Unlike the Dow, which you calculate by just adding up the prices of the component stocks and multiplying by a constant, the S&P 500 is more complex. Several factors influence the index's value besides a company's share price. Instead of adding the constituents' stock prices, the S&P 500 adds the companies’ float-adjusted market capitalization. Also, the index does not include gains from cash dividends paid by the companies that comprise the index.
Float-adjusted means counting only the shares available to the public, excluding those held by management, governments, and other companies. There are hundreds of ostensibly publicly traded companies that keep most of their shares in-house.
Stocks Removed From the S&P 500
With so many components and such stringent criteria, the S&P 500 is dynamic. S&P Dow Jones Indices, the subsidiary of S&P Global that determines the components of the index, has little patience for slackers.
Case in point: United States Steel (X), one of the stalwarts of the 20th-century industry, was listed on the S&P 500 since its inception. In fact, at one point, the company was the largest company in the world. When it fell below the $4 billion threshold in 2013, the index gave it the boot and made room for Martin Marietta Materials (MLM), a construction aggregate producer.
Only on Wall Street does the Iron Age give way to the Stone Age.
The S&P 500's most recent rebalancing was announced on Sep. 1, 2023, and took effect before markets opened on Sept. 18, 2023. Blackstone Inc. and Airbnb Inc. replaced Lincoln National Corp. and Newell Brands Inc., respectively.
But even technologically adept companies have to meet the S&P 500’s list of requirements. Turnover in the S&P 500 has been lower than you might think, but the length of time companies stay on the list is shrinking.
According to a study by McKinsey, the average lifespan of a company on the S&P 500 was 61 years in 1958. As of 2021, it was 16 years. The study also states that by 2027, 75% of the companies currently listed on the index will disappear.
Sometimes a company buys a company it replaces on the index or spins off a large chunk of itself. Other companies leave the list when they can no longer reach the market cap requirement. Typically, when that happens, the company is relegated to the index from which its replacement was promoted.
Is there a survivorship bias here? Sure, but there’s also a survivorship bias in the economy at large. The remaining stocks flourish by virtue of remaining. One study even claims that over the decades, stocks removed from the S&P 500 have ended up outperforming their replacements.
Who Keeps Track of the S&P 500 Constituents?
The S&P Dow Jones Indices, a subsidiary of S&P Global determines which companies get added to the index. It sets the requirements and monitors the constituents' adherence to those requirements.
How Does a Company Get Added to the S&P 500?
To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least $14.5 billion, be highly liquid, and have a public float of at least 10% of its shares outstanding. The company must also be profitable in its most recent quarter’s earnings, and the sum of its trailing four consecutive quarters’ earnings must be positive.
Does the S&P 500 lnclude Nasdaq Stocks?
Yes, the S&P 500 is composed of 500 of the largest companies traded on the NYSE, Nasdaq, and CBOE.
What Are the 10 Biggest Stocks in the S&P 500?
The 10 largest components of the S&P 500, as of Aug. 31, 2023, are:Apple (AAPL)Microsoft (MSFT)Amazon (AMZN)Nvidia (NVDA)Alphabet Class A (GOOGL)Alphabet Class C (GOOG)Tesla (TSLA)Meta Class A (META)Berkshire Hathaway Class B (BRK.B)Exxon Mobil (XOM)
Can You Just Invest in the S&P 500?
If you want to invest in the S&P 500 as a whole, you don't need to purchase all 500 stocks individually. Several index funds and exchange-traded funds (ETFs) are available to investors. These funds are designed to track the performance of the S&P 500 index.
The Bottom Line
For the most part, the S&P 500 doesn’t convey information that differs drastically from comparable indices (or vice versa). It broadly matches the more exclusive Dow and the more inclusive Russell 1000.
Even so, the S&P 500 represents a happy medium of sorts: comprehensive enough to indicate the relative strength or weakness of the larger economy but not so exhaustive as to include too much noise with the signal. Overall, the S&P 500 is the index of indices—the bellwether adopted by analysts, policymakers, and ordinary market participants alike.
Correction—Nov. 16, 2023: This article has been corrected to state that the S&P 500 is comparable to the Russell 1000 index.
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https://www.investopedia.com/how-do-credit-cards-work-5025119 | How Do Credit Cards Work? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> When you need to make a purchase or pay a bill, credit cards can offer both convenience and the potential to save money if you’re earning back some of what you spend in rewards. At the same time, you can also use credit cards to build credit history through healthy financial habits.
</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"> While <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">credit cards</a> and debit cards may look similar, they work very differently. If you’re new to using credit, here are a few important credit card facts 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>Credit cards have a credit limit that you can make purchases against, then repay at a later date.</li><li>Carrying a balance on a credit card can trigger interest charges. </li><li>It’s important to read the fine print closely on credit card promotional offers.</li><li>Some credit cards allow you to earn rewards on purchases in the form of points, miles, or cash back.</li></ul></div></div></div>
<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_7-0"> <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_8-0"> A credit card is a physical card that can be used to make purchases, pay bills, or, depending on the card, withdraw cash. The simplest way to think of a credit card is as a type of short-term loan.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> When you open a credit card account, your credit card company gives you a set <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_limit.asp">credit limit</a>. This is essentially an amount of money that the credit card company allows you to use to make purchases or pay bills. Your available credit is reduced as you charge things to the card. You then pay back what you spent from your credit limit to the credit card company.
</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>Credit cards can be secured or unsecured. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">secured credit card</a> requires a cash deposit to open, which typically doubles as your credit limit.</p></div></div></div>
<span class="heading-toc" id="toc-how-credit-cards-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> How Credit Cards Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Credit cards can be used to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">make purchases online</a> or in stores and pay bills. When you use a credit card for either one, your card details are sent to the merchant’s bank. The bank then gets authorization from the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp">credit card network</a> to process the transaction. Your card issuer then has to verify your information and either approve or decline the transaction.
</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"> If the transaction is approved, the payment is made to the merchant and your card’s available credit is reduced by the transaction amount. At the end of your billing cycle, your card issuer will send you a statement showing all the transactions for that month, your previous balance and new balance, your minimum payment due, and your due date.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grace-period-credit.asp">grace period</a> is the period of time between the date of a purchase on your card and the due date listed on your statement. During this period, if you pay your bill in full by the due date, no interest charges accrue.
</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"> But if you carry a balance month to month, your card issuer can charge you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>. Your credit card’s <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> reflects the cost of carrying a balance on an annualized basis. Your APR includes both your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-card-interest-rate-5076674">interest rate</a> and other costs, such as an annual fee if your card has one.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Most credit cards have a variable APR that’s tied to 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>. This means that your card’s APR can change over time, though the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-card-accountability-responsibility-and-disclosure-act-of-2009.asp">Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009</a> sets strict guidelines on when credit card companies can and can’t raise your 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_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-warning" 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">Warning</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Being 60 days late on making payments to your credit card can trigger a penalty APR, which can approach the 30% range.</p></div></div></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"> Types of Credit Cards </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> There are several types of credit cards, with the biggest category being <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-a-rewards-credit-card-5071957">rewards cards</a>. Rewards credit cards can include travel-related rewards earned for purchases. You may also earn more <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092215/debit-vs-credit-card-paying-gas.asp">rewards for spending in certain categories</a>. Many reward cards are co-branded with certain airlines or hotels.
</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"> Similar to rewards cards are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-back.asp">cash-back</a> cards, which offer a certain level of cash back (such as 2% or 5%) for spending. Secured credit cards are for those looking to build or rebuild their credit. If your credit profile is thin, you may be able to get a secured card, which requires a security deposit that is held as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a> by the issuer.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Student-focused credit cards also help those with little <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> build credit. These cards are tailored to those in college and may offer little in terms of rewards.
</p>
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<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"> Credit Card Fees </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> With credit cards come various fees—not just the interest rate. Other fees can include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balance-transfer-fee.asp">balance transfer fees</a>, or fees charged for transferring your balance to another card. These fee is usually a percentage of the balance transferred, such as 2%. <br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> There may also be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overlimit-fee.asp">over-limit fees</a>, which are charged if you go over your card’s limit. Of course there are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/late-fee.asp">late fees</a>, which are charged if you don’t make the minimum payment by the due date. Note that if you’re late on a payment, the issuer may also revoke any <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/teaserrate.asp">introductory rate</a> you had.<br/>
</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-credit-cards-vs-debit-cards"></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"> Credit Cards vs. Debit Cards </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> A credit card and a debit card may seem like the same thing, but they’re not. When you make purchases with a credit card, you’re not actually spending any of your own money at that moment. Instead, you’re spending the credit card company’s money, which you then have to pay back, potentially with 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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">Debit cards</a>, on the other hand, are linked to your checking account (they’re not exactly the same as a prepaid card). When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed. There’s nothing to pay back later, since the money has already been taken from 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_43-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Many credit card issuers offer a $0 fraud liability guarantee automatically, meaning that you aren’t responsible for any fraudulent charges made with your card.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Debit and credit cards also differ in terms of their <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> impact. Using a debit card has no impact on your credit score because your bank account activity is not reported to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/top-three-credit-bureaus/">credit bureaus</a>.
</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"> Credit cards, on the other hand, can impact your credit score directly. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ficoscore.asp">FICO Scores</a>, for instance, calculate your scores based on:
</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>Payment history</li><li>Credit usage</li><li>Credit age</li><li>Credit mix</li><li>Inquiries for new credit</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-do-credit-card-payments-work-5069924">Making credit card payments</a> on time can help your score while paying late could hurt it. Similarly, keeping a low balance compared to your credit limit can have a positive impact, while maxing out your card limits can detract from your score. It's best to pay your balance in full each month, but you <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-you-pay-a-credit-card-with-a-credit-card-5070049">can't use another credit card</a> to pay that amount.
</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"> Another key difference between debit cards and credit cards lies in fraud protection. Federal law offers more fraud protections for credit cards than debit cards. This chart highlights your liability for unauthorized transactions with debit and credit cards.
</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>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="2">Debit Cards vs. Credit Cards</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Debit Card Liability</b></td>
<td><b>Credit Card Liability</b></td>
</tr>
<tr>
<td>You’re not responsible for unauthorized transactions if a lost or stolen card is reported before it’s used by someone else. If a lost or stolen card is reported within two business days, your liability is limited to $50. If a lost or stolen card is reported more than two business days later, but less than 60 calendar days after your statement is sent to you, your liability is limited to $500. If a lost or stolen card is reported more than 60 calendar days later, you’re responsible for all unauthorized transactions. If your card isn’t lost but is used to make unauthorized transactions, you’re not liable if they’re reported within 60 days of your statement being sent to you.</td>
<td>Under the <a class="null" 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>, your liability for unauthorized card use is limited to $50. If your credit card number is stolen, but not the card itself, you are not responsible for unauthorized purchases. </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>
<span class="heading-toc" id="toc-pros-and-cons-of-credit-cards"></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"> Pros and Cons of Credit Cards </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> The biggest advantage of using a credit card is the ease of use and safety. If your card is lost or stolen, you will likely be reimbursed for any fraudulent charges. You may also be able to get an 0% introductory rate for a set period (such as 18 months) that will allow you to make a large purchase and pay it off over time without incurring interest charges.<br>
</br></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"> You’ll also get rewards or cash back with most cards, which is a free incentive to use the card. Credit cards can also help boost your credit score if used responsibly.<br>
</br></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"> On the flip side, credit cards can come with high interest rates, which can be expensive if you don’t pay your balance in full monthly. With credit cards, it can also be easier to spend more money than you can reasonably pay off in a short period of time.<br/>
</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"> If your debt spirals and you can’t make minimum payments on your cards, your credit score will take a hit. You will also rack up late fees and likely be subject to an even higher interest rate.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_67-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_68-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Credit Card Pros & Cons</h3>
<div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Ease of use <br/></p></li>
<li><p>Safer than cash <br/></p></li>
<li><p>Rewards and cash back <br/></p></li>
<li><p>Can boost credit score </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>High interest and fees <br/></p></li>
<li><p>Potential debt spiral <br/></p></li>
<li><p>Can hurt credit if payments are missed</p></li>
</ul>
</div>
</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-how-to-compare-credit-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"> How to Compare Credit Cards </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> If you’re in the market for your first credit card or your next credit card, it’s important to do some comparison shopping. Some of the key things to look for when comparing credit cards include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> <li>Regular variable APR for purchases</li><li>APR for balance transfers and cash advances</li><li>Promotional APR terms and conditions</li><li>Annual fees</li><li>Rewards programs</li><li>Introductory bonus offer terms</li>
</ul>
<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"> It’s also helpful to look at the card’s other benefits and features, if any. For example, if you’re interested in opening a travel credit card to earn miles or points toward flights and hotel stays, you may also be interested in finding a card that comes with benefits such as airport lounge access or airline fee credits. If a card has an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0711/credit-cards-should-you-ever-pay-an-annual-fee.aspx">annual fee</a>, it’s helpful to compare the value of rewards and benefits to the fee to decide if it’s worth it.
</p>
<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-why-you-should-use-a-credit-card"></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"> Why You Should Use a Credit Card </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Overall, the pros of having and using a credit card outweigh the cons (for most people). They’ll help you build credit—if used responsibly. Good credit helps lower the interest rates you’ll pay for other loans, such as home or car loans. Credit cards can also help with budgeting, either through the budgeting tools that the issuer offers or by allowing you to track and categorize spending. <br/>
</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"> And of course, credit cards tend to offer rewards or cash back. If you have a high amount of spending, such as on dining out or flights, you can take advantage of cards that offer high rewards rates in those categories. <br/>
</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"> But perhaps one of the biggest reasons to use a credit card (over, say, cash or a debit card) is the fraud protection. If there are fraudulent charges made on your card, or if it’s lost or stolen, you’re protected from fraud liability.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_84-0"><span class="heading-toc" id="toc-what-are-the-main-differences-between-credit-and-debit-cards"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the main differences between credit and debit cards?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You’re essentially borrowing money to make purchases when you use a credit card. Any balance not paid back during the billing month accrues interest that must be paid. Debit cards are linked to a bank account. When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_86-0"><span class="heading-toc" id="toc-how-does-a-credit-card-help-you-build-better-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">How does a credit card help you build better credit?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>When used properly, credit cards will help you build credit history through healthy financial habits. When the balances are paid off monthly, you establish a reputation as a good <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrisk.asp">credit risk</a>. This boosts your credit score, which may make you eligible for lower-interest-rate loans and credit cards, and generally improved financial terms, when borrowing.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_88-0"><span class="heading-toc" id="toc-how-does-a-person-shop-for-credit-cards"></span> <h2 class="mntl-sc-block-questionandanswer__question">How does a person shop for credit cards?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Comparison shopping is how you find the best card for you. Compare things like regular variable annual percentage rate (APR) for purchases; APR for balance transfers and cash advances; promotional APR terms and conditions; annual fees; rewards; and more.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></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_90-0"> <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_91-0"> Credit cards can be a credit-building tool if used responsibly. Paying your bill on time, maintaining a low balance, and only opening credit cards as needed can help you build and maintain good credit. Also, keep in mind that the best way to avoid interest charges and build a strong credit score is by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deadbeat.asp">paying your bill in full each month</a>.<span class="ql-inline-citation" data-cite="2"></span>
</p></div> | When you need to make a purchase or pay a bill, credit cards can offer both convenience and the potential to save money if you’re earning back some of what you spend in rewards. At the same time, you can also use credit cards to build credit history through healthy financial habits.
While [credit cards](https://www.investopedia.com/terms/c/creditcard.asp) and debit cards may look similar, they work very differently. If you’re new to using credit, here are a few important credit card facts to know.
### Key Takeaways
* Credit cards have a credit limit that you can make purchases against, then repay at a later date.
* Carrying a balance on a credit card can trigger interest charges.
* It’s important to read the fine print closely on credit card promotional offers.
* Some credit cards allow you to earn rewards on purchases in the form of points, miles, or cash back.
## What Is a Credit Card?
A credit card is a physical card that can be used to make purchases, pay bills, or, depending on the card, withdraw cash. The simplest way to think of a credit card is as a type of short-term loan.
When you open a credit card account, your credit card company gives you a set [credit limit](https://www.investopedia.com/terms/c/credit_limit.asp). This is essentially an amount of money that the credit card company allows you to use to make purchases or pay bills. Your available credit is reduced as you charge things to the card. You then pay back what you spent from your credit limit to the credit card company.
### Note
Credit cards can be secured or unsecured. A [secured credit card](https://www.investopedia.com/best-credit-cards-4801582) requires a cash deposit to open, which typically doubles as your credit limit.
## How Credit Cards Work
Credit cards can be used to [make purchases online](https://www.investopedia.com/best-credit-cards-4801582) or in stores and pay bills. When you use a credit card for either one, your card details are sent to the merchant’s bank. The bank then gets authorization from the [credit card network](https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp) to process the transaction. Your card issuer then has to verify your information and either approve or decline the transaction.
If the transaction is approved, the payment is made to the merchant and your card’s available credit is reduced by the transaction amount. At the end of your billing cycle, your card issuer will send you a statement showing all the transactions for that month, your previous balance and new balance, your minimum payment due, and your due date.
The [grace period](https://www.investopedia.com/terms/g/grace-period-credit.asp) is the period of time between the date of a purchase on your card and the due date listed on your statement. During this period, if you pay your bill in full by the due date, no interest charges accrue.
But if you carry a balance month to month, your card issuer can charge you [interest](https://www.investopedia.com/terms/i/interest.asp). Your credit card’s [annual percentage rate (APR)](https://www.investopedia.com/terms/a/apr.asp) reflects the cost of carrying a balance on an annualized basis. Your APR includes both your [interest rate](https://www.investopedia.com/average-credit-card-interest-rate-5076674) and other costs, such as an annual fee if your card has one.
Most credit cards have a variable APR that’s tied to the [prime rate](https://www.investopedia.com/terms/p/primerate.asp). This means that your card’s APR can change over time, though the [Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009](https://www.investopedia.com/terms/c/credit-card-accountability-responsibility-and-disclosure-act-of-2009.asp) sets strict guidelines on when credit card companies can and can’t raise your rate.
### Warning
Being 60 days late on making payments to your credit card can trigger a penalty APR, which can approach the 30% range.
### Types of Credit Cards
There are several types of credit cards, with the biggest category being [rewards cards](https://www.investopedia.com/what-is-a-rewards-credit-card-5071957). Rewards credit cards can include travel-related rewards earned for purchases. You may also earn more [rewards for spending in certain categories](https://www.investopedia.com/articles/investing/092215/debit-vs-credit-card-paying-gas.asp). Many reward cards are co-branded with certain airlines or hotels.
Similar to rewards cards are [cash-back](https://www.investopedia.com/terms/c/cash-back.asp) cards, which offer a certain level of cash back (such as 2% or 5%) for spending. Secured credit cards are for those looking to build or rebuild their credit. If your credit profile is thin, you may be able to get a secured card, which requires a security deposit that is held as [collateral](https://www.investopedia.com/terms/c/collateral.asp) by the issuer.
Student-focused credit cards also help those with little [credit history](https://www.investopedia.com/terms/c/credit-history.asp) build credit. These cards are tailored to those in college and may offer little in terms of rewards.
### Credit Card Fees
With credit cards come various fees—not just the interest rate. Other fees can include [balance transfer fees](https://www.investopedia.com/terms/b/balance-transfer-fee.asp), or fees charged for transferring your balance to another card. These fee is usually a percentage of the balance transferred, such as 2%.
There may also be [over-limit fees](https://www.investopedia.com/terms/o/overlimit-fee.asp), which are charged if you go over your card’s limit. Of course there are [late fees](https://www.investopedia.com/terms/l/late-fee.asp), which are charged if you don’t make the minimum payment by the due date. Note that if you’re late on a payment, the issuer may also revoke any [introductory rate](https://www.investopedia.com/terms/t/teaserrate.asp) you had.
## Credit Cards vs. Debit Cards
A credit card and a debit card may seem like the same thing, but they’re not. When you make purchases with a credit card, you’re not actually spending any of your own money at that moment. Instead, you’re spending the credit card company’s money, which you then have to pay back, potentially with interest.
[Debit cards](https://www.investopedia.com/terms/d/debitcard.asp), on the other hand, are linked to your checking account (they’re not exactly the same as a prepaid card). When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed. There’s nothing to pay back later, since the money has already been taken from your account.
### Tip
Many credit card issuers offer a $0 fraud liability guarantee automatically, meaning that you aren’t responsible for any fraudulent charges made with your card.
Debit and credit cards also differ in terms of their [credit score](https://www.investopedia.com/terms/c/credit_score.asp) impact. Using a debit card has no impact on your credit score because your bank account activity is not reported to the [credit bureaus](https://www.investopedia.com/personal-finance/top-three-credit-bureaus/).
Credit cards, on the other hand, can impact your credit score directly. [FICO Scores](https://www.investopedia.com/terms/f/ficoscore.asp), for instance, calculate your scores based on:
* Payment history
* Credit usage
* Credit age
* Credit mix
* Inquiries for new credit
[Making credit card payments](https://www.investopedia.com/how-do-credit-card-payments-work-5069924) on time can help your score while paying late could hurt it. Similarly, keeping a low balance compared to your credit limit can have a positive impact, while maxing out your card limits can detract from your score. It's best to pay your balance in full each month, but you [can't use another credit card](https://www.investopedia.com/can-you-pay-a-credit-card-with-a-credit-card-5070049) to pay that amount.
Another key difference between debit cards and credit cards lies in fraud protection. Federal law offers more fraud protections for credit cards than debit cards. This chart highlights your liability for unauthorized transactions with debit and credit cards.
| Debit Cards vs. Credit Cards | |
| --- | --- |
| **Debit Card Liability** | **Credit Card Liability** |
| You’re not responsible for unauthorized transactions if a lost or stolen card is reported before it’s used by someone else. If a lost or stolen card is reported within two business days, your liability is limited to $50. If a lost or stolen card is reported more than two business days later, but less than 60 calendar days after your statement is sent to you, your liability is limited to $500. If a lost or stolen card is reported more than 60 calendar days later, you’re responsible for all unauthorized transactions. If your card isn’t lost but is used to make unauthorized transactions, you’re not liable if they’re reported within 60 days of your statement being sent to you. | Under the [Fair Credit Billing Act](https://www.investopedia.com/terms/f/fair-credit-billing-act-fcba.asp), your liability for unauthorized card use is limited to $50. If your credit card number is stolen, but not the card itself, you are not responsible for unauthorized purchases. |
## Pros and Cons of Credit Cards
The biggest advantage of using a credit card is the ease of use and safety. If your card is lost or stolen, you will likely be reimbursed for any fraudulent charges. You may also be able to get an 0% introductory rate for a set period (such as 18 months) that will allow you to make a large purchase and pay it off over time without incurring interest charges.
You’ll also get rewards or cash back with most cards, which is a free incentive to use the card. Credit cards can also help boost your credit score if used responsibly.
On the flip side, credit cards can come with high interest rates, which can be expensive if you don’t pay your balance in full monthly. With credit cards, it can also be easier to spend more money than you can reasonably pay off in a short period of time.
If your debt spirals and you can’t make minimum payments on your cards, your credit score will take a hit. You will also rack up late fees and likely be subject to an even higher interest rate.
### Credit Card Pros & Cons
Pros
* Ease of use
* Safer than cash
* Rewards and cash back
* Can boost credit score
Cons
* High interest and fees
* Potential debt spiral
* Can hurt credit if payments are missed
## How to Compare Credit Cards
If you’re in the market for your first credit card or your next credit card, it’s important to do some comparison shopping. Some of the key things to look for when comparing credit cards include:
* Regular variable APR for purchases
* APR for balance transfers and cash advances
* Promotional APR terms and conditions
* Annual fees
* Rewards programs
* Introductory bonus offer terms
It’s also helpful to look at the card’s other benefits and features, if any. For example, if you’re interested in opening a travel credit card to earn miles or points toward flights and hotel stays, you may also be interested in finding a card that comes with benefits such as airport lounge access or airline fee credits. If a card has an [annual fee](https://www.investopedia.com/financial-edge/0711/credit-cards-should-you-ever-pay-an-annual-fee.aspx), it’s helpful to compare the value of rewards and benefits to the fee to decide if it’s worth it.
## Why You Should Use a Credit Card
Overall, the pros of having and using a credit card outweigh the cons (for most people). They’ll help you build credit—if used responsibly. Good credit helps lower the interest rates you’ll pay for other loans, such as home or car loans. Credit cards can also help with budgeting, either through the budgeting tools that the issuer offers or by allowing you to track and categorize spending.
And of course, credit cards tend to offer rewards or cash back. If you have a high amount of spending, such as on dining out or flights, you can take advantage of cards that offer high rewards rates in those categories.
But perhaps one of the biggest reasons to use a credit card (over, say, cash or a debit card) is the fraud protection. If there are fraudulent charges made on your card, or if it’s lost or stolen, you’re protected from fraud liability.
## What are the main differences between credit and debit cards?
You’re essentially borrowing money to make purchases when you use a credit card. Any balance not paid back during the billing month accrues interest that must be paid. Debit cards are linked to a bank account. When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed.
## How does a credit card help you build better credit?
When used properly, credit cards will help you build credit history through healthy financial habits. When the balances are paid off monthly, you establish a reputation as a good [credit risk](https://www.investopedia.com/terms/c/creditrisk.asp). This boosts your credit score, which may make you eligible for lower-interest-rate loans and credit cards, and generally improved financial terms, when borrowing.
## How does a person shop for credit cards?
Comparison shopping is how you find the best card for you. Compare things like regular variable annual percentage rate (APR) for purchases; APR for balance transfers and cash advances; promotional APR terms and conditions; annual fees; rewards; and more.
## The Bottom Line
Credit cards can be a credit-building tool if used responsibly. Paying your bill on time, maintaining a low balance, and only opening credit cards as needed can help you build and maintain good credit. Also, keep in mind that the best way to avoid interest charges and build a strong credit score is by [paying your bill in full each month](https://www.investopedia.com/terms/d/deadbeat.asp).
| When you need to make a purchase or pay a bill, credit cards can offer both convenience and the potential to save money if you’re earning back some of what you spend in rewards. At the same time, you can also use credit cards to build credit history through healthy financial habits.
While credit cards and debit cards may look similar, they work very differently. If you’re new to using credit, here are a few important credit card facts to know.
Key Takeaways
Credit cards have a credit limit that you can make purchases against, then repay at a later date.Carrying a balance on a credit card can trigger interest charges. It’s important to read the fine print closely on credit card promotional offers.Some credit cards allow you to earn rewards on purchases in the form of points, miles, or cash back.
What Is a Credit Card?
A credit card is a physical card that can be used to make purchases, pay bills, or, depending on the card, withdraw cash. The simplest way to think of a credit card is as a type of short-term loan.
When you open a credit card account, your credit card company gives you a set credit limit. This is essentially an amount of money that the credit card company allows you to use to make purchases or pay bills. Your available credit is reduced as you charge things to the card. You then pay back what you spent from your credit limit to the credit card company.
Note
Credit cards can be secured or unsecured. A secured credit card requires a cash deposit to open, which typically doubles as your credit limit.
How Credit Cards Work
Credit cards can be used to make purchases online or in stores and pay bills. When you use a credit card for either one, your card details are sent to the merchant’s bank. The bank then gets authorization from the credit card network to process the transaction. Your card issuer then has to verify your information and either approve or decline the transaction.
If the transaction is approved, the payment is made to the merchant and your card’s available credit is reduced by the transaction amount. At the end of your billing cycle, your card issuer will send you a statement showing all the transactions for that month, your previous balance and new balance, your minimum payment due, and your due date.
The grace period is the period of time between the date of a purchase on your card and the due date listed on your statement. During this period, if you pay your bill in full by the due date, no interest charges accrue.
But if you carry a balance month to month, your card issuer can charge you interest. Your credit card’s annual percentage rate (APR) reflects the cost of carrying a balance on an annualized basis. Your APR includes both your interest rate and other costs, such as an annual fee if your card has one.
Most credit cards have a variable APR that’s tied to the prime rate. This means that your card’s APR can change over time, though the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 sets strict guidelines on when credit card companies can and can’t raise your rate.
Warning
Being 60 days late on making payments to your credit card can trigger a penalty APR, which can approach the 30% range.
Types of Credit Cards
There are several types of credit cards, with the biggest category being rewards cards. Rewards credit cards can include travel-related rewards earned for purchases. You may also earn more rewards for spending in certain categories. Many reward cards are co-branded with certain airlines or hotels.
Similar to rewards cards are cash-back cards, which offer a certain level of cash back (such as 2% or 5%) for spending. Secured credit cards are for those looking to build or rebuild their credit. If your credit profile is thin, you may be able to get a secured card, which requires a security deposit that is held as collateral by the issuer.
Student-focused credit cards also help those with little credit history build credit. These cards are tailored to those in college and may offer little in terms of rewards.
Credit Card Fees
With credit cards come various fees—not just the interest rate. Other fees can include balance transfer fees, or fees charged for transferring your balance to another card. These fee is usually a percentage of the balance transferred, such as 2%.
There may also be over-limit fees, which are charged if you go over your card’s limit. Of course there are late fees, which are charged if you don’t make the minimum payment by the due date. Note that if you’re late on a payment, the issuer may also revoke any introductory rate you had.
Credit Cards vs. Debit Cards
A credit card and a debit card may seem like the same thing, but they’re not. When you make purchases with a credit card, you’re not actually spending any of your own money at that moment. Instead, you’re spending the credit card company’s money, which you then have to pay back, potentially with interest.
Debit cards, on the other hand, are linked to your checking account (they’re not exactly the same as a prepaid card). When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed. There’s nothing to pay back later, since the money has already been taken from your account.
Tip
Many credit card issuers offer a $0 fraud liability guarantee automatically, meaning that you aren’t responsible for any fraudulent charges made with your card.
Debit and credit cards also differ in terms of their credit score impact. Using a debit card has no impact on your credit score because your bank account activity is not reported to the credit bureaus.
Credit cards, on the other hand, can impact your credit score directly. FICO Scores, for instance, calculate your scores based on:
Payment historyCredit usageCredit ageCredit mixInquiries for new credit
Making credit card payments on time can help your score while paying late could hurt it. Similarly, keeping a low balance compared to your credit limit can have a positive impact, while maxing out your card limits can detract from your score. It's best to pay your balance in full each month, but you can't use another credit card to pay that amount.
Another key difference between debit cards and credit cards lies in fraud protection. Federal law offers more fraud protections for credit cards than debit cards. This chart highlights your liability for unauthorized transactions with debit and credit cards.
Debit Cards vs. Credit Cards
Debit Card Liability
Credit Card Liability
You’re not responsible for unauthorized transactions if a lost or stolen card is reported before it’s used by someone else. If a lost or stolen card is reported within two business days, your liability is limited to $50. If a lost or stolen card is reported more than two business days later, but less than 60 calendar days after your statement is sent to you, your liability is limited to $500. If a lost or stolen card is reported more than 60 calendar days later, you’re responsible for all unauthorized transactions. If your card isn’t lost but is used to make unauthorized transactions, you’re not liable if they’re reported within 60 days of your statement being sent to you.
Under the Fair Credit Billing Act, your liability for unauthorized card use is limited to $50. If your credit card number is stolen, but not the card itself, you are not responsible for unauthorized purchases.
Pros and Cons of Credit Cards
The biggest advantage of using a credit card is the ease of use and safety. If your card is lost or stolen, you will likely be reimbursed for any fraudulent charges. You may also be able to get an 0% introductory rate for a set period (such as 18 months) that will allow you to make a large purchase and pay it off over time without incurring interest charges.
You’ll also get rewards or cash back with most cards, which is a free incentive to use the card. Credit cards can also help boost your credit score if used responsibly.
On the flip side, credit cards can come with high interest rates, which can be expensive if you don’t pay your balance in full monthly. With credit cards, it can also be easier to spend more money than you can reasonably pay off in a short period of time.
If your debt spirals and you can’t make minimum payments on your cards, your credit score will take a hit. You will also rack up late fees and likely be subject to an even higher interest rate.
Credit Card Pros & Cons
Pros
Ease of use
Safer than cash
Rewards and cash back
Can boost credit score
Cons
High interest and fees
Potential debt spiral
Can hurt credit if payments are missed
How to Compare Credit Cards
If you’re in the market for your first credit card or your next credit card, it’s important to do some comparison shopping. Some of the key things to look for when comparing credit cards include:
Regular variable APR for purchasesAPR for balance transfers and cash advancesPromotional APR terms and conditionsAnnual feesRewards programsIntroductory bonus offer terms
It’s also helpful to look at the card’s other benefits and features, if any. For example, if you’re interested in opening a travel credit card to earn miles or points toward flights and hotel stays, you may also be interested in finding a card that comes with benefits such as airport lounge access or airline fee credits. If a card has an annual fee, it’s helpful to compare the value of rewards and benefits to the fee to decide if it’s worth it.
Why You Should Use a Credit Card
Overall, the pros of having and using a credit card outweigh the cons (for most people). They’ll help you build credit—if used responsibly. Good credit helps lower the interest rates you’ll pay for other loans, such as home or car loans. Credit cards can also help with budgeting, either through the budgeting tools that the issuer offers or by allowing you to track and categorize spending.
And of course, credit cards tend to offer rewards or cash back. If you have a high amount of spending, such as on dining out or flights, you can take advantage of cards that offer high rewards rates in those categories.
But perhaps one of the biggest reasons to use a credit card (over, say, cash or a debit card) is the fraud protection. If there are fraudulent charges made on your card, or if it’s lost or stolen, you’re protected from fraud liability.
What are the main differences between credit and debit cards?
You’re essentially borrowing money to make purchases when you use a credit card. Any balance not paid back during the billing month accrues interest that must be paid. Debit cards are linked to a bank account. When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed.
How does a credit card help you build better credit?
When used properly, credit cards will help you build credit history through healthy financial habits. When the balances are paid off monthly, you establish a reputation as a good credit risk. This boosts your credit score, which may make you eligible for lower-interest-rate loans and credit cards, and generally improved financial terms, when borrowing.
How does a person shop for credit cards?
Comparison shopping is how you find the best card for you. Compare things like regular variable annual percentage rate (APR) for purchases; APR for balance transfers and cash advances; promotional APR terms and conditions; annual fees; rewards; and more.
The Bottom Line
Credit cards can be a credit-building tool if used responsibly. Paying your bill on time, maintaining a low balance, and only opening credit cards as needed can help you build and maintain good credit. Also, keep in mind that the best way to avoid interest charges and build a strong credit score is by paying your bill in full each month.
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https://www.investopedia.com/best-auto-loan-rates-4846394 | Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99% | <div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content list-sc" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body">
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PenFed Credit Union is the best overall auto loan lender thanks to its wide selection of loan types and competitive rates, according to our research. It offers rates for used cars as low as 6.49%, and another one of our picks, OpenRoad Lending, offers rates as low as 1.99%. We reviewed 21 auto loan lenders and collected the best new, used, and refinance auto loan rates, evaluating APRs, loan types, loan terms, vehicle and borrower requirements, and other factors. We also surveyed 1,016 auto loan borrowers, asking how they felt about lenders and the loan process.
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<h2 class="summary-list__title">
Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
</h2>
<ul class="summary-list__content">
<li class="summary-list__item">
<span class="summary-list__item-top-pick-container">
<strong class="summary-list__item-category">Best Overall:</strong>
<a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=penfed&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1" rel="nofollow noskim noopener nocaes" target="_blank"> PenFed</a><!-- end: summary-list__item-top-pick -->
</span>
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<strong class="summary-list__item-category">Best for Bad Credit/Low Rates:</strong>
<a class="summary-list__item-top-pick" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> AUTOPAY</a><!-- end: summary-list__item-top-pick -->
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<strong class="summary-list__item-category">Best Credit Union:</strong>
<a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1" rel="nofollow noskim noopener nocaes" target="_blank"> Consumers Credit Union</a><!-- end: summary-list__item-top-pick -->
</span>
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<strong class="summary-list__item-category">Best for Refinance:</strong>
<a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl" rel="nofollow noskim noopener nocaes" target="_blank"> LendingTree</a><!-- end: summary-list__item-top-pick -->
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<strong class="summary-list__item-category">Best for Fair Credit:</strong>
<a class="summary-list__item-top-pick" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> LendingClub</a><!-- end: summary-list__item-top-pick -->
</span>
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<strong class="summary-list__item-category">Best for Full Car Buying Experience:</strong>
<a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=carvana&bwid_id=6385e804ca097c71ee1e23c1" rel="nofollow noskim noopener nocaes" target="_blank"> Carvana</a><!-- end: summary-list__item-top-pick -->
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<strong class="summary-list__item-category">Best for High Maximum Accepted Mileage:</strong>
<a class="summary-list__item-top-pick" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> OpenRoad Lending</a><!-- end: summary-list__item-top-pick -->
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Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
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Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
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<a class="mntl-toc__list-item-link js-mntl-toc-link" href="#summary-list" rel="nocaes"> <span class="link__wrapper">Our Top Picks</span>
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<a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-PenFed" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-overall-penfed" rel="nocaes"> <span class="link__wrapper">PenFed</span>
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<a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-AUTOPAY" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-bad-creditlow-rates-autopay" rel="nocaes"> <span class="link__wrapper">AUTOPAY</span>
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<a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Consumers Credit Union" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-credit-union-consumers-credit-union" rel="nocaes"> <span class="link__wrapper">Consumers Credit Union</span>
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<li class="comp nested-toc-item nested-toc-item--additional mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item" data-click-action="OnPageClick-LendingTree" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__list-item_2-0-3">
<a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-LendingTree" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-refinance-lendingtree" rel="nocaes"> <span class="link__wrapper">LendingTree</span>
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<a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-LendingClub" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-fair-credit-lendingclub" rel="nocaes"> <span class="link__wrapper">LendingClub</span>
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<li class="comp nested-toc-item nested-toc-item--additional mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item" data-click-action="OnPageClick-Carvana" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__list-item_2-0-5">
<a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Carvana" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-full-car-buying-experience-carvana" rel="nocaes"> <span class="link__wrapper">Carvana</span>
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<li class="comp nested-toc-item nested-toc-item--additional mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item" data-click-action="OnPageClick-OpenRoad Lending" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__list-item_2-0-6">
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-The Bottom Line" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-the-bottom-line" id="mntl-toc__list-item-link_1-0" rel="nocaes"><span class="link__wrapper">The Bottom Line</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Compare Best Auto Loan Lenders" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-compare-best-auto-loan-lenders" id="mntl-toc__list-item-link_1-0-1" rel="nocaes"><span class="link__wrapper">Compare Best Auto Loan Lenders</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-What Is an Auto Loan?" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-is-an-auto-loan-and-how-does-it-work" id="mntl-toc__list-item-link_1-0-2" rel="nocaes"><span class="link__wrapper">What Is an Auto Loan?</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Apply" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-apply-for-an-auto-loan" id="mntl-toc__list-item-link_1-0-3" rel="nocaes"><span class="link__wrapper">How to Apply</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Auto Loan Calculator" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-auto-loan-calculator" id="mntl-toc__list-item-link_1-0-4" rel="nocaes"><span class="link__wrapper">Auto Loan Calculator</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Other Auto Loans" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-other-types-of-auto-loans" id="mntl-toc__list-item-link_1-0-7" rel="nocaes"><span class="link__wrapper">Other Auto Loans</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Guide to Auto Loans" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-guide-to-auto-loans" id="mntl-toc__list-item-link_1-0-8" rel="nocaes"><span class="link__wrapper">Guide to Auto Loans</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-we-picked-the-best-auto-loans" id="mntl-toc__list-item-link_1-0-9" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Why You Should Trust Us" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-why-you-should-trust-us" id="mntl-toc__list-item-link_1-0-10" rel="nocaes"><span class="link__wrapper">Why You Should Trust Us</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<li><strong>Used APR Range:</strong> 6.49%–17.99%</li><li><strong>Used Loan Amounts:</strong> $500–$150,000</li><li><strong>Minimum Recommended Credit Score: </strong>Not disclosed</li>
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<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-2">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=penfed&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1" id="button_1-0" rel="noskim noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-4">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Full suite of auto loan types available</p></li>
<li><p>Allows private-party vehicle purchases</p></li>
<li><p>Promotional offers if you use car-buying service</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Must join credit union</p></li>
<li><p>Doesn’t allow co-signers</p></li>
<li><p>No rate discounts available</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-6">
PenFed is our top pick overall for auto financing because it offers all of the loan types you’d ever hope to use, and offers competitive rates: loans for new or used cars, refinances, cash-out refinances, and even lease buyout loans. You can even use a used car loan to buy a car from a private seller, if you wish.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-7">
PenFed will mail you a check if you’re approved for any of its loans.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-8">
That can take a few days, but if you’re OK with using the TrueCar car-buying service, PenFed offers a pretty good relationship discount. Your loan could be funded the same day you’re approved, if you use this service.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-9">
PenFed's customer service is available by phone or secure online message. PenFed has been in business since 1935, and has headquarters in McLean, Virginia.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-10">
Read our full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/penfed-auto-loans-review-7853548">PenFed auto loans review</a>.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3">
<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-12">
<li><strong>Used loan terms:</strong> 3–7 years</li><li>Available in all 50 states and Washington, D.C.</li><li>Must join the credit union by depositing at least $5 in a savings account.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="4">
<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="4">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-14">
<li><strong>For loans less than seven years:</strong> No limit on vehicle age, and must have 125,000 miles or fewer</li><li><strong>For loans of seven years or more:</strong> Vehicle must be less than five years old and be under 60,000 miles</li><li><strong>Maximum loan-to-value ratio:</strong> 125%</li><li><strong>Allows private-party vehicle purchases:</strong> Yes</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
</div><!-- end: comp list-sc-item__intro mntl-block -->
</div><!-- end: comp list-sc-item__content mntl-block -->
</div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-1">
<span class="heading-toc" id="toc-best-for-bad-creditlow-rates-autopay"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-1">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for Bad Credit/Low Rates</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> AUTOPAY</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-1"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-1">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-1">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-15" style="--imgWidth: 92px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="AutoPay" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/52p5kikdi2NHO5WyCy8OmTt0Nzo=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Autopay-ec4375470de24d2f8aca313b8f153804.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-1" width="1500"/>
<noscript>
<img alt="AutoPay" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/52p5kikdi2NHO5WyCy8OmTt0Nzo=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Autopay-ec4375470de24d2f8aca313b8f153804.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-1">
<span class="figure-article-caption-owner"><p> AutoPay</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-2x1 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res -->
<div class="tabbed-sc-block-intro__content">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-16">
<li><strong>Used APR Range:</strong> As low as 5.69%</li><li><strong>Used Loan Amounts:</strong> $2,500–$100,000</li><li><strong>Minimum Recommended Credit Score: </strong>500</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-17">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-1">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER" id="button_1-0-1" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-19">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Relatively low rates<br/></p></li>
<li><p>No payments for 45 days</p></li>
<li><p>Low minimum credit score requirement</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Very sparse on loan details</p></li>
<li><p>Doesn’t disclose partner lenders</p></li>
<li><p>Can’t apply with a co-signer, only a co-borrower</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-21">
AUTOPAY is a loan aggregator and it's a bit light on the details; maybe intentional in order to get you to bite. If you have excellent borrower qualifications, AUTOPAY certainly has the potential to be one of your cheapest financing options, advertising some of the best car loan rates today compared to other lenders and aggregators.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-22">
It's our top pick for bad credit because it works with borrowers with credit scores as low as 500; but it doesn’t specify the <em>top</em> end of the rate range you’d be likely to pay if you have poor credit, so you’ll need to be careful—especially since you can’t <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_sign.asp">apply with a co-signer</a> (only a co-borrower). But, if you do have good credit, you may enjoy some very good interest rates.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-23">
AUTOPAY does offer a full suite of auto loan types: used cars, new cars, refinances, cash-out refinances, and even lease buyout loans. It works with a network of partner lenders rather than offering the loans itself, and that’s how it can offer so much flexibility. For that reason, it’s a good choice to add to your shopping list, although we would prefer if it offered more concrete details.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-24">
AUTOPAY was founded in 2007, and is based in Denver, Colorado. You can get in touch with the company by phone or online message. Read more in our full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/autopay-auto-loans-review-7643912">AUTOPAY auto loans review</a>.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_3-0-25">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0">
<p>The best auto loan rates are often advertised through third-party companies that network with partner lenders, like AUTOPAY. Most don’t disclose their partners, however, so you can’t always see all of the companies you’re actually checking your rates with. You may need to sign up for automatic payments to get the best rates, as well.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3">
<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-27">
<li><strong>Used loan terms:</strong> 2–8 years</li><li>Recommened credit score of 500 or higher</li><li>Available in all U.S. states and Washington, D.C.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="4">
<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="4">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-29">
<li><strong>Maximum accepted vehicle age: </strong>10 years</li><li><strong>Maximum accepted mileage:</strong> 150,000 miles</li><li><strong>Maximum loan-to-value ratio:</strong> Not disclosed</li><li><strong>Allows private-party vehicle purchases:</strong> Yes</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
</div><!-- end: comp list-sc-item__intro mntl-block -->
</div><!-- end: comp list-sc-item__content mntl-block -->
</div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-2">
<span class="heading-toc" id="toc-best-credit-union-consumers-credit-union"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-2">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best Credit Union</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> Consumers Credit Union</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-2"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-2">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-2">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-30" style="--imgWidth: 345px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="Consumers Credit Union" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/jsTMARbCXTkTjLGQiYfwGHj83mA=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Consumers_Credit-223ffc22f8644a9085928005b684f825.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-2" width="1500"/>
<noscript>
<img alt="Consumers Credit Union" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/jsTMARbCXTkTjLGQiYfwGHj83mA=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Consumers_Credit-223ffc22f8644a9085928005b684f825.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-2">
<span class="figure-article-caption-owner"><p> Consumers Credit Union</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-2x1 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res -->
<div class="tabbed-sc-block-intro__content">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-31">
<li><strong>Used APR Range:</strong> As low as 6.84%</li><li><strong>Used Loan Amounts:</strong> $500–$350,000</li><li><strong>Minimum Recommended Credit Score:</strong> Not disclosed<br/></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-32">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-2">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1" id="button_1-0-2" rel="noskim noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-34">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Allows co-signers</p></li>
<li><p>No age or mileage restrictions</p></li>
<li><p>Offers a full suite of car loan options</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Can only be used at a dealership</p></li>
<li><p>Must join credit union to receive loan</p></li>
<li><p>Lack of transparency about loan requirements</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-36">
As our highest-rated credit union, Consumers Credit Union is a good choice for people who prefer to bank with these financial institutions. It’s also a good choice if you’re trying to buy an older car from a dealership because it’s one of the few lenders that doesn’t put any limits on your vehicle’s model year or mileage.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-37">
Consumers also offers an optional mechanical repair insurance plan through ForeverCar, which might be especially important if you <em>are</em> driving an older car.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-38">
Consumers doesn’t specify what sort of credit history you need to qualify for a loan (or any other qualifications, really), but it might be good to add this one to your shopping list if you have bad credit. The maximum rate you’ll pay for a refinance loan, for example, is about half of what some other lenders may charge. It also has a relatively low minimum loan amount.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-39">
Customer support is available by phone, email, or live online chat.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-40">
Consumers Credit Union was chartered in 1930, and has corporate headquarters in Round Lake Beach, Illinois.<br/>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3">
<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-42">
<li><strong>Used loan terms:</strong> 36–84 months</li><li>Available to people living in all 50 states and Washington, D.C.</li><li>Need to join Consumers Cooperative Association ($5 fee) and deposit $5 in a savings account to establish your membership, if approved for a loan</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="4">
<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="4">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-44">
<li><strong>Maximum accepted vehicle age: </strong>None</li><li><strong>Maximum accepted mileage:</strong> None</li><li><strong>Maximum loan-to-value ratio:</strong> 125%</li><li><strong>Allows private-party vehicle purchases:</strong> No</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
</div><!-- end: comp list-sc-item__intro mntl-block -->
</div><!-- end: comp list-sc-item__content mntl-block -->
</div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-3">
<span class="heading-toc" id="toc-best-for-refinance-lendingtree"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-3">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for Refinance</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> LendingTree</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-3"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-3">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-3">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-45" style="--imgWidth: 429px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="LendingTree" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/iiWPfT31bUxKm2QxdJ3yRRS_Z64=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Lending_Tree-d0a3fa57948942248204c37c8ad26841.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-3" width="1500"/>
<noscript>
<img alt="LendingTree" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/iiWPfT31bUxKm2QxdJ3yRRS_Z64=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Lending_Tree-d0a3fa57948942248204c37c8ad26841.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-3">
<span class="figure-article-caption-owner"><p> LendingTree</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-2x1 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res -->
<div class="tabbed-sc-block-intro__content">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-46">
<li><strong>Refinance APR Range:</strong> As low as 5.99%</li><li><strong>Refinance Loan Amounts:</strong> Not disclosed</li><li><strong>Minimum Recommended Credit Score:</strong> Not disclosed<br/></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-47">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-3">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl" id="button_1-0-3" rel="noskim noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-49">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Potential for very low rates</p></li>
<li><p>Compare many refinance loan offers at once</p></li>
<li><p>No limits on age or mileage of vehicle</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Can generate a lot of spam</p></li>
<li><p>Very low loan-to-value ratios</p></li>
<li><p>Doesn’t offer many details about its loans</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-51">
LendingTree is another company that can help you quickly identify the best financing rates from among its network of lenders. It suffers from the same problems as other lender networks, however—namely, that it doesn’t tell you which lenders it’s checking your rates with, nor what the types of loans you might qualify for look like. You can also expect a lot of companies reaching out to you with spam, too.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-52">
Still, it’s a great option if you’re looking for a car loan refinance, advertising competitively low rates. You’ll just need to make sure you have plenty of equity in your vehicle since LendingTree lenders don’t offer loans with a loan-to-value ratio above 80%. That means underwater loans aren’t eligible for refinance.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-53">
You can contact LendingTree by phone, but if you used LendingTree to get a loan with a partner lender you'll likely need to contact that lender instead.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-54">
LendingTree was founded in 1996, and now has headquarters in Charlotte, North Carolina.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3">
<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-56">
<li><strong>Refinance loan terms:</strong> 36–72 months</li><li>Available to residents of all 50 states and Washington, D.C.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="4">
<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="4">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-58">
<li><strong>Maximum accepted vehicle age: </strong>None</li><li><strong>Maximum accepted mileage:</strong> None</li><li><strong>Maximum loan-to-value ratio:</strong> 80%</li><li><strong>Allows private-party vehicle purchases:</strong> Not disclosed</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
</div><!-- end: comp list-sc-item__intro mntl-block -->
</div><!-- end: comp list-sc-item__content mntl-block -->
</div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-4">
<span class="heading-toc" id="toc-best-for-fair-credit-lendingclub"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-4">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for Fair Credit</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> LendingClub</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-4"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-4">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-4">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-59" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="LendingClub" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/XVWG2R3tRomlhIPfq0eRmjCiyzI=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Lending_Club-51af42c5c7174fc1931ee8f86f263d15.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-4" width="1500"/>
<noscript>
<img alt="LendingClub" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/XVWG2R3tRomlhIPfq0eRmjCiyzI=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Lending_Club-51af42c5c7174fc1931ee8f86f263d15.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-4">
<span class="figure-article-caption-owner"><p> LendingClub</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res -->
<div class="tabbed-sc-block-intro__content">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-60">
<li><strong>Refinance APR Range:</strong> 4.99%–24.99%</li><li><strong>Refinance Loan Amounts:</strong> $4,000–$55,000</li><li><strong>Minimum Recommended Credit Score:</strong> 600<br/></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-61">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-4">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance" id="button_1-0-4" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-63">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Minimum recommended credit score of 600</p></li>
<li><p>No loan fees</p></li>
<li><p>Can refinance with the same lender</p></li>
<li><p>Low rates for well-qualified borrowers</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Doesn’t allow co-signers</p></li>
<li><p>Many residency and car restrictions</p></li>
<li><p>Doesn’t offer new or used auto loans</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-65">
LendingClub, the former peer-to-peer lender, is now in the auto refinance business where it offers very good rates to borrowers with good credit. Borrowers with fair credit can be approved too—making it our top pick for this category, along with its high overall score as well—but if your credit is quite bad LendingTree may charge you a higher rate than most other lenders. On the bright side, LendingClub doesn’t charge any fees—origination fees, late fees, prepayment penalties, nothing.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-66">
LendingClub is one of a handful of lenders that allow you to refinance your current LendingClub loan with another LendingClub loan, if you happen to qualify. However, be aware that there are many loan limitations with this lender. It’s not available in many sparsely populated states, for example, and there are many makes and models of popular cars LendingClub won’t finance.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-67">
LendingClub was incorporated in 2007, and it's headquartered in San Francisco, California.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-68">
See more of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loans-for-fair-credit-7486579">best auto loans for fair credit</a> to explore your options.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3">
<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-70">
<li><strong>Refinance loan terms:</strong> 2–7 years</li><li>600 or higher recommended credit score</li><li>Current auto loan must have been open for at least one month</li><li>Current auto loan must have at least 24 months remaining</li><li>Available to residents of all U.S. states except for: Alaska, District of Columbia, Hawaii, Maine, New Hampshire, North Dakota, Vermont, West Virginia, Wyoming</li><li>You must be at least 18 years of age</li><li>You must be a U.S. citizen or permanent resident or live in the U.S. on a valid long-term visa</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="4">
<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="4">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-72">
<li><strong>Maximum accepted vehicle age: </strong>10 years</li><li><strong>Maximum accepted mileage:</strong> 120,000 miles</li><li><strong>Maximum loan-to-value ratio:</strong> Not disclosed</li><li><strong>Allows private-party vehicle purchases:</strong> No</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-73">
In addition:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-74">
<li>The loan’s remaining balance must be between $5,000 and $55,000</li><li>Can’t refinance business vehicles</li><li>Vehicle must be registered in the same state you live</li><li>Many cars not eligible for financing, such as Nissan Leafs and models from Suzuki, Saturn, Mercury, Saab, Pontiac, Oldsmobile, Hummer, and more</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
</div><!-- end: comp list-sc-item__intro mntl-block -->
</div><!-- end: comp list-sc-item__content mntl-block -->
</div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-5">
<span class="heading-toc" id="toc-best-for-full-car-buying-experience-carvana"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-5">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for Full Car Buying Experience</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> Carvana</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-5"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-5">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-5">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-75" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="Carvana" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/jlAToQS7VdGiN-vrWIvD-rLAxLs=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Carvana-2fe03d13b669495ab4a5198f4d69896b.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-5" width="1500"/>
<noscript>
<img alt="Carvana" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/jlAToQS7VdGiN-vrWIvD-rLAxLs=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Carvana-2fe03d13b669495ab4a5198f4d69896b.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-5">
<span class="figure-article-caption-owner"><p> Carvana</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res -->
<div class="tabbed-sc-block-intro__content">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-76">
<li><strong>APR Range:</strong> Not disclosed</li><li><strong>Loan Amounts:</strong> Not disclosed</li><li><strong>Minimum Credit Score:</strong> 500<br/></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-77">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-5">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=carvana&bwid_id=6385e804ca097c71ee1e23c1" id="button_1-0-5" rel="noskim noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-79">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Neat, techy way to buy a car</p></li>
<li><p>Offers seven-day return policy</p></li>
<li><p>Long 45-day pre-approval window</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Not available outside of contiguous U.S.</p></li>
<li><p>Doesn’t allow co-borrowers, only co-signers</p></li>
<li><p>Delivery charges not refundable if you return car</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-81">
Carvana is a used car dealership that offers a completely online car-buying experience, similar to TrueCar; it's our highest-rated company that offers this service.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-82">
You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/carvana-auto-loans-review-7965774">apply for an auto loan</a> online, find a car, and then pick it up or even have it delivered to you.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-83">
One of Carvana’s claims to fame, however, is its car vending machines. If you’re pre-approved for a loan you can schedule an appointment to take a car for a test drive from one of its giant vending machines. The company will even provide you with a token to use.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-84">
If you like the car, you can keep it. If not, you’ll have seven days to return it.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-85">
It’s a futuristic way to buy a car that many people like; however, there can be problems with the setup. If you have a car delivered and you don’t like it, for example, you can return it, but the shipping charge is nonrefundable. That makes it costly and impractical to test drive different models like you would at a dealership.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-86">
Carvana's customer support team is available by text or by live chat on the website. The company was founded in 2012, and is based in Tempe, Arizona.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3">
<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-88">
<li><strong>Loan terms:</strong> Not disclosed</li><li>Minimum recommended credit score of 500</li><li>Must be at least 18 years old</li><li>Minimum annual income of $4,000</li><li>Must not have any active bankruptcies</li><li>Available to residents in contiguous U.S.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="4">
<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="4">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-90">
<li><strong>Maximum accepted vehicle age: </strong>Varies</li><li><strong>Maximum accepted mileage:</strong> 140,000 miles</li><li><strong>Maximum loan-to-value ratio:</strong> Not disclosed</li><li><strong>Allows private-party vehicle purchases:</strong> No (only for used cars bought through the Carvana platform)</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
</div><!-- end: comp list-sc-item__intro mntl-block -->
</div><!-- end: comp list-sc-item__content mntl-block -->
</div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-6">
<span class="heading-toc" id="toc-best-for-high-maximum-accepted-mileage-openroad-lending"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-6">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for High Maximum Accepted Mileage</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> OpenRoad Lending</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-6"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-6">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-6">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-3x2 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-low-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-91" style="--imgWidth: 844px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:66.6%;">
<img alt="OpenRoad Lending" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/mY3JtoavOKV1_P-1mpdWu50Gm7M=/fit-in/1500x1000/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Open_Road_Lending-37f22388fed54364bf8922b784cee9b9.jpg" data-tracking-container="false" height="1000" id="mntl-sc-block-image_1-0-6" width="1500"/>
<noscript>
<img alt="OpenRoad Lending" class="img--noscript universal-image__image" height="1000" src="https://www.investopedia.com/thmb/mY3JtoavOKV1_P-1mpdWu50Gm7M=/fit-in/1500x1000/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Open_Road_Lending-37f22388fed54364bf8922b784cee9b9.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-6">
<span class="figure-article-caption-owner"><p> OpenRoad Lending</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-3x2 upscaleImg mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-low-res -->
<div class="tabbed-sc-block-intro__content">
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-92">
<li><strong>Refinance APR Range:</strong> 1.99%–24.99%</li><li><strong>Refinance Loan Amounts:</strong> $7,500–$100,000</li><li><strong>Minimum Recommended Credit Score:</strong> 500<br/></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-93">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-6">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-click-action="OffPageClick - External" data-retailer-type="other" data-tracking-container="true" href="https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489" id="button_1-0-6" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
</div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block -->
</div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block -->
</div>
</div>
</div>
<div class="tabbed-sc-block tabbed-sc-block--no-tabs tabbed-sc-block--full-accordion" data-click-action="OnPageClick-Product Tab Click" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard">
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-95">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Maximum accepted mileage of 160,000, according to customer service</p></li>
<li><p>Offers lease buyout loans</p></li>
<li><p>Refinancing available if you’re underwater on loan</p></li>
<li><p>Can re-refinance your loan through OpenRoad again</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Potentially high rates and fees</p></li>
<li><p>Doesn’t allow co-signers</p></li>
<li><p>Many vehicle restrictions</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-97">
OpenRoad Lending’s website looks like it was designed in the previous decade. But it can be helpful if you’re struggling to make your auto loan payments and you’re not able to qualify for a better loan with another lender—especially if you need to refinance a loan for a high-mileage car, because OpenRoad Lending's 160,000 mile-limit is the highest disclosed limit among lenders we reviewed.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-98">
It comes with very high origination fees ranging from $249 to $449, a 5% late payment fee, and interest rates that zoom into credit-card-debt territory for less-qualified borrowers.<span class="ql-inline-citation" data-cite="51"></span>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-99">
However, OpenRoad Lending is still better than many other types of alternative auto loans, such as those from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buy-here-pay-here.asp">buy-here-pay-here lenders</a>. You can still qualify if you have a poor credit score, even if you’re underwater on your current loan—a common problem for people with bad car loans.
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OpenRoad Lending has a maximum loan-to-value ratio of 180%, meaning you may be able to borrow nearly twice your car’s actual value in order to pay off your existing loan—far more than most other lenders.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-101">
OpenRoad Lending was founded in 2009, and is based in Fort Worth, Texas.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-102">
If you need help, you can get in touch with OpenRoad by phone or email. Read more in our full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/openroad-lending-auto-loan-review-7642719">OpenRoad Lending auto loans review</a>.
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<span class="tabbed-sc-block__text">Terms and Borrower Qualifications</span>
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<li><strong>Refinance loan terms:</strong> 24–72 months</li><li>Minimum credit score of 500 </li><li>Must be at least 18 years old</li><li>Available to residents in 46 U.S. states</li><li>You must make at least $2,000 per month (earnings from Uber or similar services do not count toward the income requirement) </li><li>Your DTI cannot exceed 40%</li><li>Can only refinance auto loans issued by NCUA- or FDIC-insured lenders such as credit unions and banks</li>
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<span class="tabbed-sc-block__text">Vehicle Qualifications</span>
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<li><strong>Maximum accepted vehicle age: </strong>Not disclosed</li><li><strong>Maximum accepted mileage:</strong> 160,000 miles</li><li><strong>Maximum loan-to-value ratio:</strong> 175%</li><li><strong>Allows private-party vehicle purchases:</strong> No</li><li>Business vehicles, Oldsmobile, Daewoo, Smart Car, and Isuzu vehicles are not eligible for refinancing</li>
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<span class="heading-toc" id="toc-the-bottom-line"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-1">
If you’re looking for the best overall auto loans, try starting with PenFed; it's a credit union, but anyone can join for just $5 when approved for a loan. AUTOPAY is worth checking as well, especially if you'd like to browse a variety of lenders. LendingTree is also a top choice for a rate-comparison website. If you prefer sticking with credit unions, Consumers Credit Union is yet another good option that allows anyone to apply.
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Or, if you’re not too picky about your car and prefer a more streamlined experience, Carvana offers some unique and affordable financing options. And finally, while expensive, OpenRoad Lending offers a lot of potential if you’re looking to get out of a car loan with a high rate.
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<span class="heading-toc" id="toc-compare-best-auto-loan-lenders"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-3"> <span class="mntl-sc-block-heading__text"> Compare Best Auto Loan Lenders </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="PRM Roundup | Table Block" id="mntl-sc-block_4-0-4">
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<th><b>Company</b></th>
<th><b>Used APR Range</b></th>
<th><b>Used Loan Amounts</b></th>
<th><b>Used Loan Terms</b></th>
<th>Min. Rec. Credit Score</th>
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</thead>
<tbody data-check="0">
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<th><a class="summary-list__item-top-pick" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://track.supermoney.com/aff_c?offer_id=2027&aff_id=1715&featured-product=penfed-credit-union-auto-loan" rel="sponsored nofollow">PenFed</a> Best Overall</th>
<td>6.49%–17.99%</td>
<td>$500–$150,000</td>
<td>3–7 years</td>
<td>Not disclosed</td>
</tr>
<tr>
<th><a class="summary-list__item-top-pick" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER" rel="sponsored nofollow">AUTOPAY</a> Best for Bad Credit/Low Rates</th>
<td>As low as 5.69%</td>
<td>$2,500–$100,000</td>
<td>2–8 years</td>
<td>500</td>
</tr>
<tr>
<th><a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=nf3003f0dc8e844698103523de66b2efd20" rel="nofollow">Consumers Credit Union</a> Best Credit Union</th>
<td>As low as 6.84%</td>
<td>$500–$350,000</td>
<td>36–84 months</td>
<td>Not disclosed</td>
</tr>
<tr>
<th><a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl&pub_param_1=4846394&pub_param_2=nf3003f0dc8e844698103523de66b2efd20" rel="nofollow">LendingTree</a> Best for Refinance</th>
<td>As low as 5.99% (Refinance)</td>
<td>Not disclosed</td>
<td>36–72 months (Refinance)</td>
<td>Not disclosed</td>
</tr>
<tr>
<th><a class="summary-list__item-top-pick" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance" rel="sponsored nofollow">LendingClub</a> Best for Fair Credit</th>
<td>4.99%–24.99% (Refinance)</td>
<td>$4,000–$55,000</td>
<td>2–7 years (Refinance)</td>
<td>600</td>
</tr>
<tr>
<th><a class="summary-list__item-top-pick" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&pub_param_2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=carvana&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=nf3003f0dc8e844698103523de66b2efd20" rel="nofollow">Carvana</a> Best for Full Car Buying Experience</th>
<td>Not disclosed</td>
<td>Not disclosed</td>
<td>Not disclosed</td>
<td>500</td>
</tr>
<tr>
<th><a class="summary-list__item-top-pick" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489" rel="sponsored nofollow">OpenRoad Lending</a> Best for High Maximum Accepted Mileage</th>
<td>1.99%–24.99% (Refinance)</td>
<td>$7,500–$100,000 (Refinance)</td>
<td>24–72 months (Refinance)</td>
<td>500</td>
</tr>
</tbody>
</table>
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<p>Looking for a specific type of loan? See our top picks for auto loans in a variety of categories:</p>
<ul>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-used-car-loans-7373705">Best Used Car Loans</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-bad-credit-7372351">Best Car Loans for Bad Credit</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">Best Auto Refinance Loans</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-private-party-car-loans-7372372">Best Private Party Car Loans</a><br/></li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-motorcycle-loans-5080905">Best Motorcycle Loans</a></li>
<li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-rv-loan-rates-5082108">Best RV Loans</a></li>
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<span class="heading-toc" id="toc-what-is-an-auto-loan-and-how-does-it-work"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-6"> <span class="mntl-sc-block-heading__text"> What Is an Auto Loan and How Does It Work? </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-7">
An auto loan is an installment loan used to buy a new or used car, or to <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">refinance an existing auto loan</a>. Auto loans are usually <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-loans-5076025">secured</a>, which means the vehicle serves as collateral for the loan. If you fail to make monthly car payments as agreed, the lender can seize the vehicle.
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You can use a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">personal loan</a> to make a car purchase, but secured auto loans typically have lower rates because lenders have more security if you don't pay as agreed.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-9">
Auto loan lenders may allow you to borrow more than the purchase price of the car, to account for taxes, fees, dealer upgrades, and other add-ons.<br>
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Like other installment loans, when you borrow money with an auto loan the funds are provided in a lump sum. The borrower makes equal monthly installment payments until the term loan is paid off. The money is lent at interest, so the borrower ends up paying back more than they originally borrow.
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-11"> <span class="mntl-sc-block-subheading__text"> Auto Loan Rates </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-12">
Longer loan terms may come with a lower monthly payment and lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rates (APRs)</a>, but don't be fooled. In general, it's best to choose the shortest term and the highest monthly payments you can afford; this will make the overall loan as inexpensive as possible. When the loan is fully paid off, the vehicle belongs to the borrower (instead of the lender).
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-13"> <span class="mntl-sc-block-subheading__text"> Where To Get an Auto Loan </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-14">
Auto loans are available from traditional banks, online banks, credit unions, and lending marketplaces (which partner with banks and credit unions). You'll find new, used, and refinance auto loans from all of those sources, although some lenders only offer certain loan types; some lenders offer special deals for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461">first-time car buyers</a>, as well.
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Auto loans are also available through dealerships that partner with banks; in some cases you may find lower rates through a dealership, but it's worth getting pre-approved with lenders on your own to see what kind of rates you can get. Then, you can go to the dealership with some bargaining power—see if the dealer will beat the best rate you found on your own.
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Learn more in our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-car-loans-work-5202265">expert explanation of how auto loans work</a>.
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<div class="comp mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_4-0-17">
<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/s4l76/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Top 5 Auto Loan Features"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-18"> <span class="mntl-sc-block-subheading__text"> Types of Auto Loans </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-19">
Some people choose the type of car they get based on the type of loan they'd like. For example, new cars are more expensive, but the loans are often much cheaper than for used cars—and that’s one reason many people prefer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/neworusedcar.asp">new cars over used cars</a>.
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<li><strong>New car loan: </strong>Just about every lender offers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-buy-a-new-car-7484059">new car loans</a>. They feature lower rates and may come with longer term lengths since you’ll likely be financing a car that costs more, given the higher price tag for new cars.</li>
<li><strong><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-used-car-loans-7373705">Used car loan</a>: </strong>Equally common, the rates on used car loans are generally a bit higher. Lenders may have more restrictions in place for loan approval, such as only being able to buy used cars from dealerships or cars below a certain age or mileage level.</li>
<li><strong><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">Auto loan refinance</a>: </strong>Many lenders offer refinance loans, which are used to pay off your current loan contract, replacing it with a new one. You might do this to get lower monthly payments and/or to pay off your loan faster while saving money.</li>
<li><strong>Cash-out refinance:</strong> A cash-out refinance works the same as above, except you borrow a higher amount of money than you need. You get the difference back as cash that you can use for other things, like home repairs or debt consolidation. </li>
<li><strong>Auto title loan: </strong>These are similar to payday loans except your paid-off (or mostly paid-off) car serves as loan collateral. <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/car-title-loan.asp">Auto title loans</a> are extremely expensive and difficult to repay, resulting in some borrowers having their car repossessed, so we don't recommend them.</li>
<li><strong>Buy-here-pay-here loan: </strong>These dealerships market to people with bad credit. Your car may come installed with a tracking device to make it easier to repossess, and you may be charged exorbitantly high rates. We don’t recommend buy-here-pay-here loans.</li>
<li><strong>Lease buyout loan:</strong> It can be difficult and expensive to get out of a car lease contract early so you’ll need to calculate the costs for all of your options carefully. If you can’t pay cash, some lenders offer a lease buyout loan for this purpose.</li>
<li><strong>Private party auto loan: </strong>A private party auto loan is used to purchase a vehicle from a private seller—i.e., not a car dealership or business. Only some lenders provide loans for private party purchases.</li>
<li><strong>Bad credit car loans:</strong> Some lenders offer auto loans of various kinds for people with poor credit; these loans are just like any other kind of loan, but they typically come with higher interest rates and fees.</li>
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Auto loans can either be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp">secured or unsecured</a>. Most auto loans are secured by the very car you’re buying and offer lower rates because of that. Your car serves as collateral for the loan and if you don’t repay it, the lender will repossess your car.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-22">
Unsecured<strong> </strong>car loans aren’t as common, but some lenders (like <a data-affiliate-link-rewriter="subid=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lightstream.com/?fact=19969&subid=4846394&subid=4846394" rel="sponsored nofollow">LightStream</a>) do offer them. They’re often faster to get but they charge much higher rates because the lender doesn’t have an easy way to get their money back if you default.
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-23"> <span class="mntl-sc-block-subheading__text"> How to Get the Lowest Interest Rates On Your Auto Loan<br/> </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-24">
Auto loan rates depend in part on the federal prime rate, but the borrower's qualifications play a large role as well.
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<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-25">
<li><strong>Shop around:</strong> Different lenders offer different interest rates; seek out lenders with low minimum APRs and get pre-approved to check your rates.</li>
<li><strong>Build your credit:</strong> There are many ways to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-improve-your-credit-score-4590097">improve your credit score</a>—some can be quick, like reducing your credit utilization, while others can take some time, like building up a history of on-time payments.</li>
<li><strong>Increase your income:</strong> Having more money available (either for a down payment or for monthly payments) can improve your odds of getting a good rate.</li>
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<span class="heading-toc" id="toc-auto-loan-rates-by-credit-score"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-26"> <span class="mntl-sc-block-heading__text"> Auto Loan Rates by Credit Score </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="PRM Roundup | Table Block" id="mntl-sc-block_4-0-27">
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<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>Credit Level/Score</th>
<th>Used Car Loans</th>
<th>New Car Loans</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Super Prime: 781–850</td>
<td>7.43%</td>
<td>5.61%</td>
</tr>
<tr>
<td>Prime: 661–780</td>
<td>9.33%</td>
<td>6.88%</td>
</tr>
<tr>
<td>Nonprime: 601–660</td>
<td>13.53%</td>
<td>9.29%</td>
</tr>
<tr>
<td>Subprime: 501-600</td>
<td>18.39%</td>
<td>11.86%</td>
</tr>
<tr>
<td>Deep subprime: 300–500</td>
<td>14.17%</td>
<td>21.18%<span data-cite="81"></span></td>
</tr>
</tbody>
</table>
<figcaption>Data from Experian's State of the Automotive Finance Market Report Q3 2023.</figcaption>
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<span class="heading-toc" id="toc-how-to-apply-for-an-auto-loan"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-28"> <span class="mntl-sc-block-heading__text"> How to Apply for an Auto Loan </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ol class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-29">
<li>You can get an auto loan from several different types of lenders: online lenders, banks, and credit unions. Dealerships themselves also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dealer-financing.asp">partner with these lenders to offer you financing</a>.</li>
<li>It’s best to do your loan shopping before you actually start looking for a car, because you can take the time to find the best loan options and you’ll have more bargaining power when you do find the car you want.</li>
<li>Each lender will check two things in order to approve your loan: your financial situation and the car you want to buy.</li>
<li>You can start the loan shopping process by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-pre-approved-for-a-car-loan-7485858">getting pre-approved</a> with multiple lenders. This may require a hard credit inquiry, in some cases. Chances are, some lenders will offer lower rates than others.</li>
<li>If you’re pre-approved based on the initial details you provide, including personal details like Social Security number and some financial details, the lender will let you know what rates and terms you’re likely to qualify for.</li>
<li>Lenders look for a few things. Your credit score, income, and debt payments are three of the most important factors, so it’s a good idea to clean up your credit in advance if it needs work and you have the time. Consider ways to reduce your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dti.asp">debt-to-income ratio</a>.</li>
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-30">
If you’re not able to qualify on your own and you have someone who’s willing to help, applying with a co-signer can improve your odds of qualifying for a loan.
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<p>“When my wife and I were shopping for a car last year, we prepared by getting a pre-qualification from our bank—Bank of America. We did it online, through our account portal. It was really easy, and because we have several accounts with BofA, we qualified for a rate discount. We planned on using the pre-approval as a negotiating tool, and figured the dealer would offer a better rate. To our surprise, the dealer couldn’t beat it. So now we have yet another account with BofA.” — Lars Peterson (Investopedia Senior Editor, Financial Products and Services).</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-32">
Once you find the car you want, you can provide the details to your chosen lender and submit a full loan application. The lender will usually disburse the loan funds directly to you, either by check or bank deposit. In some cases lenders may send the money directly to dealerships; for refinance loans, lenders may send the money directly to the current holder of your loan.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-33">
Your new lender will provide you with details on how to set up an account, manage your loan, and make payments.<br/>
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<span class="heading-toc" id="toc-auto-loan-calculator"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-34"> <span class="mntl-sc-block-heading__text"> Auto Loan Calculator </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-35">
See how much car you can afford with our <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>; plug in your details, and you can see how big your monthly payments will be at different terms and interest rates.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-36">
Say you take out a loan for a new 2024 Ford F-150 Platinum with the following details, for example:
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<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-37">
<li><strong>Car price:</strong> $64,915</li><li><strong>Down payment:</strong> $5,000</li><li><strong>Loan amount:</strong> $59,915</li><li><strong>Loan term:</strong> 72 months</li><li><strong>Credit:</strong> Fair (601–660 credit score)</li><li><strong>Interest rate:</strong> 7.14%</li><li><strong>Total paid over the life of the loan:</strong> $73,837.72</li>
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-38">
With those terms, you'd have a monthly loan payment of <strong>$1,025.52</strong>. If you were to make a larger down payment, such as $8,000, you could take out a smaller loan (<strong>$56,915</strong>), and your monthly payment would be <strong>$974.17</strong>. You'd pay less overall: <strong>$70,140.59</strong> over the life of the loan.<br/>
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<p><strong>In the News: </strong>Auto loan rates are related to the Federal Reserve's benchmark rate—if the Fed rate goes up, average auto loan rates usually will, as well. Today's interest rates are pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame decades-high inflation.</p>
<p>The Fed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952">held rates steady</a> for a sixth consecutive time at its meeting the concluded May 1. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.<span class="ql-inline-citation" data-cite="84"></span><span class="ql-inline-citation" data-cite="83"></span></p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<span class="heading-toc" id="toc-auto-loans-pros-and-cons"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-40"> <span class="mntl-sc-block-heading__text"> Auto Loans: Pros and Cons </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-41"> <span class="mntl-sc-block-subheading__text"> <br/>Pros </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-42">
<li><strong>Provides access to a car:</strong> If you need a car to get to work or school and can't afford to buy one with cash, an auto loan can give you that access to the transportation you need.</li>
<li><strong>Spreads out the expense of a vehicle purchase:</strong> Even if you have enough cash to buy a car, auto financing spreads out that expense, so you don’t deplete your savings all at once.</li>
<li><strong>You'll own the car:</strong> Your lender technically owns the car while you pay down your loan, but once it's paid off, you'll own the car outright. New car leases can save you money with lower monthly payments, but there's no vehicle ownership.</li>
<li><strong>Flexible loans:</strong> Auto loans can offer flexibility with loan amounts and repayment terms to help fit into your budget.</li>
<li><strong>Can help build credit:</strong> Like other installment loans, auto loans can be used to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/101614/build-your-credit-score.asp">build credit</a> as you make on-time monthly payments.</li>
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-43"> <span class="mntl-sc-block-subheading__text"> Cons </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-44">
<li><strong>Interest rates can be high: </strong>Auto loan rates are lower than what you can expect from a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">personal loan</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">credit card</a>. But if your credit isn't in great shape, you can still end up with a high interest rate, which could make monthly payments unaffordable.</li>
<li><strong>Vehicles depreciate:</strong> While you're paying down your loan, the value of your vehicle is depreciating. If the vehicle's value is less than what you owe on your loan, you may have to pay the difference when you sell the car or if the vehicle gets totaled in an accident.</li>
<li><strong>Can damage your credit:</strong> If you miss a payment by 30 days or more, it could damage your credit score significantly.</li>
<li><strong>Default can result in repossession:</strong> If you fail to make payments for a longer period, your lender could repossess the vehicle and sell it to recoup the remaining loan balance. If there's a deficiency after the sale, you may still be on the hook for that debt.</li>
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<span class="heading-toc" id="toc-where-are-the-big-banks"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-45"> <span class="mntl-sc-block-heading__text"> Where Are the Big Banks? </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-46">
We included big banks like Chase, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/capital-one-auto-loans-review-7968929">Capital One</a>, Bank of America, and U.S. Bank in our review of the auto loan industry, but these financial institutions don't always make our "Best" lists.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-47">
Why? Although these banks are reliable and used by millions of people, they usually don't offer the very best rates and terms. Online banks and lender marketplaces tend to have lower operating costs, and can pass those savings on to borrowers. Big banks tend to score well in our rankings, but they don't usually come out on top when it comes to auto loan interest rates, flexibility in terms, and accessibility.
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<div class="comp mntl-sc-block prm-sc-block-faq--finance prm-sc-block-faq mntl-sc-block-faq mntl-block" data-click-action="OnPageClick - FAQ Header" data-tracking-container="true" data-tracking-id="PRM Roundup | FAQ" id="mntl-sc-block_4-0-48">
<span class="heading-toc" id="toc-faqs-29dfee65-cce3-4a9e-9a1c-7084182bea46"></span>
<h2 class="comp mntl-sc-block-faq__title mntl-text-block" id="mntl-sc-block-faq__title_1-0">
Frequently Asked Questions</h2><!-- end: comp mntl-sc-block-faq__title mntl-text-block -->
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<div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-0" tabindex="-1">
<h3 class="accordion__title">Which Companies Are Best for Car Loans?</h3>
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<p>Our top-rated lenders offer the lowest rates on new and used car loans in the auto financing industry—if you've got good credit and you want the best rates, take a look at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=penfed&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=na771cd002a744fabb39e1053634a454c16" rel="nofollow">PenFed</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER" rel="sponsored nofollow">AUTOPAY</a>, <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=na771cd002a744fabb39e1053634a454c16" rel="nofollow">Consumers Credit Union</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl&pub_param_1=4846394&pub_param_2=na771cd002a744fabb39e1053634a454c16" rel="nofollow">LendingTree</a>, <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance" rel="sponsored nofollow">LendingClub</a>, and <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489" rel="sponsored nofollow">OpenRoad Lending</a>. You'll also find several good options for refinancing, as well.</p>
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<div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-1" tabindex="-1">
<h3 class="accordion__title">How Do You Get the Best Car Loan Rate?</h3>
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<div class="accordion__body">
<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-1">
<div class="faq-accordion__item-answer">
<p>Not everyone qualifies for the best auto loan rates. Here are <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">some things you can do</a> before and during the application process to tip the odds in your favor:<span class="ql-inline-citation" data-cite="64"></span></p><ul><li>Check your rate with as many lenders as you can (within a short timeframe).</li><li>Pay down your existing debt, especially credit card debt.</li><li>Check your credit reports and fix any errors before you apply for a loan.</li><li>Use your loan pre-approval offers to negotiate a lower rate with the dealership.</li></ul>
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<div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-2" tabindex="-1">
<h3 class="accordion__title">What Credit Score Do You Need to Qualify for a Car Loan?</h3>
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<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-2">
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<p>There is no overall minimum credit score you’ll need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-credit-score-do-you-need-to-buy-a-car-5181034">qualify for an auto loan</a>.<span class="ql-inline-citation" data-cite="67"></span> It depends on the lender; each lender has its own credit requirements. In general, if you have good or excellent credit (670 or higher), you’ll qualify for the best auto loan rates.<span class="ql-inline-citation" data-cite="68"></span> Lenders typically use an auto-loan specific credit scoring model. See the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-bad-credit-7372351">best car loans for bad credit</a> if you’re dealing with a lower score.</p>
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<h3 class="accordion__title">Where Can I Get an Auto Loan?</h3>
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<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-3">
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<p>You can obtain an auto loan through a dealer in a dealer-arranged financing agreement or directly from an online lender, credit union, or traditional bank. Some dealers also offer in-house financing for car buyers with bad credit.<br/></p>
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<h3 class="accordion__title">When Is the Best Time to Buy a Car?</h3>
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<p>Ultimately, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/when-is-the-best-time-to-buy-a-car-5207171">best time to buy a car</a> is when you need one. But if you have some flexibility, experts recommend the following times:</p><ul><li><strong>The end of the month, quarter, or year:</strong> Car salespeople often have to meet quotas for each month, quarter, and year, so they may be motivated to make a deal toward the end of those periods to ensure they make the cut.</li><li><strong>Three-day weekends:</strong> Dealerships often run sales events for President's Day, Memorial Day, Labor Day, and other three-day weekends. The same goes for other holidays, such as the Fourth of July and Black Friday.</li><li><strong>The end of the model year:</strong> Dealers may offer deals to get rid of inventory and make way for the latest model. Research when new models are released for the car you want and see if it can help you with negotiations.<span class="ql-inline-citation" data-cite="73"></span></li></ul>
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<h3 class="accordion__title">What Is a Good APR for an Auto Loan?</h3>
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<p>According to a report by Experian in Nov. 2023, average rates for 2023 were 7.03% for new cars and 11.35% for used cars, although rates will have changed somewhat since then. If you get a rate lower than the average, you can generally feel like you're getting a good deal. Your rate will vary depending on your credit score, income, and other factors.<span class="ql-inline-citation" data-cite="8"></span></p>
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<h3 class="accordion__title">What Are Used Car Loan Interest Rates?</h3>
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<p>By Nov. 2023, the average interest rate for used cars in 2023 was 11.35%, according to Experian. Here's the average used car loan interest rate for each credit score range:</p><ul><li><strong>Super prime: </strong>7.43%</li><li><strong>Prime:</strong> 9.33%</li><li><strong>Near prime:</strong> 13.53%</li><li><strong>Subprime:</strong> 18.39%</li><li><strong>Deep subprime:</strong> 21.18%<span class="ql-inline-citation" data-cite="8"></span></li></ul>
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<h3 class="accordion__title">Companies We Reviewed</h3>
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<p>We researched and reviewed 21 companies to find the best seven lenders you see on the list above. While we write individual reviews for most companies, we do not always write reviews for companies we would not recommend. Below are the companies we researched along with links to individual company reviews to help you learn more before making a decision:</p><p>Alliant Credit Union, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/autopay-auto-loans-review-7643912">AUTOPAY</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bank-of-america-auto-loan-review-8357865">Bank of America</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/capital-one-auto-loans-review-7968929">Capital One</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/carmax-auto-loan-review-7642717">CarMax</a>, <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/carvana-auto-loans-review-7965774">Carvana</a>, <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-auto-loans-review-7972436">Chase Auto</a>, <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/consumers-credit-union-auto-loan-review-8357871">Consumers Credit Union</a>, Credible, <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/first-tech-fcu-auto-loans-review-7965780">First Tech FCU</a>, LendingClub, <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lendingtree-auto-loans-review-7965787">LendingTree</a>, <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lightstream-auto-loans-review-7853022">LightStream</a>, NASA FCU, Navy Federal Credit Union, <a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/openroad-lending-auto-loan-review-7642719">OpenRoad Lending</a>, <a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/penfed-auto-loans-review-7853548">PenFed</a>, <a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pnc-bank-auto-loans-review-7965779">PNC Bank</a>, U.S. Bank, USAA, Vroom.</p>
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<span class="heading-toc" id="toc-other-types-of-auto-loans"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-49"> <span class="mntl-sc-block-heading__text"> Other Types of Auto Loans </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-50">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-used-car-loans-7373705">Best Used Car Loans</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-bad-credit-7372351">Best Car Loans for Bad Credit</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">Best Auto Refinance Loans</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-private-party-car-loans-7372372">Best Private Party Car Loans</a></li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461">Best Car Loans for First Time Buyers</a></li>
<li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-motorcycle-loans-5080905">Best Motorcycle Loans</a></li>
<li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-rv-loan-rates-5082108">Best RV Loans</a></li>
<li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-repair-loans-7372941">Best Auto Repair Loans</a></li>
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<span class="heading-toc" id="toc-guide-to-auto-loans"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-51"> <span class="mntl-sc-block-heading__text"> Guide to Auto Loans </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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Learn more about auto loans:
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<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-53">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-car-loans-work-5202265">How Auto Loans Work</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-credit-union-auto-loans-work-7484368">How Credit Union Auto Loans Work</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-pre-approved-for-a-car-loan-7485858">How to Get Pre-Approved for a Car Loan</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-a-car-loan-7368513">How to Get a Car Loan</a></li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-buy-a-new-car-7484059">How to Buy a New Car</a></li>
<li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-refinance-a-car-loan-7368491">How to Refinance a Car Loan</a></li>
<li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-buy-a-car-with-no-credit-7371498">How to Buy a Car With No Credit</a><br/></li>
<li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dealer-financing.asp">Dealer Financing: What It Is, How It Works</a></li>
<li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-buy-a-car-from-a-dealership-7973665">How to Buy a Car From a Dealership</a><br/></li>
<li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/061615/how-interest-rates-work-car-loans.asp">How Interest Rates Work on Car Loans</a><br/></li>
<li><a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/credit-union-vs-bank-auto-loan-what-s-the-best-choice-7556622">Credit Union vs. Bank for Auto Loan: What’s the Best Choice?</a></li>
<li><a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="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?</a></li>
<li><a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime_auto_loans.asp">Subprime Auto Loan: Meaning, Rates, FAQs</a></li>
<li><a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/car-title-loan.asp">Car Title Loan: What It is, How It Works, Example</a><br/></li>
<li><a data-component="link" data-ordinal="15" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761">Auto Loan Payment and Interest Calculator</a></li>
<li><a data-component="link" data-ordinal="16" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/auto-loan-review-methodology-7552736">Auto Loan Review Methodology</a></li>
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<span class="heading-toc" id="toc-how-we-picked-the-best-auto-loans"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-54"> <span class="mntl-sc-block-heading__text"> How We Picked the Best Auto Loans </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-55">
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of auto loan lenders. To rate providers, we collected hundreds of data points for a period of over two months across more than 20 auto loan lenders, including interest rates, fees, loan amounts, borrower requirements, and vehicle requirements, to ensure that our reviews help users make informed decisions for their borrowing needs. We also conducted a survey of 1,016 auto loan borrowers for attitudes and opinions about lenders and the loan approval and disbursement process.
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<span class="heading-toc" id="toc-why-you-should-trust-us"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-56"> <span class="mntl-sc-block-heading__text"> Why You Should Trust Us<br> </br></span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-57">
Investopedia collected 1,176 key data points from 21 companies across three months to identify the most important factors for readers choosing an auto loan. We used this data to review each company for interest rates, loan requirements, and other features to provide unbiased, comprehensive reviews to ensure our readers make the right decision for their needs. Investopedia launched in 1999, and has been helping readers find the best auto loans since 2020.
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<li class="mntl-sources__source" id="citation-51"><p>Board of Governors of the Federal Reserve System. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/releases/g19/current/">Consumer Credit - G.19</a>."</p></li>
<li class="mntl-sources__source" id="citation-81"><p>Experian. "<a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/experian-safm.pdf" rel="nofollow sponsored">State of the Automotive Finance Market Q3 2023</a>."</p></li>
<li class="mntl-sources__source" id="citation-84"><p>Bureau of Labor Statistics. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bls.gov/news.release/cpi.nr0.htm">Consumer Price Index</a>."</p></li>
<li class="mntl-sources__source" id="citation-83"><p>Federal Reserve. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm">Federal Reserve Issues FOMC Statement</a>."</p></li>
<li class="mntl-sources__source" id="citation-64"><p>Experian. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.experian.com/blogs/ask-experian/step-by-step-checklist-for-buying-a-new-car/" rel="nofollow sponsored">Step-by-Step Checklist for Buying a New Car</a>.”</p></li>
<li class="mntl-sources__source" id="citation-67"><p>Experian. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.experian.com/blogs/ask-experian/what-is-a-good-credit-score-for-an-auto-loan/" rel="nofollow sponsored">What Credit Score Do I Need for an Auto Loan?</a>”</p></li>
<li class="mntl-sources__source" id="citation-68"><p>FICO. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.myfico.com/credit-education/what-is-a-fico-score" rel="nofollow sponsored">What is a FICO® Score?</a>”</p></li>
<li class="mntl-sources__source" id="citation-73"><p>Progressive. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.progressive.com/answers/best-time-to-buy-a-car/" rel="nofollow sponsored">When is the best time to buy a car?</a>"</p></li>
<li class="mntl-sources__source" id="citation-8"><p>Experian. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/experian-safm.pdf" rel="nofollow sponsored">State of the Automotive Finance Market Report</a>."</p></li>
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PenFed Credit Union is the best overall auto loan lender thanks to its wide selection of loan types and competitive rates, according to our research. It offers rates for used cars as low as 6.49%, and another one of our picks, OpenRoad Lending, offers rates as low as 1.99%. We reviewed 21 auto loan lenders and collected the best new, used, and refinance auto loan rates, evaluating APRs, loan types, loan terms, vehicle and borrower requirements, and other factors. We also surveyed 1,016 auto loan borrowers, asking how they felt about lenders and the loan process.
## Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
* **Best Overall:**
[PenFed](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=penfed&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1)
* **Best for Bad Credit/Low Rates:**
[AUTOPAY](https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER)
* **Best Credit Union:**
[Consumers Credit Union](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1)
* **Best for Refinance:**
[LendingTree](https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl)
* **Best for Fair Credit:**
[LendingClub](https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance)
* **Best for Full Car Buying Experience:**
[Carvana](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=carvana&bwid_id=6385e804ca097c71ee1e23c1)
* **Best for High Maximum Accepted Mileage:**
[OpenRoad Lending](https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489)
Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
Expand
Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
* [Our Top Picks](#summary-list)
* [PenFed](#toc-best-overall-penfed)
* [AUTOPAY](#toc-best-for-bad-creditlow-rates-autopay)
* [Consumers Credit Union](#toc-best-credit-union-consumers-credit-union)
* [LendingTree](#toc-best-for-refinance-lendingtree)
* [LendingClub](#toc-best-for-fair-credit-lendingclub)
* [Carvana](#toc-best-for-full-car-buying-experience-carvana)
* [OpenRoad Lending](#toc-best-for-high-maximum-accepted-mileage-openroad-lending)
* See More (4)
* [The Bottom Line](#toc-the-bottom-line)
* [Compare Best Auto Loan Lenders](#toc-compare-best-auto-loan-lenders)
* [What Is an Auto Loan?](#toc-what-is-an-auto-loan-and-how-does-it-work)
* [How to Apply](#toc-how-to-apply-for-an-auto-loan)
* [Auto Loan Calculator](#toc-auto-loan-calculator)
* [Pros and Cons](#toc-auto-loans-pros-and-cons)
* [FAQs](#toc-faqs-29dfee65-cce3-4a9e-9a1c-7084182bea46)
* [Other Auto Loans](#toc-other-types-of-auto-loans)
* [Guide to Auto Loans](#toc-guide-to-auto-loans)
* [Methodology](#toc-how-we-picked-the-best-auto-loans)
* [Why You Should Trust Us](#toc-why-you-should-trust-us)
### Best Overall
:
PenFed
---
![PenFed logo]()
:fill(white):max_bytes(150000):strip_icc()/Pen-Fed-logo-f8c3ab7908564d66abcf5a6b19564ed9.jpeg)
PenFed logo.
* **Used APR Range:** 6.49%–17.99%
* **Used Loan Amounts:** $500–$150,000
* **Minimum Recommended Credit Score:** Not disclosed
[Apply Now](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=penfed&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1)
Pros & Cons
Pros
* Full suite of auto loan types available
* Allows private-party vehicle purchases
* Promotional offers if you use car-buying service
Cons
* Must join credit union
* Doesn’t allow co-signers
* No rate discounts available
Why We Chose It
PenFed is our top pick overall for auto financing because it offers all of the loan types you’d ever hope to use, and offers competitive rates: loans for new or used cars, refinances, cash-out refinances, and even lease buyout loans. You can even use a used car loan to buy a car from a private seller, if you wish.
PenFed will mail you a check if you’re approved for any of its loans.
That can take a few days, but if you’re OK with using the TrueCar car-buying service, PenFed offers a pretty good relationship discount. Your loan could be funded the same day you’re approved, if you use this service.
PenFed's customer service is available by phone or secure online message. PenFed has been in business since 1935, and has headquarters in McLean, Virginia.
Read our full [PenFed auto loans review](https://www.investopedia.com/penfed-auto-loans-review-7853548).
Terms and Borrower Qualifications
* **Used loan terms:** 3–7 years
* Available in all 50 states and Washington, D.C.
* Must join the credit union by depositing at least $5 in a savings account.
Vehicle Qualifications
* **For loans less than seven years:** No limit on vehicle age, and must have 125,000 miles or fewer
* **For loans of seven years or more:** Vehicle must be less than five years old and be under 60,000 miles
* **Maximum loan-to-value ratio:** 125%
* **Allows private-party vehicle purchases:** Yes
### Best for Bad Credit/Low Rates
:
AUTOPAY
---
![AutoPay]()
:fill(white):max_bytes(150000):strip_icc()/Autopay-ec4375470de24d2f8aca313b8f153804.jpg)
AutoPay
* **Used APR Range:** As low as 5.69%
* **Used Loan Amounts:** $2,500–$100,000
* **Minimum Recommended Credit Score:** 500
[Apply Now](https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER)
Pros & Cons
Pros
* Relatively low rates
* No payments for 45 days
* Low minimum credit score requirement
Cons
* Very sparse on loan details
* Doesn’t disclose partner lenders
* Can’t apply with a co-signer, only a co-borrower
Why We Chose It
AUTOPAY is a loan aggregator and it's a bit light on the details; maybe intentional in order to get you to bite. If you have excellent borrower qualifications, AUTOPAY certainly has the potential to be one of your cheapest financing options, advertising some of the best car loan rates today compared to other lenders and aggregators.
It's our top pick for bad credit because it works with borrowers with credit scores as low as 500; but it doesn’t specify the *top* end of the rate range you’d be likely to pay if you have poor credit, so you’ll need to be careful—especially since you can’t [apply with a co-signer](https://www.investopedia.com/terms/c/co_sign.asp) (only a co-borrower). But, if you do have good credit, you may enjoy some very good interest rates.
AUTOPAY does offer a full suite of auto loan types: used cars, new cars, refinances, cash-out refinances, and even lease buyout loans. It works with a network of partner lenders rather than offering the loans itself, and that’s how it can offer so much flexibility. For that reason, it’s a good choice to add to your shopping list, although we would prefer if it offered more concrete details.
AUTOPAY was founded in 2007, and is based in Denver, Colorado. You can get in touch with the company by phone or online message. Read more in our full [AUTOPAY auto loans review](https://www.investopedia.com/autopay-auto-loans-review-7643912).
The best auto loan rates are often advertised through third-party companies that network with partner lenders, like AUTOPAY. Most don’t disclose their partners, however, so you can’t always see all of the companies you’re actually checking your rates with. You may need to sign up for automatic payments to get the best rates, as well.
Terms and Borrower Qualifications
* **Used loan terms:** 2–8 years
* Recommened credit score of 500 or higher
* Available in all U.S. states and Washington, D.C.
Vehicle Qualifications
* **Maximum accepted vehicle age:** 10 years
* **Maximum accepted mileage:** 150,000 miles
* **Maximum loan-to-value ratio:** Not disclosed
* **Allows private-party vehicle purchases:** Yes
### Best Credit Union
:
Consumers Credit Union
---
![Consumers Credit Union]()
:fill(white):max_bytes(150000):strip_icc()/Consumers_Credit-223ffc22f8644a9085928005b684f825.jpg)
Consumers Credit Union
* **Used APR Range:** As low as 6.84%
* **Used Loan Amounts:** $500–$350,000
* **Minimum Recommended Credit Score:** Not disclosed
[Apply Now](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1)
Pros & Cons
Pros
* Allows co-signers
* No age or mileage restrictions
* Offers a full suite of car loan options
Cons
* Can only be used at a dealership
* Must join credit union to receive loan
* Lack of transparency about loan requirements
Why We Chose It
As our highest-rated credit union, Consumers Credit Union is a good choice for people who prefer to bank with these financial institutions. It’s also a good choice if you’re trying to buy an older car from a dealership because it’s one of the few lenders that doesn’t put any limits on your vehicle’s model year or mileage.
Consumers also offers an optional mechanical repair insurance plan through ForeverCar, which might be especially important if you *are* driving an older car.
Consumers doesn’t specify what sort of credit history you need to qualify for a loan (or any other qualifications, really), but it might be good to add this one to your shopping list if you have bad credit. The maximum rate you’ll pay for a refinance loan, for example, is about half of what some other lenders may charge. It also has a relatively low minimum loan amount.
Customer support is available by phone, email, or live online chat.
Consumers Credit Union was chartered in 1930, and has corporate headquarters in Round Lake Beach, Illinois.
Terms and Borrower Qualifications
* **Used loan terms:** 36–84 months
* Available to people living in all 50 states and Washington, D.C.
* Need to join Consumers Cooperative Association ($5 fee) and deposit $5 in a savings account to establish your membership, if approved for a loan
Vehicle Qualifications
* **Maximum accepted vehicle age:** None
* **Maximum accepted mileage:** None
* **Maximum loan-to-value ratio:** 125%
* **Allows private-party vehicle purchases:** No
### Best for Refinance
:
LendingTree
---
![LendingTree]()
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LendingTree
* **Refinance APR Range:** As low as 5.99%
* **Refinance Loan Amounts:** Not disclosed
* **Minimum Recommended Credit Score:** Not disclosed
[Apply Now](https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl)
Pros & Cons
Pros
* Potential for very low rates
* Compare many refinance loan offers at once
* No limits on age or mileage of vehicle
Cons
* Can generate a lot of spam
* Very low loan-to-value ratios
* Doesn’t offer many details about its loans
Why We Chose It
LendingTree is another company that can help you quickly identify the best financing rates from among its network of lenders. It suffers from the same problems as other lender networks, however—namely, that it doesn’t tell you which lenders it’s checking your rates with, nor what the types of loans you might qualify for look like. You can also expect a lot of companies reaching out to you with spam, too.
Still, it’s a great option if you’re looking for a car loan refinance, advertising competitively low rates. You’ll just need to make sure you have plenty of equity in your vehicle since LendingTree lenders don’t offer loans with a loan-to-value ratio above 80%. That means underwater loans aren’t eligible for refinance.
You can contact LendingTree by phone, but if you used LendingTree to get a loan with a partner lender you'll likely need to contact that lender instead.
LendingTree was founded in 1996, and now has headquarters in Charlotte, North Carolina.
Terms and Borrower Qualifications
* **Refinance loan terms:** 36–72 months
* Available to residents of all 50 states and Washington, D.C.
Vehicle Qualifications
* **Maximum accepted vehicle age:** None
* **Maximum accepted mileage:** None
* **Maximum loan-to-value ratio:** 80%
* **Allows private-party vehicle purchases:** Not disclosed
### Best for Fair Credit
:
LendingClub
---
![LendingClub]()
:fill(white):max_bytes(150000):strip_icc()/Lending_Club-51af42c5c7174fc1931ee8f86f263d15.jpg)
LendingClub
* **Refinance APR Range:** 4.99%–24.99%
* **Refinance Loan Amounts:** $4,000–$55,000
* **Minimum Recommended Credit Score:** 600
[Apply Now](https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance)
Pros & Cons
Pros
* Minimum recommended credit score of 600
* No loan fees
* Can refinance with the same lender
* Low rates for well-qualified borrowers
Cons
* Doesn’t allow co-signers
* Many residency and car restrictions
* Doesn’t offer new or used auto loans
Why We Chose It
LendingClub, the former peer-to-peer lender, is now in the auto refinance business where it offers very good rates to borrowers with good credit. Borrowers with fair credit can be approved too—making it our top pick for this category, along with its high overall score as well—but if your credit is quite bad LendingTree may charge you a higher rate than most other lenders. On the bright side, LendingClub doesn’t charge any fees—origination fees, late fees, prepayment penalties, nothing.
LendingClub is one of a handful of lenders that allow you to refinance your current LendingClub loan with another LendingClub loan, if you happen to qualify. However, be aware that there are many loan limitations with this lender. It’s not available in many sparsely populated states, for example, and there are many makes and models of popular cars LendingClub won’t finance.
LendingClub was incorporated in 2007, and it's headquartered in San Francisco, California.
See more of the [best auto loans for fair credit](https://www.investopedia.com/best-auto-loans-for-fair-credit-7486579) to explore your options.
Terms and Borrower Qualifications
* **Refinance loan terms:** 2–7 years
* 600 or higher recommended credit score
* Current auto loan must have been open for at least one month
* Current auto loan must have at least 24 months remaining
* Available to residents of all U.S. states except for: Alaska, District of Columbia, Hawaii, Maine, New Hampshire, North Dakota, Vermont, West Virginia, Wyoming
* You must be at least 18 years of age
* You must be a U.S. citizen or permanent resident or live in the U.S. on a valid long-term visa
Vehicle Qualifications
* **Maximum accepted vehicle age:** 10 years
* **Maximum accepted mileage:** 120,000 miles
* **Maximum loan-to-value ratio:** Not disclosed
* **Allows private-party vehicle purchases:** No
In addition:
* The loan’s remaining balance must be between $5,000 and $55,000
* Can’t refinance business vehicles
* Vehicle must be registered in the same state you live
* Many cars not eligible for financing, such as Nissan Leafs and models from Suzuki, Saturn, Mercury, Saab, Pontiac, Oldsmobile, Hummer, and more
### Best for Full Car Buying Experience
:
Carvana
---
![Carvana]()
:fill(white):max_bytes(150000):strip_icc()/Carvana-2fe03d13b669495ab4a5198f4d69896b.jpg)
Carvana
* **APR Range:** Not disclosed
* **Loan Amounts:** Not disclosed
* **Minimum Credit Score:** 500
[Apply Now](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=carvana&bwid_id=6385e804ca097c71ee1e23c1)
Pros & Cons
Pros
* Neat, techy way to buy a car
* Offers seven-day return policy
* Long 45-day pre-approval window
Cons
* Not available outside of contiguous U.S.
* Doesn’t allow co-borrowers, only co-signers
* Delivery charges not refundable if you return car
Why We Chose It
Carvana is a used car dealership that offers a completely online car-buying experience, similar to TrueCar; it's our highest-rated company that offers this service.
You can [apply for an auto loan](https://www.investopedia.com/carvana-auto-loans-review-7965774) online, find a car, and then pick it up or even have it delivered to you.
One of Carvana’s claims to fame, however, is its car vending machines. If you’re pre-approved for a loan you can schedule an appointment to take a car for a test drive from one of its giant vending machines. The company will even provide you with a token to use.
If you like the car, you can keep it. If not, you’ll have seven days to return it.
It’s a futuristic way to buy a car that many people like; however, there can be problems with the setup. If you have a car delivered and you don’t like it, for example, you can return it, but the shipping charge is nonrefundable. That makes it costly and impractical to test drive different models like you would at a dealership.
Carvana's customer support team is available by text or by live chat on the website. The company was founded in 2012, and is based in Tempe, Arizona.
Terms and Borrower Qualifications
* **Loan terms:** Not disclosed
* Minimum recommended credit score of 500
* Must be at least 18 years old
* Minimum annual income of $4,000
* Must not have any active bankruptcies
* Available to residents in contiguous U.S.
Vehicle Qualifications
* **Maximum accepted vehicle age:** Varies
* **Maximum accepted mileage:** 140,000 miles
* **Maximum loan-to-value ratio:** Not disclosed
* **Allows private-party vehicle purchases:** No (only for used cars bought through the Carvana platform)
### Best for High Maximum Accepted Mileage
:
OpenRoad Lending
---
![OpenRoad Lending]()
:fill(white):max_bytes(150000):strip_icc()/Open_Road_Lending-37f22388fed54364bf8922b784cee9b9.jpg)
OpenRoad Lending
* **Refinance APR Range:** 1.99%–24.99%
* **Refinance Loan Amounts:** $7,500–$100,000
* **Minimum Recommended Credit Score:** 500
[Apply Now](https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489)
Pros & Cons
Pros
* Maximum accepted mileage of 160,000, according to customer service
* Offers lease buyout loans
* Refinancing available if you’re underwater on loan
* Can re-refinance your loan through OpenRoad again
Cons
* Potentially high rates and fees
* Doesn’t allow co-signers
* Many vehicle restrictions
Why We Chose It
OpenRoad Lending’s website looks like it was designed in the previous decade. But it can be helpful if you’re struggling to make your auto loan payments and you’re not able to qualify for a better loan with another lender—especially if you need to refinance a loan for a high-mileage car, because OpenRoad Lending's 160,000 mile-limit is the highest disclosed limit among lenders we reviewed.
It comes with very high origination fees ranging from $249 to $449, a 5% late payment fee, and interest rates that zoom into credit-card-debt territory for less-qualified borrowers.
However, OpenRoad Lending is still better than many other types of alternative auto loans, such as those from [buy-here-pay-here lenders](https://www.investopedia.com/terms/b/buy-here-pay-here.asp). You can still qualify if you have a poor credit score, even if you’re underwater on your current loan—a common problem for people with bad car loans.
OpenRoad Lending has a maximum loan-to-value ratio of 180%, meaning you may be able to borrow nearly twice your car’s actual value in order to pay off your existing loan—far more than most other lenders.
OpenRoad Lending was founded in 2009, and is based in Fort Worth, Texas.
If you need help, you can get in touch with OpenRoad by phone or email. Read more in our full [OpenRoad Lending auto loans review](https://www.investopedia.com/openroad-lending-auto-loan-review-7642719).
Terms and Borrower Qualifications
* **Refinance loan terms:** 24–72 months
* Minimum credit score of 500
* Must be at least 18 years old
* Available to residents in 46 U.S. states
* You must make at least $2,000 per month (earnings from Uber or similar services do not count toward the income requirement)
* Your DTI cannot exceed 40%
* Can only refinance auto loans issued by NCUA- or FDIC-insured lenders such as credit unions and banks
Vehicle Qualifications
* **Maximum accepted vehicle age:** Not disclosed
* **Maximum accepted mileage:** 160,000 miles
* **Maximum loan-to-value ratio:** 175%
* **Allows private-party vehicle purchases:** No
* Business vehicles, Oldsmobile, Daewoo, Smart Car, and Isuzu vehicles are not eligible for refinancing
## The Bottom Line
If you’re looking for the best overall auto loans, try starting with PenFed; it's a credit union, but anyone can join for just $5 when approved for a loan. AUTOPAY is worth checking as well, especially if you'd like to browse a variety of lenders. LendingTree is also a top choice for a rate-comparison website. If you prefer sticking with credit unions, Consumers Credit Union is yet another good option that allows anyone to apply.
Or, if you’re not too picky about your car and prefer a more streamlined experience, Carvana offers some unique and affordable financing options. And finally, while expensive, OpenRoad Lending offers a lot of potential if you’re looking to get out of a car loan with a high rate.
## Compare Best Auto Loan Lenders
| **Company** | **Used APR Range** | **Used Loan Amounts** | **Used Loan Terms** | Min. Rec. Credit Score |
| --- | --- | --- | --- | --- |
| [PenFed](https://track.supermoney.com/aff_c?offer_id=2027&aff_id=1715&featured-product=penfed-credit-union-auto-loan) Best Overall | 6.49%–17.99% | $500–$150,000 | 3–7 years | Not disclosed |
| [AUTOPAY](https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER) Best for Bad Credit/Low Rates | As low as 5.69% | $2,500–$100,000 | 2–8 years | 500 |
| [Consumers Credit Union](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=nf3003f0dc8e844698103523de66b2efd20) Best Credit Union | As low as 6.84% | $500–$350,000 | 36–84 months | Not disclosed |
| [LendingTree](https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl&pub_param_1=4846394&pub_param_2=nf3003f0dc8e844698103523de66b2efd20) Best for Refinance | As low as 5.99% (Refinance) | Not disclosed | 36–72 months (Refinance) | Not disclosed |
| [LendingClub](https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance) Best for Fair Credit | 4.99%–24.99% (Refinance) | $4,000–$55,000 | 2–7 years (Refinance) | 600 |
| [Carvana](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=carvana&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=nf3003f0dc8e844698103523de66b2efd20) Best for Full Car Buying Experience | Not disclosed | Not disclosed | Not disclosed | 500 |
| [OpenRoad Lending](https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489) Best for High Maximum Accepted Mileage | 1.99%–24.99% (Refinance) | $7,500–$100,000 (Refinance) | 24–72 months (Refinance) | 500 |
Looking for a specific type of loan? See our top picks for auto loans in a variety of categories:
* [Best Used Car Loans](https://www.investopedia.com/best-used-car-loans-7373705)
* [Best Car Loans for Bad Credit](https://www.investopedia.com/best-car-loans-for-bad-credit-7372351)
* [Best Auto Refinance Loans](https://www.investopedia.com/best-auto-refinance-loans-5069118)
* [Best Private Party Car Loans](https://www.investopedia.com/best-private-party-car-loans-7372372)
* [Best Motorcycle Loans](https://www.investopedia.com/best-motorcycle-loans-5080905)
* [Best RV Loans](https://www.investopedia.com/best-rv-loan-rates-5082108)
## What Is an Auto Loan and How Does It Work?
An auto loan is an installment loan used to buy a new or used car, or to [refinance an existing auto loan](https://www.investopedia.com/how-to-refinance-a-car-loan-7368491). Auto loans are usually [secured](https://www.investopedia.com/secured-loans-5076025), which means the vehicle serves as collateral for the loan. If you fail to make monthly car payments as agreed, the lender can seize the vehicle.
You can use a [personal loan](https://www.investopedia.com/best-personal-loans-4773300) to make a car purchase, but secured auto loans typically have lower rates because lenders have more security if you don't pay as agreed.
Auto loan lenders may allow you to borrow more than the purchase price of the car, to account for taxes, fees, dealer upgrades, and other add-ons.
Like other installment loans, when you borrow money with an auto loan the funds are provided in a lump sum. The borrower makes equal monthly installment payments until the term loan is paid off. The money is lent at interest, so the borrower ends up paying back more than they originally borrow.
### Auto Loan Rates
Longer loan terms may come with a lower monthly payment and lower [annual percentage rates (APRs)](https://www.investopedia.com/terms/a/apr.asp), but don't be fooled. In general, it's best to choose the shortest term and the highest monthly payments you can afford; this will make the overall loan as inexpensive as possible. When the loan is fully paid off, the vehicle belongs to the borrower (instead of the lender).
### Where To Get an Auto Loan
Auto loans are available from traditional banks, online banks, credit unions, and lending marketplaces (which partner with banks and credit unions). You'll find new, used, and refinance auto loans from all of those sources, although some lenders only offer certain loan types; some lenders offer special deals for [first-time car buyers](https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461), as well.
Auto loans are also available through dealerships that partner with banks; in some cases you may find lower rates through a dealership, but it's worth getting pre-approved with lenders on your own to see what kind of rates you can get. Then, you can go to the dealership with some bargaining power—see if the dealer will beat the best rate you found on your own.
Learn more in our [expert explanation of how auto loans work](https://www.investopedia.com/how-car-loans-work-5202265).
### Types of Auto Loans
Some people choose the type of car they get based on the type of loan they'd like. For example, new cars are more expensive, but the loans are often much cheaper than for used cars—and that’s one reason many people prefer [new cars over used cars](https://www.investopedia.com/articles/pf/07/neworusedcar.asp).
* **New car loan:** Just about every lender offers [new car loans](https://www.investopedia.com/how-to-buy-a-new-car-7484059). They feature lower rates and may come with longer term lengths since you’ll likely be financing a car that costs more, given the higher price tag for new cars.
* **[Used car loan](https://www.investopedia.com/best-used-car-loans-7373705):** Equally common, the rates on used car loans are generally a bit higher. Lenders may have more restrictions in place for loan approval, such as only being able to buy used cars from dealerships or cars below a certain age or mileage level.
* **[Auto loan refinance](https://www.investopedia.com/best-auto-refinance-loans-5069118):** Many lenders offer refinance loans, which are used to pay off your current loan contract, replacing it with a new one. You might do this to get lower monthly payments and/or to pay off your loan faster while saving money.
* **Cash-out refinance:** A cash-out refinance works the same as above, except you borrow a higher amount of money than you need. You get the difference back as cash that you can use for other things, like home repairs or debt consolidation.
* **Auto title loan:** These are similar to payday loans except your paid-off (or mostly paid-off) car serves as loan collateral. [Auto title loans](https://www.investopedia.com/terms/c/car-title-loan.asp) are extremely expensive and difficult to repay, resulting in some borrowers having their car repossessed, so we don't recommend them.
* **Buy-here-pay-here loan:** These dealerships market to people with bad credit. Your car may come installed with a tracking device to make it easier to repossess, and you may be charged exorbitantly high rates. We don’t recommend buy-here-pay-here loans.
* **Lease buyout loan:** It can be difficult and expensive to get out of a car lease contract early so you’ll need to calculate the costs for all of your options carefully. If you can’t pay cash, some lenders offer a lease buyout loan for this purpose.
* **Private party auto loan:** A private party auto loan is used to purchase a vehicle from a private seller—i.e., not a car dealership or business. Only some lenders provide loans for private party purchases.
* **Bad credit car loans:** Some lenders offer auto loans of various kinds for people with poor credit; these loans are just like any other kind of loan, but they typically come with higher interest rates and fees.
Auto loans can either be [secured or unsecured](https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp). Most auto loans are secured by the very car you’re buying and offer lower rates because of that. Your car serves as collateral for the loan and if you don’t repay it, the lender will repossess your car.
Unsecuredcar loans aren’t as common, but some lenders (like [LightStream](https://www.lightstream.com/?fact=19969&subid=4846394&subid=4846394)) do offer them. They’re often faster to get but they charge much higher rates because the lender doesn’t have an easy way to get their money back if you default.
### How to Get the Lowest Interest Rates On Your Auto Loan
Auto loan rates depend in part on the federal prime rate, but the borrower's qualifications play a large role as well.
* **Shop around:** Different lenders offer different interest rates; seek out lenders with low minimum APRs and get pre-approved to check your rates.
* **Build your credit:** There are many ways to [improve your credit score](https://www.investopedia.com/how-to-improve-your-credit-score-4590097)—some can be quick, like reducing your credit utilization, while others can take some time, like building up a history of on-time payments.
* **Increase your income:** Having more money available (either for a down payment or for monthly payments) can improve your odds of getting a good rate.
## Auto Loan Rates by Credit Score
| Credit Level/Score | Used Car Loans | New Car Loans |
| --- | --- | --- |
| Super Prime: 781–850 | 7.43% | 5.61% |
| Prime: 661–780 | 9.33% | 6.88% |
| Nonprime: 601–660 | 13.53% | 9.29% |
| Subprime: 501-600 | 18.39% | 11.86% |
| Deep subprime: 300–500 | 14.17% | 21.18% |
Data from Experian's State of the Automotive Finance Market Report Q3 2023.
## How to Apply for an Auto Loan
1. You can get an auto loan from several different types of lenders: online lenders, banks, and credit unions. Dealerships themselves also [partner with these lenders to offer you financing](https://www.investopedia.com/terms/d/dealer-financing.asp).
2. It’s best to do your loan shopping before you actually start looking for a car, because you can take the time to find the best loan options and you’ll have more bargaining power when you do find the car you want.
3. Each lender will check two things in order to approve your loan: your financial situation and the car you want to buy.
4. You can start the loan shopping process by [getting pre-approved](https://www.investopedia.com/how-to-get-pre-approved-for-a-car-loan-7485858) with multiple lenders. This may require a hard credit inquiry, in some cases. Chances are, some lenders will offer lower rates than others.
5. If you’re pre-approved based on the initial details you provide, including personal details like Social Security number and some financial details, the lender will let you know what rates and terms you’re likely to qualify for.
6. Lenders look for a few things. Your credit score, income, and debt payments are three of the most important factors, so it’s a good idea to clean up your credit in advance if it needs work and you have the time. Consider ways to reduce your [debt-to-income ratio](https://www.investopedia.com/terms/d/dti.asp).
If you’re not able to qualify on your own and you have someone who’s willing to help, applying with a co-signer can improve your odds of qualifying for a loan.
“When my wife and I were shopping for a car last year, we prepared by getting a pre-qualification from our bank—Bank of America. We did it online, through our account portal. It was really easy, and because we have several accounts with BofA, we qualified for a rate discount. We planned on using the pre-approval as a negotiating tool, and figured the dealer would offer a better rate. To our surprise, the dealer couldn’t beat it. So now we have yet another account with BofA.” — Lars Peterson (Investopedia Senior Editor, Financial Products and Services).
Once you find the car you want, you can provide the details to your chosen lender and submit a full loan application. The lender will usually disburse the loan funds directly to you, either by check or bank deposit. In some cases lenders may send the money directly to dealerships; for refinance loans, lenders may send the money directly to the current holder of your loan.
Your new lender will provide you with details on how to set up an account, manage your loan, and make payments.
## Auto Loan Calculator
See how much car you can afford with our [auto loan calculator](https://www.investopedia.com/car-loan-calculator-5084761); plug in your details, and you can see how big your monthly payments will be at different terms and interest rates.
Say you take out a loan for a new 2024 Ford F-150 Platinum with the following details, for example:
* **Car price:** $64,915
* **Down payment:** $5,000
* **Loan amount:** $59,915
* **Loan term:** 72 months
* **Credit:** Fair (601–660 credit score)
* **Interest rate:** 7.14%
* **Total paid over the life of the loan:** $73,837.72
With those terms, you'd have a monthly loan payment of **$1,025.52**. If you were to make a larger down payment, such as $8,000, you could take out a smaller loan (**$56,915**), and your monthly payment would be **$974.17**. You'd pay less overall: **$70,140.59** over the life of the loan.
**In the News:** Auto loan rates are related to the Federal Reserve's benchmark rate—if the Fed rate goes up, average auto loan rates usually will, as well. Today's interest rates are pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame decades-high inflation.
The Fed [held rates steady](https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952) for a sixth consecutive time at its meeting the concluded May 1. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.
## Auto Loans: Pros and Cons
### Pros
* **Provides access to a car:** If you need a car to get to work or school and can't afford to buy one with cash, an auto loan can give you that access to the transportation you need.
* **Spreads out the expense of a vehicle purchase:** Even if you have enough cash to buy a car, auto financing spreads out that expense, so you don’t deplete your savings all at once.
* **You'll own the car:** Your lender technically owns the car while you pay down your loan, but once it's paid off, you'll own the car outright. New car leases can save you money with lower monthly payments, but there's no vehicle ownership.
* **Flexible loans:** Auto loans can offer flexibility with loan amounts and repayment terms to help fit into your budget.
* **Can help build credit:** Like other installment loans, auto loans can be used to [build credit](https://www.investopedia.com/articles/personal-finance/101614/build-your-credit-score.asp) as you make on-time monthly payments.
### Cons
* **Interest rates can be high:** Auto loan rates are lower than what you can expect from a [personal loan](https://www.investopedia.com/best-personal-loans-4773300) or [credit card](https://www.investopedia.com/best-credit-cards-4801582). But if your credit isn't in great shape, you can still end up with a high interest rate, which could make monthly payments unaffordable.
* **Vehicles depreciate:** While you're paying down your loan, the value of your vehicle is depreciating. If the vehicle's value is less than what you owe on your loan, you may have to pay the difference when you sell the car or if the vehicle gets totaled in an accident.
* **Can damage your credit:** If you miss a payment by 30 days or more, it could damage your credit score significantly.
* **Default can result in repossession:** If you fail to make payments for a longer period, your lender could repossess the vehicle and sell it to recoup the remaining loan balance. If there's a deficiency after the sale, you may still be on the hook for that debt.
## Where Are the Big Banks?
We included big banks like Chase, [Capital One](https://www.investopedia.com/capital-one-auto-loans-review-7968929), Bank of America, and U.S. Bank in our review of the auto loan industry, but these financial institutions don't always make our "Best" lists.
Why? Although these banks are reliable and used by millions of people, they usually don't offer the very best rates and terms. Online banks and lender marketplaces tend to have lower operating costs, and can pass those savings on to borrowers. Big banks tend to score well in our rankings, but they don't usually come out on top when it comes to auto loan interest rates, flexibility in terms, and accessibility.
## Frequently Asked Questions
* ### Which Companies Are Best for Car Loans?
Our top-rated lenders offer the lowest rates on new and used car loans in the auto financing industry—if you've got good credit and you want the best rates, take a look at [PenFed](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=penfed&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=na771cd002a744fabb39e1053634a454c16), [AUTOPAY](https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0?id=THEIR_UNIQUE_IDENTIFER), [Consumers Credit Union](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&ts=investopedia&p=ccu&bwid_id=6385e804ca097c71ee1e23c1&pub_param_1=4846394&pub_param_2=na771cd002a744fabb39e1053634a454c16), [LendingTree](https://funnel.naturaltracking.com/v3?key=TPvixyNCIYm8b3FakDXl&pub_param_1=4846394&pub_param_2=na771cd002a744fabb39e1053634a454c16), [LendingClub](https://track.supermoney.com/aff_c?offer_id=2028&aff_id=1715&featured-product=lending-club-auto-loan-refinance), and [OpenRoad Lending](https://www.openroadlending.com/applyone/?aid=899&opt_1=best-auto-loan-rates-4173489). You'll also find several good options for refinancing, as well.
* ### How Do You Get the Best Car Loan Rate?
Not everyone qualifies for the best auto loan rates. Here are [some things you can do](https://www.investopedia.com/financial-edge/0611/-6-ways-to-cut-the-cost-of-your-car-loan.aspx) before and during the application process to tip the odds in your favor:
+ Check your rate with as many lenders as you can (within a short timeframe).
+ Pay down your existing debt, especially credit card debt.
+ Check your credit reports and fix any errors before you apply for a loan.
+ Use your loan pre-approval offers to negotiate a lower rate with the dealership.
* ### What Credit Score Do You Need to Qualify for a Car Loan?
There is no overall minimum credit score you’ll need to [qualify for an auto loan](https://www.investopedia.com/what-credit-score-do-you-need-to-buy-a-car-5181034). It depends on the lender; each lender has its own credit requirements. In general, if you have good or excellent credit (670 or higher), you’ll qualify for the best auto loan rates. Lenders typically use an auto-loan specific credit scoring model. See the [best car loans for bad credit](https://www.investopedia.com/best-car-loans-for-bad-credit-7372351) if you’re dealing with a lower score.
* ### Where Can I Get an Auto Loan?
You can obtain an auto loan through a dealer in a dealer-arranged financing agreement or directly from an online lender, credit union, or traditional bank. Some dealers also offer in-house financing for car buyers with bad credit.
* ### When Is the Best Time to Buy a Car?
Ultimately, the [best time to buy a car](https://www.investopedia.com/when-is-the-best-time-to-buy-a-car-5207171) is when you need one. But if you have some flexibility, experts recommend the following times:
+ **The end of the month, quarter, or year:** Car salespeople often have to meet quotas for each month, quarter, and year, so they may be motivated to make a deal toward the end of those periods to ensure they make the cut.
+ **Three-day weekends:** Dealerships often run sales events for President's Day, Memorial Day, Labor Day, and other three-day weekends. The same goes for other holidays, such as the Fourth of July and Black Friday.
+ **The end of the model year:** Dealers may offer deals to get rid of inventory and make way for the latest model. Research when new models are released for the car you want and see if it can help you with negotiations.
* ### What Is a Good APR for an Auto Loan?
According to a report by Experian in Nov. 2023, average rates for 2023 were 7.03% for new cars and 11.35% for used cars, although rates will have changed somewhat since then. If you get a rate lower than the average, you can generally feel like you're getting a good deal. Your rate will vary depending on your credit score, income, and other factors.
* ### What Are Used Car Loan Interest Rates?
By Nov. 2023, the average interest rate for used cars in 2023 was 11.35%, according to Experian. Here's the average used car loan interest rate for each credit score range:
+ **Super prime:** 7.43%
+ **Prime:** 9.33%
+ **Near prime:** 13.53%
+ **Subprime:** 18.39%
+ **Deep subprime:** 21.18%
* ### Companies We Reviewed
We researched and reviewed 21 companies to find the best seven lenders you see on the list above. While we write individual reviews for most companies, we do not always write reviews for companies we would not recommend. Below are the companies we researched along with links to individual company reviews to help you learn more before making a decision:
Alliant Credit Union, [AUTOPAY](https://www.investopedia.com/autopay-auto-loans-review-7643912), [Bank of America](https://www.investopedia.com/bank-of-america-auto-loan-review-8357865), [Capital One](https://www.investopedia.com/capital-one-auto-loans-review-7968929), [CarMax](https://www.investopedia.com/carmax-auto-loan-review-7642717), [Carvana](https://www.investopedia.com/carvana-auto-loans-review-7965774), [Chase Auto](https://www.investopedia.com/chase-auto-loans-review-7972436), [Consumers Credit Union](https://www.investopedia.com/consumers-credit-union-auto-loan-review-8357871), Credible, [First Tech FCU](https://www.investopedia.com/first-tech-fcu-auto-loans-review-7965780), LendingClub, [LendingTree](https://www.investopedia.com/lendingtree-auto-loans-review-7965787), [LightStream](https://www.investopedia.com/lightstream-auto-loans-review-7853022), NASA FCU, Navy Federal Credit Union, [OpenRoad Lending](https://www.investopedia.com/openroad-lending-auto-loan-review-7642719), [PenFed](https://www.investopedia.com/penfed-auto-loans-review-7853548), [PNC Bank](https://www.investopedia.com/pnc-bank-auto-loans-review-7965779), U.S. Bank, USAA, Vroom.
## Other Types of Auto Loans
* [Best Used Car Loans](https://www.investopedia.com/best-used-car-loans-7373705)
* [Best Car Loans for Bad Credit](https://www.investopedia.com/best-car-loans-for-bad-credit-7372351)
* [Best Auto Refinance Loans](https://www.investopedia.com/best-auto-refinance-loans-5069118)
* [Best Private Party Car Loans](https://www.investopedia.com/best-private-party-car-loans-7372372)
* [Best Car Loans for First Time Buyers](https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461)
* [Best Motorcycle Loans](https://www.investopedia.com/best-motorcycle-loans-5080905)
* [Best RV Loans](https://www.investopedia.com/best-rv-loan-rates-5082108)
* [Best Auto Repair Loans](https://www.investopedia.com/best-auto-repair-loans-7372941)
## Guide to Auto Loans
Learn more about auto loans:
* [How Auto Loans Work](https://www.investopedia.com/how-car-loans-work-5202265)
* [How Credit Union Auto Loans Work](https://www.investopedia.com/how-credit-union-auto-loans-work-7484368)
* [How to Get Pre-Approved for a Car Loan](https://www.investopedia.com/how-to-get-pre-approved-for-a-car-loan-7485858)
* [How to Get a Car Loan](https://www.investopedia.com/how-to-get-a-car-loan-7368513)
* [How to Buy a New Car](https://www.investopedia.com/how-to-buy-a-new-car-7484059)
* [How to Refinance a Car Loan](https://www.investopedia.com/how-to-refinance-a-car-loan-7368491)
* [How to Buy a Car With No Credit](https://www.investopedia.com/how-to-buy-a-car-with-no-credit-7371498)
* [Dealer Financing: What It Is, How It Works](https://www.investopedia.com/terms/d/dealer-financing.asp)
* [How to Buy a Car From a Dealership](https://www.investopedia.com/how-to-buy-a-car-from-a-dealership-7973665)
* [How Interest Rates Work on Car Loans](https://www.investopedia.com/articles/personal-finance/061615/how-interest-rates-work-car-loans.asp)
* [Credit Union vs. Bank for Auto Loan: What’s the Best Choice?](https://www.investopedia.com/credit-union-vs-bank-auto-loan-what-s-the-best-choice-7556622)
* [Personal Loans vs. Car Loans: What's the Difference?](https://www.investopedia.com/articles/personal-finance/070915/personal-loans-vs-car-loans-how-they-differ.asp)
* [Subprime Auto Loan: Meaning, Rates, FAQs](https://www.investopedia.com/terms/s/subprime_auto_loans.asp)
* [Car Title Loan: What It is, How It Works, Example](https://www.investopedia.com/terms/c/car-title-loan.asp)
* [Auto Loan Payment and Interest Calculator](https://www.investopedia.com/car-loan-calculator-5084761)
* [Auto Loan Review Methodology](https://www.investopedia.com/auto-loan-review-methodology-7552736)
## How We Picked the Best Auto Loans
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of auto loan lenders. To rate providers, we collected hundreds of data points for a period of over two months across more than 20 auto loan lenders, including interest rates, fees, loan amounts, borrower requirements, and vehicle requirements, to ensure that our reviews help users make informed decisions for their borrowing needs. We also conducted a survey of 1,016 auto loan borrowers for attitudes and opinions about lenders and the loan approval and disbursement process.
## Why You Should Trust Us
Investopedia collected 1,176 key data points from 21 companies across three months to identify the most important factors for readers choosing an auto loan. We used this data to review each company for interest rates, loan requirements, and other features to provide unbiased, comprehensive reviews to ensure our readers make the right decision for their needs. Investopedia launched in 1999, and has been helping readers find the best auto loans since 2020.
:max_bytes(150000):strip_icc()/Best-auto-loan-rates-4846394_final-b7456e74b9574f56b09258598d31164e.png)
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Investopedia / Michela Buttignol
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
[editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy)
1. Board of Governors of the Federal Reserve System. "[Consumer Credit - G.19](https://www.federalreserve.gov/releases/g19/current/)."
2. Experian. "[State of the Automotive Finance Market Q3 2023](https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/experian-safm.pdf)."
3. Bureau of Labor Statistics. "[Consumer Price Index](https://www.bls.gov/news.release/cpi.nr0.htm)."
4. Federal Reserve. "[Federal Reserve Issues FOMC Statement](https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm)."
5. Experian. “[Step-by-Step Checklist for Buying a New Car](https://www.experian.com/blogs/ask-experian/step-by-step-checklist-for-buying-a-new-car/).”
6. Experian. “[What Credit Score Do I Need for an Auto Loan?](https://www.experian.com/blogs/ask-experian/what-is-a-good-credit-score-for-an-auto-loan/)”
7. FICO. “[What is a FICO® Score?](https://www.myfico.com/credit-education/what-is-a-fico-score)”
8. Progressive. "[When is the best time to buy a car?](https://www.progressive.com/answers/best-time-to-buy-a-car/)"
9. Experian. "[State of the Automotive Finance Market Report](https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/experian-safm.pdf)."
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Related Terms
[Subprime Auto Loan: How It Works and Rates](https://www.investopedia.com/terms/s/subprime_auto_loans.asp)
A subprime auto loan is a type of loan used to finance a car purchase offered to people with low credit scores or limited credit histories.
[more](https://www.investopedia.com/terms/s/subprime_auto_loans.asp)
[Buy Here, Pay Here (BHPH) Car Dealership: Meaning, How It Works](https://www.investopedia.com/terms/b/buy-here-pay-here.asp)
The term “Buy Here, Pay Here (BHPH)” refers to auto dealerships in which the financing for the vehicles purchased is done in-house.
[more](https://www.investopedia.com/terms/b/buy-here-pay-here.asp)
[What Is a Secured Loan? How They Work, Types, and How to Get One](https://www.investopedia.com/secured-loans-5076025)
Secured loans are loans that require collateral to borrow. Here’s how secured loans work and where to find them.
[more](https://www.investopedia.com/secured-loans-5076025)
[Emergency Loan: Types, Eligibility, Pros and Cons](https://www.investopedia.com/emergency-loan-types-eligibility-pros-and-cons-8637206)
Emergency loans are a type of personal loan that provides fast access to cash. Learn how emergency loans work and about their pros and cons.
[more](https://www.investopedia.com/emergency-loan-types-eligibility-pros-and-cons-8637206)
[Private Student Loans: What They Are, How They Work](https://www.investopedia.com/private-student-loans-8638542)
Private student loans are offered through third-party lenders, and they don't come with the protections afforded to federal student loan borrowers.
[more](https://www.investopedia.com/private-student-loans-8638542)
[Maximum Loan Amount: Definition and Factors Lenders Consider](https://www.investopedia.com/terms/m/maximum_loan_amount.asp)
A maximum loan amount describes the total that one is authorized to borrow. It is used for standard loans, credit cards, and line-of-credit accounts.
[more](https://www.investopedia.com/terms/m/maximum_loan_amount.asp)
|
PenFed Credit Union is the best overall auto loan lender thanks to its wide selection of loan types and competitive rates, according to our research. It offers rates for used cars as low as 6.49%, and another one of our picks, OpenRoad Lending, offers rates as low as 1.99%. We reviewed 21 auto loan lenders and collected the best new, used, and refinance auto loan rates, evaluating APRs, loan types, loan terms, vehicle and borrower requirements, and other factors. We also surveyed 1,016 auto loan borrowers, asking how they felt about lenders and the loan process.
Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
Best Overall:
PenFed
Best for Bad Credit/Low Rates:
AUTOPAY
Best Credit Union:
Consumers Credit Union
Best for Refinance:
LendingTree
Best for Fair Credit:
LendingClub
Best for Full Car Buying Experience:
Carvana
Best for High Maximum Accepted Mileage:
OpenRoad Lending
Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
Expand
Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99%
Our Top Picks
PenFed
AUTOPAY
Consumers Credit Union
LendingTree
LendingClub
Carvana
OpenRoad Lending
See More (4)
The Bottom Line
Compare Best Auto Loan Lenders
What Is an Auto Loan?
How to Apply
Auto Loan Calculator
Pros and Cons
FAQs
Other Auto Loans
Guide to Auto Loans
Methodology
Why You Should Trust Us
Best Overall
:
PenFed
PenFed logo.
Used APR Range: 6.49%–17.99%Used Loan Amounts: $500–$150,000Minimum Recommended Credit Score: Not disclosed
Apply Now
Pros & Cons
Pros
Full suite of auto loan types available
Allows private-party vehicle purchases
Promotional offers if you use car-buying service
Cons
Must join credit union
Doesn’t allow co-signers
No rate discounts available
Why We Chose It
PenFed is our top pick overall for auto financing because it offers all of the loan types you’d ever hope to use, and offers competitive rates: loans for new or used cars, refinances, cash-out refinances, and even lease buyout loans. You can even use a used car loan to buy a car from a private seller, if you wish.
PenFed will mail you a check if you’re approved for any of its loans.
That can take a few days, but if you’re OK with using the TrueCar car-buying service, PenFed offers a pretty good relationship discount. Your loan could be funded the same day you’re approved, if you use this service.
PenFed's customer service is available by phone or secure online message. PenFed has been in business since 1935, and has headquarters in McLean, Virginia.
Read our full PenFed auto loans review.
Terms and Borrower Qualifications
Used loan terms: 3–7 yearsAvailable in all 50 states and Washington, D.C.Must join the credit union by depositing at least $5 in a savings account.
Vehicle Qualifications
For loans less than seven years: No limit on vehicle age, and must have 125,000 miles or fewerFor loans of seven years or more: Vehicle must be less than five years old and be under 60,000 milesMaximum loan-to-value ratio: 125%Allows private-party vehicle purchases: Yes
Best for Bad Credit/Low Rates
:
AUTOPAY
AutoPay
Used APR Range: As low as 5.69%Used Loan Amounts: $2,500–$100,000Minimum Recommended Credit Score: 500
Apply Now
Pros & Cons
Pros
Relatively low rates
No payments for 45 days
Low minimum credit score requirement
Cons
Very sparse on loan details
Doesn’t disclose partner lenders
Can’t apply with a co-signer, only a co-borrower
Why We Chose It
AUTOPAY is a loan aggregator and it's a bit light on the details; maybe intentional in order to get you to bite. If you have excellent borrower qualifications, AUTOPAY certainly has the potential to be one of your cheapest financing options, advertising some of the best car loan rates today compared to other lenders and aggregators.
It's our top pick for bad credit because it works with borrowers with credit scores as low as 500; but it doesn’t specify the top end of the rate range you’d be likely to pay if you have poor credit, so you’ll need to be careful—especially since you can’t apply with a co-signer (only a co-borrower). But, if you do have good credit, you may enjoy some very good interest rates.
AUTOPAY does offer a full suite of auto loan types: used cars, new cars, refinances, cash-out refinances, and even lease buyout loans. It works with a network of partner lenders rather than offering the loans itself, and that’s how it can offer so much flexibility. For that reason, it’s a good choice to add to your shopping list, although we would prefer if it offered more concrete details.
AUTOPAY was founded in 2007, and is based in Denver, Colorado. You can get in touch with the company by phone or online message. Read more in our full AUTOPAY auto loans review.
The best auto loan rates are often advertised through third-party companies that network with partner lenders, like AUTOPAY. Most don’t disclose their partners, however, so you can’t always see all of the companies you’re actually checking your rates with. You may need to sign up for automatic payments to get the best rates, as well.
Terms and Borrower Qualifications
Used loan terms: 2–8 yearsRecommened credit score of 500 or higherAvailable in all U.S. states and Washington, D.C.
Vehicle Qualifications
Maximum accepted vehicle age: 10 yearsMaximum accepted mileage: 150,000 milesMaximum loan-to-value ratio: Not disclosedAllows private-party vehicle purchases: Yes
Best Credit Union
:
Consumers Credit Union
Consumers Credit Union
Used APR Range: As low as 6.84%Used Loan Amounts: $500–$350,000Minimum Recommended Credit Score: Not disclosed
Apply Now
Pros & Cons
Pros
Allows co-signers
No age or mileage restrictions
Offers a full suite of car loan options
Cons
Can only be used at a dealership
Must join credit union to receive loan
Lack of transparency about loan requirements
Why We Chose It
As our highest-rated credit union, Consumers Credit Union is a good choice for people who prefer to bank with these financial institutions. It’s also a good choice if you’re trying to buy an older car from a dealership because it’s one of the few lenders that doesn’t put any limits on your vehicle’s model year or mileage.
Consumers also offers an optional mechanical repair insurance plan through ForeverCar, which might be especially important if you are driving an older car.
Consumers doesn’t specify what sort of credit history you need to qualify for a loan (or any other qualifications, really), but it might be good to add this one to your shopping list if you have bad credit. The maximum rate you’ll pay for a refinance loan, for example, is about half of what some other lenders may charge. It also has a relatively low minimum loan amount.
Customer support is available by phone, email, or live online chat.
Consumers Credit Union was chartered in 1930, and has corporate headquarters in Round Lake Beach, Illinois.
Terms and Borrower Qualifications
Used loan terms: 36–84 monthsAvailable to people living in all 50 states and Washington, D.C.Need to join Consumers Cooperative Association ($5 fee) and deposit $5 in a savings account to establish your membership, if approved for a loan
Vehicle Qualifications
Maximum accepted vehicle age: NoneMaximum accepted mileage: NoneMaximum loan-to-value ratio: 125%Allows private-party vehicle purchases: No
Best for Refinance
:
LendingTree
LendingTree
Refinance APR Range: As low as 5.99%Refinance Loan Amounts: Not disclosedMinimum Recommended Credit Score: Not disclosed
Apply Now
Pros & Cons
Pros
Potential for very low rates
Compare many refinance loan offers at once
No limits on age or mileage of vehicle
Cons
Can generate a lot of spam
Very low loan-to-value ratios
Doesn’t offer many details about its loans
Why We Chose It
LendingTree is another company that can help you quickly identify the best financing rates from among its network of lenders. It suffers from the same problems as other lender networks, however—namely, that it doesn’t tell you which lenders it’s checking your rates with, nor what the types of loans you might qualify for look like. You can also expect a lot of companies reaching out to you with spam, too.
Still, it’s a great option if you’re looking for a car loan refinance, advertising competitively low rates. You’ll just need to make sure you have plenty of equity in your vehicle since LendingTree lenders don’t offer loans with a loan-to-value ratio above 80%. That means underwater loans aren’t eligible for refinance.
You can contact LendingTree by phone, but if you used LendingTree to get a loan with a partner lender you'll likely need to contact that lender instead.
LendingTree was founded in 1996, and now has headquarters in Charlotte, North Carolina.
Terms and Borrower Qualifications
Refinance loan terms: 36–72 monthsAvailable to residents of all 50 states and Washington, D.C.
Vehicle Qualifications
Maximum accepted vehicle age: NoneMaximum accepted mileage: NoneMaximum loan-to-value ratio: 80%Allows private-party vehicle purchases: Not disclosed
Best for Fair Credit
:
LendingClub
LendingClub
Refinance APR Range: 4.99%–24.99%Refinance Loan Amounts: $4,000–$55,000Minimum Recommended Credit Score: 600
Apply Now
Pros & Cons
Pros
Minimum recommended credit score of 600
No loan fees
Can refinance with the same lender
Low rates for well-qualified borrowers
Cons
Doesn’t allow co-signers
Many residency and car restrictions
Doesn’t offer new or used auto loans
Why We Chose It
LendingClub, the former peer-to-peer lender, is now in the auto refinance business where it offers very good rates to borrowers with good credit. Borrowers with fair credit can be approved too—making it our top pick for this category, along with its high overall score as well—but if your credit is quite bad LendingTree may charge you a higher rate than most other lenders. On the bright side, LendingClub doesn’t charge any fees—origination fees, late fees, prepayment penalties, nothing.
LendingClub is one of a handful of lenders that allow you to refinance your current LendingClub loan with another LendingClub loan, if you happen to qualify. However, be aware that there are many loan limitations with this lender. It’s not available in many sparsely populated states, for example, and there are many makes and models of popular cars LendingClub won’t finance.
LendingClub was incorporated in 2007, and it's headquartered in San Francisco, California.
See more of the best auto loans for fair credit to explore your options.
Terms and Borrower Qualifications
Refinance loan terms: 2–7 years600 or higher recommended credit scoreCurrent auto loan must have been open for at least one monthCurrent auto loan must have at least 24 months remainingAvailable to residents of all U.S. states except for: Alaska, District of Columbia, Hawaii, Maine, New Hampshire, North Dakota, Vermont, West Virginia, WyomingYou must be at least 18 years of ageYou must be a U.S. citizen or permanent resident or live in the U.S. on a valid long-term visa
Vehicle Qualifications
Maximum accepted vehicle age: 10 yearsMaximum accepted mileage: 120,000 milesMaximum loan-to-value ratio: Not disclosedAllows private-party vehicle purchases: No
In addition:
The loan’s remaining balance must be between $5,000 and $55,000Can’t refinance business vehiclesVehicle must be registered in the same state you liveMany cars not eligible for financing, such as Nissan Leafs and models from Suzuki, Saturn, Mercury, Saab, Pontiac, Oldsmobile, Hummer, and more
Best for Full Car Buying Experience
:
Carvana
Carvana
APR Range: Not disclosedLoan Amounts: Not disclosedMinimum Credit Score: 500
Apply Now
Pros & Cons
Pros
Neat, techy way to buy a car
Offers seven-day return policy
Long 45-day pre-approval window
Cons
Not available outside of contiguous U.S.
Doesn’t allow co-borrowers, only co-signers
Delivery charges not refundable if you return car
Why We Chose It
Carvana is a used car dealership that offers a completely online car-buying experience, similar to TrueCar; it's our highest-rated company that offers this service.
You can apply for an auto loan online, find a car, and then pick it up or even have it delivered to you.
One of Carvana’s claims to fame, however, is its car vending machines. If you’re pre-approved for a loan you can schedule an appointment to take a car for a test drive from one of its giant vending machines. The company will even provide you with a token to use.
If you like the car, you can keep it. If not, you’ll have seven days to return it.
It’s a futuristic way to buy a car that many people like; however, there can be problems with the setup. If you have a car delivered and you don’t like it, for example, you can return it, but the shipping charge is nonrefundable. That makes it costly and impractical to test drive different models like you would at a dealership.
Carvana's customer support team is available by text or by live chat on the website. The company was founded in 2012, and is based in Tempe, Arizona.
Terms and Borrower Qualifications
Loan terms: Not disclosedMinimum recommended credit score of 500Must be at least 18 years oldMinimum annual income of $4,000Must not have any active bankruptciesAvailable to residents in contiguous U.S.
Vehicle Qualifications
Maximum accepted vehicle age: VariesMaximum accepted mileage: 140,000 milesMaximum loan-to-value ratio: Not disclosedAllows private-party vehicle purchases: No (only for used cars bought through the Carvana platform)
Best for High Maximum Accepted Mileage
:
OpenRoad Lending
OpenRoad Lending
Refinance APR Range: 1.99%–24.99%Refinance Loan Amounts: $7,500–$100,000Minimum Recommended Credit Score: 500
Apply Now
Pros & Cons
Pros
Maximum accepted mileage of 160,000, according to customer service
Offers lease buyout loans
Refinancing available if you’re underwater on loan
Can re-refinance your loan through OpenRoad again
Cons
Potentially high rates and fees
Doesn’t allow co-signers
Many vehicle restrictions
Why We Chose It
OpenRoad Lending’s website looks like it was designed in the previous decade. But it can be helpful if you’re struggling to make your auto loan payments and you’re not able to qualify for a better loan with another lender—especially if you need to refinance a loan for a high-mileage car, because OpenRoad Lending's 160,000 mile-limit is the highest disclosed limit among lenders we reviewed.
It comes with very high origination fees ranging from $249 to $449, a 5% late payment fee, and interest rates that zoom into credit-card-debt territory for less-qualified borrowers.
However, OpenRoad Lending is still better than many other types of alternative auto loans, such as those from buy-here-pay-here lenders. You can still qualify if you have a poor credit score, even if you’re underwater on your current loan—a common problem for people with bad car loans.
OpenRoad Lending has a maximum loan-to-value ratio of 180%, meaning you may be able to borrow nearly twice your car’s actual value in order to pay off your existing loan—far more than most other lenders.
OpenRoad Lending was founded in 2009, and is based in Fort Worth, Texas.
If you need help, you can get in touch with OpenRoad by phone or email. Read more in our full OpenRoad Lending auto loans review.
Terms and Borrower Qualifications
Refinance loan terms: 24–72 monthsMinimum credit score of 500 Must be at least 18 years oldAvailable to residents in 46 U.S. statesYou must make at least $2,000 per month (earnings from Uber or similar services do not count toward the income requirement) Your DTI cannot exceed 40%Can only refinance auto loans issued by NCUA- or FDIC-insured lenders such as credit unions and banks
Vehicle Qualifications
Maximum accepted vehicle age: Not disclosedMaximum accepted mileage: 160,000 milesMaximum loan-to-value ratio: 175%Allows private-party vehicle purchases: NoBusiness vehicles, Oldsmobile, Daewoo, Smart Car, and Isuzu vehicles are not eligible for refinancing
The Bottom Line
If you’re looking for the best overall auto loans, try starting with PenFed; it's a credit union, but anyone can join for just $5 when approved for a loan. AUTOPAY is worth checking as well, especially if you'd like to browse a variety of lenders. LendingTree is also a top choice for a rate-comparison website. If you prefer sticking with credit unions, Consumers Credit Union is yet another good option that allows anyone to apply.
Or, if you’re not too picky about your car and prefer a more streamlined experience, Carvana offers some unique and affordable financing options. And finally, while expensive, OpenRoad Lending offers a lot of potential if you’re looking to get out of a car loan with a high rate.
Compare Best Auto Loan Lenders
Company
Used APR Range
Used Loan Amounts
Used Loan Terms
Min. Rec. Credit Score
PenFed Best Overall
6.49%–17.99%
$500–$150,000
3–7 years
Not disclosed
AUTOPAY Best for Bad Credit/Low Rates
As low as 5.69%
$2,500–$100,000
2–8 years
500
Consumers Credit Union Best Credit Union
As low as 6.84%
$500–$350,000
36–84 months
Not disclosed
LendingTree Best for Refinance
As low as 5.99% (Refinance)
Not disclosed
36–72 months (Refinance)
Not disclosed
LendingClub Best for Fair Credit
4.99%–24.99% (Refinance)
$4,000–$55,000
2–7 years (Refinance)
600
Carvana Best for Full Car Buying Experience
Not disclosed
Not disclosed
Not disclosed
500
OpenRoad Lending Best for High Maximum Accepted Mileage
1.99%–24.99% (Refinance)
$7,500–$100,000 (Refinance)
24–72 months (Refinance)
500
Looking for a specific type of loan? See our top picks for auto loans in a variety of categories:
Best Used Car Loans
Best Car Loans for Bad Credit
Best Auto Refinance Loans
Best Private Party Car Loans
Best Motorcycle Loans
Best RV Loans
What Is an Auto Loan and How Does It Work?
An auto loan is an installment loan used to buy a new or used car, or to refinance an existing auto loan. Auto loans are usually secured, which means the vehicle serves as collateral for the loan. If you fail to make monthly car payments as agreed, the lender can seize the vehicle.
You can use a personal loan to make a car purchase, but secured auto loans typically have lower rates because lenders have more security if you don't pay as agreed.
Auto loan lenders may allow you to borrow more than the purchase price of the car, to account for taxes, fees, dealer upgrades, and other add-ons.
Like other installment loans, when you borrow money with an auto loan the funds are provided in a lump sum. The borrower makes equal monthly installment payments until the term loan is paid off. The money is lent at interest, so the borrower ends up paying back more than they originally borrow.
Auto Loan Rates
Longer loan terms may come with a lower monthly payment and lower annual percentage rates (APRs), but don't be fooled. In general, it's best to choose the shortest term and the highest monthly payments you can afford; this will make the overall loan as inexpensive as possible. When the loan is fully paid off, the vehicle belongs to the borrower (instead of the lender).
Where To Get an Auto Loan
Auto loans are available from traditional banks, online banks, credit unions, and lending marketplaces (which partner with banks and credit unions). You'll find new, used, and refinance auto loans from all of those sources, although some lenders only offer certain loan types; some lenders offer special deals for first-time car buyers, as well.
Auto loans are also available through dealerships that partner with banks; in some cases you may find lower rates through a dealership, but it's worth getting pre-approved with lenders on your own to see what kind of rates you can get. Then, you can go to the dealership with some bargaining power—see if the dealer will beat the best rate you found on your own.
Learn more in our expert explanation of how auto loans work.
Types of Auto Loans
Some people choose the type of car they get based on the type of loan they'd like. For example, new cars are more expensive, but the loans are often much cheaper than for used cars—and that’s one reason many people prefer new cars over used cars.
New car loan: Just about every lender offers new car loans. They feature lower rates and may come with longer term lengths since you’ll likely be financing a car that costs more, given the higher price tag for new cars.
Used car loan: Equally common, the rates on used car loans are generally a bit higher. Lenders may have more restrictions in place for loan approval, such as only being able to buy used cars from dealerships or cars below a certain age or mileage level.
Auto loan refinance: Many lenders offer refinance loans, which are used to pay off your current loan contract, replacing it with a new one. You might do this to get lower monthly payments and/or to pay off your loan faster while saving money.
Cash-out refinance: A cash-out refinance works the same as above, except you borrow a higher amount of money than you need. You get the difference back as cash that you can use for other things, like home repairs or debt consolidation.
Auto title loan: These are similar to payday loans except your paid-off (or mostly paid-off) car serves as loan collateral. Auto title loans are extremely expensive and difficult to repay, resulting in some borrowers having their car repossessed, so we don't recommend them.
Buy-here-pay-here loan: These dealerships market to people with bad credit. Your car may come installed with a tracking device to make it easier to repossess, and you may be charged exorbitantly high rates. We don’t recommend buy-here-pay-here loans.
Lease buyout loan: It can be difficult and expensive to get out of a car lease contract early so you’ll need to calculate the costs for all of your options carefully. If you can’t pay cash, some lenders offer a lease buyout loan for this purpose.
Private party auto loan: A private party auto loan is used to purchase a vehicle from a private seller—i.e., not a car dealership or business. Only some lenders provide loans for private party purchases.
Bad credit car loans: Some lenders offer auto loans of various kinds for people with poor credit; these loans are just like any other kind of loan, but they typically come with higher interest rates and fees.
Auto loans can either be secured or unsecured. Most auto loans are secured by the very car you’re buying and offer lower rates because of that. Your car serves as collateral for the loan and if you don’t repay it, the lender will repossess your car.
Unsecured car loans aren’t as common, but some lenders (like LightStream) do offer them. They’re often faster to get but they charge much higher rates because the lender doesn’t have an easy way to get their money back if you default.
How to Get the Lowest Interest Rates On Your Auto Loan
Auto loan rates depend in part on the federal prime rate, but the borrower's qualifications play a large role as well.
Shop around: Different lenders offer different interest rates; seek out lenders with low minimum APRs and get pre-approved to check your rates.
Build your credit: There are many ways to improve your credit score—some can be quick, like reducing your credit utilization, while others can take some time, like building up a history of on-time payments.
Increase your income: Having more money available (either for a down payment or for monthly payments) can improve your odds of getting a good rate.
Auto Loan Rates by Credit Score
Credit Level/Score
Used Car Loans
New Car Loans
Super Prime: 781–850
7.43%
5.61%
Prime: 661–780
9.33%
6.88%
Nonprime: 601–660
13.53%
9.29%
Subprime: 501-600
18.39%
11.86%
Deep subprime: 300–500
14.17%
21.18%
Data from Experian's State of the Automotive Finance Market Report Q3 2023.
How to Apply for an Auto Loan
You can get an auto loan from several different types of lenders: online lenders, banks, and credit unions. Dealerships themselves also partner with these lenders to offer you financing.
It’s best to do your loan shopping before you actually start looking for a car, because you can take the time to find the best loan options and you’ll have more bargaining power when you do find the car you want.
Each lender will check two things in order to approve your loan: your financial situation and the car you want to buy.
You can start the loan shopping process by getting pre-approved with multiple lenders. This may require a hard credit inquiry, in some cases. Chances are, some lenders will offer lower rates than others.
If you’re pre-approved based on the initial details you provide, including personal details like Social Security number and some financial details, the lender will let you know what rates and terms you’re likely to qualify for.
Lenders look for a few things. Your credit score, income, and debt payments are three of the most important factors, so it’s a good idea to clean up your credit in advance if it needs work and you have the time. Consider ways to reduce your debt-to-income ratio.
If you’re not able to qualify on your own and you have someone who’s willing to help, applying with a co-signer can improve your odds of qualifying for a loan.
“When my wife and I were shopping for a car last year, we prepared by getting a pre-qualification from our bank—Bank of America. We did it online, through our account portal. It was really easy, and because we have several accounts with BofA, we qualified for a rate discount. We planned on using the pre-approval as a negotiating tool, and figured the dealer would offer a better rate. To our surprise, the dealer couldn’t beat it. So now we have yet another account with BofA.” — Lars Peterson (Investopedia Senior Editor, Financial Products and Services).
Once you find the car you want, you can provide the details to your chosen lender and submit a full loan application. The lender will usually disburse the loan funds directly to you, either by check or bank deposit. In some cases lenders may send the money directly to dealerships; for refinance loans, lenders may send the money directly to the current holder of your loan.
Your new lender will provide you with details on how to set up an account, manage your loan, and make payments.
Auto Loan Calculator
See how much car you can afford with our auto loan calculator; plug in your details, and you can see how big your monthly payments will be at different terms and interest rates.
Say you take out a loan for a new 2024 Ford F-150 Platinum with the following details, for example:
Car price: $64,915Down payment: $5,000Loan amount: $59,915Loan term: 72 monthsCredit: Fair (601–660 credit score)Interest rate: 7.14%Total paid over the life of the loan: $73,837.72
With those terms, you'd have a monthly loan payment of $1,025.52. If you were to make a larger down payment, such as $8,000, you could take out a smaller loan ($56,915), and your monthly payment would be $974.17. You'd pay less overall: $70,140.59 over the life of the loan.
In the News: Auto loan rates are related to the Federal Reserve's benchmark rate—if the Fed rate goes up, average auto loan rates usually will, as well. Today's interest rates are pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame decades-high inflation.
The Fed held rates steady for a sixth consecutive time at its meeting the concluded May 1. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.
Auto Loans: Pros and Cons
Pros
Provides access to a car: If you need a car to get to work or school and can't afford to buy one with cash, an auto loan can give you that access to the transportation you need.
Spreads out the expense of a vehicle purchase: Even if you have enough cash to buy a car, auto financing spreads out that expense, so you don’t deplete your savings all at once.
You'll own the car: Your lender technically owns the car while you pay down your loan, but once it's paid off, you'll own the car outright. New car leases can save you money with lower monthly payments, but there's no vehicle ownership.
Flexible loans: Auto loans can offer flexibility with loan amounts and repayment terms to help fit into your budget.
Can help build credit: Like other installment loans, auto loans can be used to build credit as you make on-time monthly payments.
Cons
Interest rates can be high: Auto loan rates are lower than what you can expect from a personal loan or credit card. But if your credit isn't in great shape, you can still end up with a high interest rate, which could make monthly payments unaffordable.
Vehicles depreciate: While you're paying down your loan, the value of your vehicle is depreciating. If the vehicle's value is less than what you owe on your loan, you may have to pay the difference when you sell the car or if the vehicle gets totaled in an accident.
Can damage your credit: If you miss a payment by 30 days or more, it could damage your credit score significantly.
Default can result in repossession: If you fail to make payments for a longer period, your lender could repossess the vehicle and sell it to recoup the remaining loan balance. If there's a deficiency after the sale, you may still be on the hook for that debt.
Where Are the Big Banks?
We included big banks like Chase, Capital One, Bank of America, and U.S. Bank in our review of the auto loan industry, but these financial institutions don't always make our "Best" lists.
Why? Although these banks are reliable and used by millions of people, they usually don't offer the very best rates and terms. Online banks and lender marketplaces tend to have lower operating costs, and can pass those savings on to borrowers. Big banks tend to score well in our rankings, but they don't usually come out on top when it comes to auto loan interest rates, flexibility in terms, and accessibility.
Frequently Asked Questions
Which Companies Are Best for Car Loans?
Our top-rated lenders offer the lowest rates on new and used car loans in the auto financing industry—if you've got good credit and you want the best rates, take a look at PenFed, AUTOPAY, Consumers Credit Union, LendingTree, LendingClub, and OpenRoad Lending. You'll also find several good options for refinancing, as well.
How Do You Get the Best Car Loan Rate?
Not everyone qualifies for the best auto loan rates. Here are some things you can do before and during the application process to tip the odds in your favor:Check your rate with as many lenders as you can (within a short timeframe).Pay down your existing debt, especially credit card debt.Check your credit reports and fix any errors before you apply for a loan.Use your loan pre-approval offers to negotiate a lower rate with the dealership.
What Credit Score Do You Need to Qualify for a Car Loan?
There is no overall minimum credit score you’ll need to qualify for an auto loan. It depends on the lender; each lender has its own credit requirements. In general, if you have good or excellent credit (670 or higher), you’ll qualify for the best auto loan rates. Lenders typically use an auto-loan specific credit scoring model. See the best car loans for bad credit if you’re dealing with a lower score.
Where Can I Get an Auto Loan?
You can obtain an auto loan through a dealer in a dealer-arranged financing agreement or directly from an online lender, credit union, or traditional bank. Some dealers also offer in-house financing for car buyers with bad credit.
When Is the Best Time to Buy a Car?
Ultimately, the best time to buy a car is when you need one. But if you have some flexibility, experts recommend the following times:The end of the month, quarter, or year: Car salespeople often have to meet quotas for each month, quarter, and year, so they may be motivated to make a deal toward the end of those periods to ensure they make the cut.Three-day weekends: Dealerships often run sales events for President's Day, Memorial Day, Labor Day, and other three-day weekends. The same goes for other holidays, such as the Fourth of July and Black Friday.The end of the model year: Dealers may offer deals to get rid of inventory and make way for the latest model. Research when new models are released for the car you want and see if it can help you with negotiations.
What Is a Good APR for an Auto Loan?
According to a report by Experian in Nov. 2023, average rates for 2023 were 7.03% for new cars and 11.35% for used cars, although rates will have changed somewhat since then. If you get a rate lower than the average, you can generally feel like you're getting a good deal. Your rate will vary depending on your credit score, income, and other factors.
What Are Used Car Loan Interest Rates?
By Nov. 2023, the average interest rate for used cars in 2023 was 11.35%, according to Experian. Here's the average used car loan interest rate for each credit score range:Super prime: 7.43%Prime: 9.33%Near prime: 13.53%Subprime: 18.39%Deep subprime: 21.18%
Companies We Reviewed
We researched and reviewed 21 companies to find the best seven lenders you see on the list above. While we write individual reviews for most companies, we do not always write reviews for companies we would not recommend. Below are the companies we researched along with links to individual company reviews to help you learn more before making a decision:Alliant Credit Union, AUTOPAY, Bank of America, Capital One, CarMax, Carvana, Chase Auto, Consumers Credit Union, Credible, First Tech FCU, LendingClub, LendingTree, LightStream, NASA FCU, Navy Federal Credit Union, OpenRoad Lending, PenFed, PNC Bank, U.S. Bank, USAA, Vroom.
Other Types of Auto Loans
Best Used Car Loans
Best Car Loans for Bad Credit
Best Auto Refinance Loans
Best Private Party Car Loans
Best Car Loans for First Time Buyers
Best Motorcycle Loans
Best RV Loans
Best Auto Repair Loans
Guide to Auto Loans
Learn more about auto loans:
How Auto Loans Work
How Credit Union Auto Loans Work
How to Get Pre-Approved for a Car Loan
How to Get a Car Loan
How to Buy a New Car
How to Refinance a Car Loan
How to Buy a Car With No Credit
Dealer Financing: What It Is, How It Works
How to Buy a Car From a Dealership
How Interest Rates Work on Car Loans
Credit Union vs. Bank for Auto Loan: What’s the Best Choice?
Personal Loans vs. Car Loans: What's the Difference?
Subprime Auto Loan: Meaning, Rates, FAQs
Car Title Loan: What It is, How It Works, Example
Auto Loan Payment and Interest Calculator
Auto Loan Review Methodology
How We Picked the Best Auto Loans
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of auto loan lenders. To rate providers, we collected hundreds of data points for a period of over two months across more than 20 auto loan lenders, including interest rates, fees, loan amounts, borrower requirements, and vehicle requirements, to ensure that our reviews help users make informed decisions for their borrowing needs. We also conducted a survey of 1,016 auto loan borrowers for attitudes and opinions about lenders and the loan approval and disbursement process.
Why You Should Trust Us
Investopedia collected 1,176 key data points from 21 companies across three months to identify the most important factors for readers choosing an auto loan. We used this data to review each company for interest rates, loan requirements, and other features to provide unbiased, comprehensive reviews to ensure our readers make the right decision for their needs. Investopedia launched in 1999, and has been helping readers find the best auto loans since 2020.
Investopedia / Michela Buttignol
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
editorial policy.
Board of Governors of the Federal Reserve System. "Consumer Credit - G.19."
Experian. "State of the Automotive Finance Market Q3 2023."
Bureau of Labor Statistics. "Consumer Price Index."
Federal Reserve. "Federal Reserve Issues FOMC Statement."
Experian. “Step-by-Step Checklist for Buying a New Car.”
Experian. “What Credit Score Do I Need for an Auto Loan?”
FICO. “What is a FICO® Score?”
Progressive. "When is the best time to buy a car?"
Experian. "State of the Automotive Finance Market Report."
Related Articles
Best Auto Loans for Fair Credit of 2024
Best Auto Refinance Loans for May 2024
Best Used Car Loans for 2024
Best Motorcycle Loans of 2024
Best Private Party Car Loans
Best RV Loans for May 2024
Related Terms
Subprime Auto Loan: How It Works and Rates
A subprime auto loan is a type of loan used to finance a car purchase offered to people with low credit scores or limited credit histories.
more
Buy Here, Pay Here (BHPH) Car Dealership: Meaning, How It Works
The term “Buy Here, Pay Here (BHPH)” refers to auto dealerships in which the financing for the vehicles purchased is done in-house.
more
What Is a Secured Loan? How They Work, Types, and How to Get One
Secured loans are loans that require collateral to borrow. Here’s how secured loans work and where to find them.
more
Emergency Loan: Types, Eligibility, Pros and Cons
Emergency loans are a type of personal loan that provides fast access to cash. Learn how emergency loans work and about their pros and cons.
more
Private Student Loans: What They Are, How They Work
Private student loans are offered through third-party lenders, and they don't come with the protections afforded to federal student loan borrowers.
more
Maximum Loan Amount: Definition and Factors Lenders Consider
A maximum loan amount describes the total that one is authorized to borrow. It is used for standard loans, credit cards, and line-of-credit accounts.
more
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https://www.investopedia.com/terms/c/classbshares.asp | Class B Shares: Definition, How They Work, and Voting Power | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-class-b-shares"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are Class B Shares? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Class B shares are a classification of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commonstock.asp" rel="noopener noreferrer">common stock</a> that may be accompanied by more or fewer <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/votingright.asp" rel="noopener noreferrer">voting rights</a> than Class A shares. Class B shares may also have lower repayment priority in the event of a bankruptcy.
</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 detailed description of a company's different classes of stock is included in the company's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prospectus.asp" rel="noopener noreferrer">prospectus</a>, bylaws, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corporatecharter.asp" rel="noopener noreferrer">charter</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>Class B shares are issued by corporations as a class of common stock with fewer voting rights and lower dividend priority than Class A shares.</li><li>Such a dual-class structure might be instituted if the original owners of the company wanted to sell the majority of their stake in the firm but still maintain control and make key decisions.</li><li>Class B shares may also refer to mutual fund shares that carry no sales load.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-class-b-shares"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding Class B Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/share_class.asp" rel="noopener noreferrer">share classes</a> within the same entity typically confer different rights to the stockholder. For example, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/publiccompany.asp" rel="noopener noreferrer">public company</a> may offer two classes of common stock outstanding: Class A common stock and Class B common stock. This dual-class structure is typically decided on when a company first goes public and issues stock in the secondary market through an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp" rel="noopener noreferrer">IPO</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"> Class B shares typically have lower dividend priority than Class A shares and fewer voting rights. However, different classes do not usually affect an average investor’s share of the profits or benefits from the company’s overall success. Some companies offer more than two classes of shares (for instance, Class C and D) for various reasons. Sometimes, a company will offer a second class of shares that have a lower share price in order to attract individual investors as opposed to institutional shareholders—for instance, with Berkshire Hathaway's Class A shares (BRK.A) trading at around $330,000 (as of September 2020) and its Class B shares (BRK.B) at a more palatable $220 per share.
</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-voting-power-of-share-classes"></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"> Voting Power of Share Classes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> An investor should research details of a company’s share classes when considering investing in a firm with more than one class. For example, a private company deciding to go public typically issues a large number of common shares, but it may provide its founders, executives, or other large stakeholders with a different class of common stock carrying multiple votes for each share. Increasing voting shares gives key company <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insider.asp" rel="noopener noreferrer">insiders</a> greater control over voting rights, the company’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boardofdirectors.asp" rel="noopener noreferrer">board of directors</a> (B of D), and corporate actions. Because key insiders may maintain majority voting rights without owning more than half the outstanding shares, the insiders may defend the company against hostile takeovers. As long as large stakeholders owning greater <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/votingshares.asp" rel="noopener noreferrer">voting shares</a> are successfully running the business, individual investors need not be concerned.
</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"> Although <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/classashares.asp" rel="noopener noreferrer">Class A shares</a> are often thought to carry more voting rights than Class B shares, this is not always the case: Companies will sometimes try to disguise the disadvantages associated with owning shares with fewer voting rights by naming those shares "Class A" and those with more voting rights "Class B."
</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-mutual-fund-class-b-shares"></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"> Mutual Fund Class B Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> In terms of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp" rel="noopener noreferrer">mutual fund</a> designations, commissioned mutual fund brokers typically recommend Class A shares to individual investors. The fund shares have a sales <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/load.asp" rel="noopener noreferrer">load</a>, or commission, that investors must pay when buying the fund's shares. Investors purchasing large numbers of shares, or who have shares in other funds offered by the same mutual fund company, may receive discounts on the load. Class A shares may have a lower <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/12b-1fees.asp" rel="noopener noreferrer">12B-1 fee</a>, or marketing and distribution fee, than other share classes.
</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 contrast, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bshare.asp" rel="noopener noreferrer">Class B mutual fund shares</a> have <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/no-loadfund.asp" rel="noopener noreferrer">no load</a> fees. Investors purchasing Class B shares may instead pay a fee when selling their shares, but the fee may be waived when holding the shares five years or longer. In addition, Class B shares may convert to Class A shares if held long term. Although the absence of a load means the entire purchase price of the shares is invested into the mutual fund, rather than having a percentage subtracted upfront, Class B shares have higher 12B-1 and annual management fees than Class A shares.
</p></div> | ## What Are Class B Shares?
Class B shares are a classification of [common stock](https://www.investopedia.com/terms/c/commonstock.asp) that may be accompanied by more or fewer [voting rights](https://www.investopedia.com/terms/v/votingright.asp) than Class A shares. Class B shares may also have lower repayment priority in the event of a bankruptcy.
A detailed description of a company's different classes of stock is included in the company's [prospectus](https://www.investopedia.com/terms/p/prospectus.asp), bylaws, and [charter](https://www.investopedia.com/terms/c/corporatecharter.asp).
### Key Takeaways
* Class B shares are issued by corporations as a class of common stock with fewer voting rights and lower dividend priority than Class A shares.
* Such a dual-class structure might be instituted if the original owners of the company wanted to sell the majority of their stake in the firm but still maintain control and make key decisions.
* Class B shares may also refer to mutual fund shares that carry no sales load.
## Understanding Class B Shares
Different [share classes](https://www.investopedia.com/terms/s/share_class.asp) within the same entity typically confer different rights to the stockholder. For example, a [public company](https://www.investopedia.com/terms/p/publiccompany.asp) may offer two classes of common stock outstanding: Class A common stock and Class B common stock. This dual-class structure is typically decided on when a company first goes public and issues stock in the secondary market through an [IPO](https://www.investopedia.com/terms/i/ipo.asp).
Class B shares typically have lower dividend priority than Class A shares and fewer voting rights. However, different classes do not usually affect an average investor’s share of the profits or benefits from the company’s overall success. Some companies offer more than two classes of shares (for instance, Class C and D) for various reasons. Sometimes, a company will offer a second class of shares that have a lower share price in order to attract individual investors as opposed to institutional shareholders—for instance, with Berkshire Hathaway's Class A shares (BRK.A) trading at around $330,000 (as of September 2020) and its Class B shares (BRK.B) at a more palatable $220 per share.
## Voting Power of Share Classes
An investor should research details of a company’s share classes when considering investing in a firm with more than one class. For example, a private company deciding to go public typically issues a large number of common shares, but it may provide its founders, executives, or other large stakeholders with a different class of common stock carrying multiple votes for each share. Increasing voting shares gives key company [insiders](https://www.investopedia.com/terms/i/insider.asp) greater control over voting rights, the company’s [board of directors](https://www.investopedia.com/terms/b/boardofdirectors.asp) (B of D), and corporate actions. Because key insiders may maintain majority voting rights without owning more than half the outstanding shares, the insiders may defend the company against hostile takeovers. As long as large stakeholders owning greater [voting shares](https://www.investopedia.com/terms/v/votingshares.asp) are successfully running the business, individual investors need not be concerned.
Although [Class A shares](https://www.investopedia.com/terms/c/classashares.asp) are often thought to carry more voting rights than Class B shares, this is not always the case: Companies will sometimes try to disguise the disadvantages associated with owning shares with fewer voting rights by naming those shares "Class A" and those with more voting rights "Class B."
## Mutual Fund Class B Shares
In terms of [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) designations, commissioned mutual fund brokers typically recommend Class A shares to individual investors. The fund shares have a sales [load](https://www.investopedia.com/terms/l/load.asp), or commission, that investors must pay when buying the fund's shares. Investors purchasing large numbers of shares, or who have shares in other funds offered by the same mutual fund company, may receive discounts on the load. Class A shares may have a lower [12B-1 fee](https://www.investopedia.com/terms/1/12b-1fees.asp), or marketing and distribution fee, than other share classes.
In contrast, [Class B mutual fund shares](https://www.investopedia.com/terms/b/bshare.asp) have [no load](https://www.investopedia.com/terms/n/no-loadfund.asp) fees. Investors purchasing Class B shares may instead pay a fee when selling their shares, but the fee may be waived when holding the shares five years or longer. In addition, Class B shares may convert to Class A shares if held long term. Although the absence of a load means the entire purchase price of the shares is invested into the mutual fund, rather than having a percentage subtracted upfront, Class B shares have higher 12B-1 and annual management fees than Class A shares.
| What Are Class B Shares?
Class B shares are a classification of common stock that may be accompanied by more or fewer voting rights than Class A shares. Class B shares may also have lower repayment priority in the event of a bankruptcy.
A detailed description of a company's different classes of stock is included in the company's prospectus, bylaws, and charter.
Key Takeaways
Class B shares are issued by corporations as a class of common stock with fewer voting rights and lower dividend priority than Class A shares.Such a dual-class structure might be instituted if the original owners of the company wanted to sell the majority of their stake in the firm but still maintain control and make key decisions.Class B shares may also refer to mutual fund shares that carry no sales load.
Understanding Class B Shares
Different share classes within the same entity typically confer different rights to the stockholder. For example, a public company may offer two classes of common stock outstanding: Class A common stock and Class B common stock. This dual-class structure is typically decided on when a company first goes public and issues stock in the secondary market through an IPO.
Class B shares typically have lower dividend priority than Class A shares and fewer voting rights. However, different classes do not usually affect an average investor’s share of the profits or benefits from the company’s overall success. Some companies offer more than two classes of shares (for instance, Class C and D) for various reasons. Sometimes, a company will offer a second class of shares that have a lower share price in order to attract individual investors as opposed to institutional shareholders—for instance, with Berkshire Hathaway's Class A shares (BRK.A) trading at around $330,000 (as of September 2020) and its Class B shares (BRK.B) at a more palatable $220 per share.
Voting Power of Share Classes
An investor should research details of a company’s share classes when considering investing in a firm with more than one class. For example, a private company deciding to go public typically issues a large number of common shares, but it may provide its founders, executives, or other large stakeholders with a different class of common stock carrying multiple votes for each share. Increasing voting shares gives key company insiders greater control over voting rights, the company’s board of directors (B of D), and corporate actions. Because key insiders may maintain majority voting rights without owning more than half the outstanding shares, the insiders may defend the company against hostile takeovers. As long as large stakeholders owning greater voting shares are successfully running the business, individual investors need not be concerned.
Although Class A shares are often thought to carry more voting rights than Class B shares, this is not always the case: Companies will sometimes try to disguise the disadvantages associated with owning shares with fewer voting rights by naming those shares "Class A" and those with more voting rights "Class B."
Mutual Fund Class B Shares
In terms of mutual fund designations, commissioned mutual fund brokers typically recommend Class A shares to individual investors. The fund shares have a sales load, or commission, that investors must pay when buying the fund's shares. Investors purchasing large numbers of shares, or who have shares in other funds offered by the same mutual fund company, may receive discounts on the load. Class A shares may have a lower 12B-1 fee, or marketing and distribution fee, than other share classes.
In contrast, Class B mutual fund shares have no load fees. Investors purchasing Class B shares may instead pay a fee when selling their shares, but the fee may be waived when holding the shares five years or longer. In addition, Class B shares may convert to Class A shares if held long term. Although the absence of a load means the entire purchase price of the shares is invested into the mutual fund, rather than having a percentage subtracted upfront, Class B shares have higher 12B-1 and annual management fees than Class A shares.
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] |
https://www.investopedia.com/how-to-stake-ethereum-7482623 | How to Stake Ethereum | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-staking-ethereum"></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 Staking Ethereum? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Staking ether (ETH) is locking some cryptocurrency in a smart contract and offering your services to the network as a validator. Validators with 32 ETH are randomly chosen by the network to verify transactions and add new blocks to the blockchain. In exchange for the work, they earn freshly minted ETH and portions of network transaction fees.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> This article will explore Ethereum staking, its benefits and risks, and share tips for finding a reliable and trustworthy staking platform based on criteria such as security, fees, and reputation.
</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>Ethereum staking involves committing ether as collateral to validate transactions on the Ethereum network and earn ETH.</li><li>Ethereum can be staked independently or through a third party such as a crypto wallet, exchange, or staking pool.</li><li>Ethereum replaced its energy-intensive, computation-driven Proof-of-Work (PoW) mining mechanism with a financially-governed Proof-of-Stake (PoS) mechanism.<br/></li><li>Ethereum staking offers the benefits of passive income, network security contribution, governance influence, ecological sustainability, and capital appreciation.</li><li>It also carries the risks of hardware expenses, cybersecurity threats, opportunity costs, and capital depreciation.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-ethereum-staking"></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 Ethereum Staking </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Ethereum's native token ether is used on the blockchain as a payment, a reward, and as collateral. Its use as collateral is what staking is all about.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-subheading__text"> Why Stake? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> To operate, the blockchain and network need participants it can trust to honestly verify that a user has enough ether to send a transaction and has signed it with the right private key. The network sends the transaction to a randomly-selected node's pool, which broadcasts it to other nodes. These nodes add it to their pools and broadcast it also, in a process called "gossiping." To host a node and become a validator, a user must stake 32 ether.
</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 selected node processes transactions into a block and broadcasts it to other nodes, who also process the block to verify its validity and add it to their stored blockchain if it is. The randomly selected node receives a reward proportional to the number of validators on the network, the validator's effective balance, and the total amount of ether staked on the network. Other validators also receive rewards for participating in block validation.<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_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"> Staked Ether Is Locked </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The validator who proposed the block had 32 ETH locked into a smart contract for the chance to be chosen. This ETH cannot be used or transferred until the validator requests that the network release (unstake) it. This process can take several days to complete, as the network is limited to 16 withdrawals per block or 115,200 validator withdrawals per day.<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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The ether committed to staking is the participant's guarantee that they will not act unethically as a validator.
</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"> Staking Penalties </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The network is programmed to take staked ETH away if a validator acts dishonestly (a very rare occurrence). Validators are also required to ensure that their hardware remains functional, they stay connected, and don't miss their target and source voting. In certain circumstances, they may face penalties, such as having the rewards they would have received removed from their balance.<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_23-0"></div>
<span class="heading-toc" id="toc-how-to-stake-ethereum"></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"> How to Stake Ethereum </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Participants have options to solo stake, participate in staking-as-a-service, or join a staking pool. The tradeoffs and trust assumptions of staking independently or through an intermediary vary:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li><strong>Solo staking</strong>: The most secure option, you'll need to 32 ETH to stake and have a dedicated computer with a reliable and constant connection.</li><li><strong>Staking pools</strong>: You join a pool using any amount of ETH, which is used to create a node of 32 ETH. Rewards are distributed based on the pool rules, most of which are based on how much you stake. Some pools lock your ETH in a smart contract and offer you an ERC20 token that represents it.</li><li><strong>Staking-as-a-service</strong>: The least secure option because you're trusting others to act honestly, you'll need to delegate your ether to a service provider and trust that they'll act in your best interests.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
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<img alt="How to Stake Ethereum" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/wGqkCMxB-ut9dGXeCIyxhusxk-U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/StakeEthereums-v1-84946cba6cc840d398aad9641168c44e.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/wGqkCMxB-ut9dGXeCIyxhusxk-U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/StakeEthereums-v1-84946cba6cc840d398aad9641168c44e.png" data-srcset="https://www.investopedia.com/thmb/gNyBaMVtdHh9E9btIFQx1TSFJPY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/StakeEthereums-v1-84946cba6cc840d398aad9641168c44e.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Mira Norian</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Minimum <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deposit.asp">deposit</a> requirements for staking-as-a-service and pooled staking, if there are any, are lower than for solo taking. Some providers may require a minimum deposit of 0.01 ETH to .05 ETH.<br/>
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> Hardware </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Hardware costs for the Ethereum validator node depend on what you use. Building a computer to serve as a node can cost between $1000 to $2000 and can go up from there, depending on the specific components, their quality, and replacement schedules. Staking is not nearly as computationally intense as mining, so the hardware should last quite some time. However, if you intend to stake for a few years, you'll need a large hard drive or be comfortable adding storage because the blockchain grows over time.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> There are a few staking device manufacturers that sell plug-and-play products designed specifically for staking. These devices generally cost between $1,000 and $4,000, depending on the hardware included in the device.<span class="ql-inline-citation" data-cite="20"></span>
</p>
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<span class="heading-toc" id="toc-benefits-of-ethereum-staking"></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"> Benefits of Ethereum Staking </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Ethereum staking allows you to passively earn income on your ETH holdings. These rewards are distributed periodically and have the potential to appreciate if ether's market value goes up. The amount of rewards depends on the amount of ETH you stake, the length of time you stake it, and the overall activity on the network.<span class="ql-inline-citation" data-cite="3"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Ethereum staking strengthens the network's security by incentivizing validators to act responsibly and honestly.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> It also lowers the barrier to entry for participating in the Ethereum network's consensus process. Anyone can participate in staking with small amounts of ETH.
</p>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The estimated rate of return for ETH staking, as of May 2024, is about 3.2%.<span class="ql-inline-citation" data-cite="9"></span></p></div></div></div>
<span class="heading-toc" id="toc-risks-of-ethereum-staking"></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"> Risks of Ethereum Staking </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Staking ETH comes with potential <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/illiquid.asp">liquidity</a> risks, maintenance and technical issues with equipment, and financial penalties. The price of ETH could drop or the validator could stop working as intended due to malfunctions, errors, or hacks, causing you to lose some of your investment. Your staked ETH will be locked up for the duration of the staking period, and you will not be able to access it during that time. Your staked ETH could be fined or slashed if you don't vote, or behave maliciously.
</p>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You are allowed downtime for equipment maintenance without penalty. The network is designed to catch you back up to where you should have been were your equipment not under maintenance. However, you won't get rewards you may have received if your equipment had been operating.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> In the Ethereum network, validators who miss source and target voting deadlines face penalties equal to the rewards they would have received had they submitted their votes. Source and target votes are crucial aspects of the PoS consensus mechanism and play a significant role in approving new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/block-bitcoin-block.asp">blocks</a> in the Ethereum blockchain:<span class="ql-inline-citation" data-cite="3"></span>
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> <li><strong>Source vote</strong>: A validator's attestation of the most recent justified checkpoint of the chain. A checkpoint is a snapshot of the blockchain at a specific point in time. Justified checkpoints represent blocks that have been sufficiently finalized and are unlikely to be reverted. Source votes help establish that checkpoints are justified.</li><li><strong>Target vote</strong>: A validator's attestation on the first block of the current epoch. An epoch is a fixed period in which validators are assigned to committees. Target votes help to ensure that all validators are on the same page regarding the start of the current epoch.</li>
</ul>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Head votes, while important, do not cause penalties if missed.<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_57-0"> Slashing is a rare severe penalty in which a validator is removed altogether from the Ethereum network and loses their staked ETH. Slashing can occur when a validator behaves maliciously by:<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_58-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> <li><strong>Proposing and signing two different blocks for the same slot</strong>: The act of a validator submitting two conflicting block proposals for the same slot in the chain. This behavior creates a fork in the chain, jeopardizing the network's consensus and potentially leading to double spending attacks.</li><li><strong>Attesting to a block that surrounds another block</strong>: The act of a validator attesting to a block that includes another block already finalized in the chain. This behavior violates the chain's structure and could lead to inconsistencies in the block history.</li><li><strong>Double voting by attesting to two candidates for the same block</strong>: The act of a validator attesting to two different validators as the proposers of the same block. This behavior creates ambiguity regarding the block's proposer and could undermine the network's consensus mechanism.<br/></li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> When a validator is slashed, 1/32 of their staked ETH is immediately burned, permanently removing it from the Ethereum network, while a 36-day removal period gradually removes their remaining staked ETH. The dual penalty structure of slashing is designed to punish the validator for misbehavior, deter others from doing the same, and prevent the validator from immediately rejoining the network and continuing to cause problems.<span class="ql-inline-citation" data-cite="3"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Halfway through the removal period, an additional penalty, the "correlation penalty," is applied. The correlation penalty is designed to discourage validators from colluding to slash each other. The magnitude of the correlation penalty scales upward with the total staked ETH of all slashed validators in the 36 days prior to the slashing event.<span class="ql-inline-citation" data-cite="3"></span><br/>
</p>
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<span class="heading-toc" id="toc-factors-to-consider-when-choosing-a-staking-method"></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"> Factors to Consider When Choosing a Staking Method </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Deposit requirements, staking fees, coding ability, service provider quality, hardware costs, and cybersecurity are important when choosing how and where to stake Ethereum. Here are some of these factors:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0">
<li><strong>Deposit Requirements</strong>: Minimum deposit requirements influence the flexibility of staking strategies. Higher minimum deposits may require longer staking periods to break even and take away capital from an investment portfolio. Lower minimum deposits may encourage shorter staking periods and free up capital allocations for other investment areas.</li>
<li><strong>Cybersecurity</strong>:<strong> </strong>Staking involves locking up a significant amount of cryptocurrency for an extended period of time. Selecting a platform with top-notch <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cybersecurity.asp">cybersecurity</a>, digital safety, and technological resilience can mitigate the risk of loss and theft.</li>
<li><strong>Staking Fees</strong>:<strong> </strong>Staking fees vary widely between different wallets and exchanges and significantly impact overall returns. It is important to carefully calculate commission fees charged to your staking participation and choose a provider offering competitive fees.</li>
<li><strong>Quality Assurance</strong>:<strong> </strong>A high-quality wallet or exchange with a strong track record of software engineering and product development can provide added security and peace of mind when staking, especially if you've locked up the maximum amount of ETH per node. Larger companies tend to have stronger talent and standards than smaller startups that run staking services.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Customer Service</strong>:<strong> </strong>If you run into any issues or have questions about staking, it is better to have access to responsive and helpful customer service. A wallet provider or an exchange with dependable customer support can make the process smoother and less stressful.</li>
<li><strong>Waiting Periods</strong>:<strong> </strong>Some third-party staking methods have long waiting periods before rewards are distributed. If you are delegating your staking, it is important to find a service that offers fast distribution times to minimize illiquidity and maximize returns, which can be reinvested.</li>
<li><strong>Coding Ability</strong>: Setting up and interacting with a validator node for solo Ethereum staking requires basic coding knowledge. While some aspects of the setup can be done through graphical user interfaces, some steps require command-line interactions and familiarity with coding concepts.</li>
<li><strong>Hardware Costs</strong>: For solo staking, you must purchase and maintain specialized hardware. The upfront hardware cost and ongoing maintenance can be significant, ranging into the thousands of dollars.</li>
</ul>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-subheading__text"> Staking Independently </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Here's a breakdown of the steps to run an Ethereum validator node on your own:
</p>
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> <li><strong>Purchase the hardware</strong>: Consistently reliable hardware for solo staking typically includes an up-to-date personal computer. For best performance, a higher-end CPU such as an Intel Core i7 or AMD Ryzen 7, 16GB to 32GB of RAM, sufficient storage of at least a 2TB SSD and a stable Internet connection with high bandwidth and low latency.<span class="ql-inline-citation" data-cite="11"></span></li><li><strong>Install the necessary software</strong>: The software for Ethereum staking includes the execution client, a consensus client, a validator client, and any additional tools. It typically involves downloading and running the software, compiling the software from source code, or using package managers like apt or yum. This requires some familiarity with command-line environments and basic Linux/Unix commands.<span class="ql-inline-citation" data-cite="10"></span></li><li><strong>Configure the validator node</strong>: Edit the node's configuration files, set up its network settings, and generate its cryptographic keys. This requires understanding the structure of configuration files, syntax of specific commands, and the usage of tools like "geth" and "geth attach" for interacting with the Ethereum network.<span class="ql-inline-citation" data-cite="12"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span><li><strong>Monitor and maintain the validator node</strong>: Check logs, update software, troubleshoot issues, and ensure consistent uptime. This requires familiarity with log analysis tools, understanding error messages, and applying software updates through command-line tools or package managers.<span class="ql-inline-citation" data-cite="13"></span></li>
</ol>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_75-0"> <span class="mntl-sc-block-subheading__text"> Staking Via Cryptocurrency Exchanges </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Here are the steps to stake Ethereum via a crypto exchange:
</p>
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> <li><strong>Sign up for an account</strong>:<strong> </strong>The first step is to sign up for an account on the exchange. This typically involves providing personal information, verifying your identity, and setting up a payment method to purchase ETH.</li><li><strong>Purchase ETH</strong>: Once your account is set up, you will need to purchase Ethereum. This can usually be done through a variety of payment methods available on the exchange, such as bank transfer, credit card, or debit card.</li><li><strong>Transfer ETH to the exchange's staking program</strong>:<strong> </strong>Once you have ETH in your exchange's wallet, you should be able to find an option to stake ETH within the wallet itself. The specific steps may vary depending on the exchange, but typically you will need to navigate to the staking section of the wallet and follow the instructions to stake your ETH.</li><li><strong>Choose your staking options</strong>: The next step is to choose your staking parameters, such as the amount of ETH you want to stake and the length of time you want to stake it for.</li><li><strong>Stake your ETH</strong>: The rewards will typically be added to your account periodically, depending on the specific staking program and its payout schedule.</li>
</ol>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Unlike traditional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp">brokerage firms</a>, cryptocurrency exchanges are not members of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sipc.asp">Securities Investor Protection Corporation (SIPC)</a>, a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/not-for-profit.asp">not-for-profit</a>, member-funded corporation created by an act of Congress to protect the clients of brokerage firms that are forced into <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>. Unless user terms specify otherwise, investors with cryptocurrency assets commingled on a <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/custodian.asp">custodial</a> cryptocurrency exchange could potentially lose their funds as unsecured creditors.</p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-subheading__text"> Staking Via Cryptocurrency Wallets </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Here are the steps to stake Ethereum via a crypto wallet:
</p>
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <li><strong>Choose a compatible wallet</strong>:<strong> </strong>Select a wallet that is compatible with Ethereum staking. Some popular options include Ledger, Trezor, and MetaMask.</li><li><strong>Transfer ETH to your wallet</strong>:<strong> </strong>Once you have selected a wallet, you will need to transfer ETH to it from an exchange or another wallet.</li><li><strong>Navigate to the staking section</strong>: Once you have ETH in your wallet, navigate to the staking section of the wallet. This may involve clicking on a specific button or tab within the wallet's interface.</li><li><strong>Follow the instructions to stake</strong>: Once you have located the staking section, follow the instructions provided by the wallet to stake your ETH.</li>
</ol>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_87-0"><span class="heading-toc" id="toc-is-it-a-good-idea-to-stake-etherum"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is It a Good Idea to Stake Etherum?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It depends on how much ether you have and if you think you'll generate enough returns from staking it. If you only want to participate in the network and are not concerned with returns, you don't need to stake your ether. You can run a node without staking, you just won't get any rewards.<br/></p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_89-0"><span class="heading-toc" id="toc-how-much-do-you-earn-by-staking-eth"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Do You Earn by Staking ETH?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In May 2024, validators were earning about 3.2% on their stakes.<br/></p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_91-0"><span class="heading-toc" id="toc-can-i-stake-eth-on-coinbase"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Stake ETH on Coinbase?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can stake your ether on Coinbase. You'll receive Coinbase Wrapped Staked Ether (cbETH) that represents it and receive ETH rewards.<br/></p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Ethereum staking is the process of locking up ETH and joining the validation process as a full node or as part of a pool. You can create your own node and stake 32 ETH, join a staking service provider, or join a pool.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> Whichever you choose, make sure you thoroughly research the method because there are no 100% fool-proof and secure ways to use cryptocurrency. Lastly, remember that your funds are not insured, and there is generally no recourse for lost or stolen cryptocurrency.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1714920039300190&usg=AOvVaw135zDT3YRqNOO1clqiKEHb">warranty and liability disclaimer</a> for more info. As of the date this article was written, the author does not own cryptocurrency.</em>
</p></div> | ## What Is Staking Ethereum?
Staking ether (ETH) is locking some cryptocurrency in a smart contract and offering your services to the network as a validator. Validators with 32 ETH are randomly chosen by the network to verify transactions and add new blocks to the blockchain. In exchange for the work, they earn freshly minted ETH and portions of network transaction fees.
This article will explore Ethereum staking, its benefits and risks, and share tips for finding a reliable and trustworthy staking platform based on criteria such as security, fees, and reputation.
### Key Takeaways
* Ethereum staking involves committing ether as collateral to validate transactions on the Ethereum network and earn ETH.
* Ethereum can be staked independently or through a third party such as a crypto wallet, exchange, or staking pool.
* Ethereum replaced its energy-intensive, computation-driven Proof-of-Work (PoW) mining mechanism with a financially-governed Proof-of-Stake (PoS) mechanism.
* Ethereum staking offers the benefits of passive income, network security contribution, governance influence, ecological sustainability, and capital appreciation.
* It also carries the risks of hardware expenses, cybersecurity threats, opportunity costs, and capital depreciation.
## Understanding Ethereum Staking
Ethereum's native token ether is used on the blockchain as a payment, a reward, and as collateral. Its use as collateral is what staking is all about.
### Why Stake?
To operate, the blockchain and network need participants it can trust to honestly verify that a user has enough ether to send a transaction and has signed it with the right private key. The network sends the transaction to a randomly-selected node's pool, which broadcasts it to other nodes. These nodes add it to their pools and broadcast it also, in a process called "gossiping." To host a node and become a validator, a user must stake 32 ether.
The selected node processes transactions into a block and broadcasts it to other nodes, who also process the block to verify its validity and add it to their stored blockchain if it is. The randomly selected node receives a reward proportional to the number of validators on the network, the validator's effective balance, and the total amount of ether staked on the network. Other validators also receive rewards for participating in block validation.
### Staked Ether Is Locked
The validator who proposed the block had 32 ETH locked into a smart contract for the chance to be chosen. This ETH cannot be used or transferred until the validator requests that the network release (unstake) it. This process can take several days to complete, as the network is limited to 16 withdrawals per block or 115,200 validator withdrawals per day.
The ether committed to staking is the participant's guarantee that they will not act unethically as a validator.
### Staking Penalties
The network is programmed to take staked ETH away if a validator acts dishonestly (a very rare occurrence). Validators are also required to ensure that their hardware remains functional, they stay connected, and don't miss their target and source voting. In certain circumstances, they may face penalties, such as having the rewards they would have received removed from their balance.
## How to Stake Ethereum
Participants have options to solo stake, participate in staking-as-a-service, or join a staking pool. The tradeoffs and trust assumptions of staking independently or through an intermediary vary:
* **Solo staking**: The most secure option, you'll need to 32 ETH to stake and have a dedicated computer with a reliable and constant connection.
* **Staking pools**: You join a pool using any amount of ETH, which is used to create a node of 32 ETH. Rewards are distributed based on the pool rules, most of which are based on how much you stake. Some pools lock your ETH in a smart contract and offer you an ERC20 token that represents it.
* **Staking-as-a-service**: The least secure option because you're trusting others to act honestly, you'll need to delegate your ether to a service provider and trust that they'll act in your best interests.
![How to Stake Ethereum]()
:max_bytes(150000):strip_icc()/StakeEthereums-v1-84946cba6cc840d398aad9641168c44e.png)
Investopedia / Mira Norian
Minimum [deposit](https://www.investopedia.com/terms/d/deposit.asp) requirements for staking-as-a-service and pooled staking, if there are any, are lower than for solo taking. Some providers may require a minimum deposit of 0.01 ETH to .05 ETH.
### Hardware
Hardware costs for the Ethereum validator node depend on what you use. Building a computer to serve as a node can cost between $1000 to $2000 and can go up from there, depending on the specific components, their quality, and replacement schedules. Staking is not nearly as computationally intense as mining, so the hardware should last quite some time. However, if you intend to stake for a few years, you'll need a large hard drive or be comfortable adding storage because the blockchain grows over time.
There are a few staking device manufacturers that sell plug-and-play products designed specifically for staking. These devices generally cost between $1,000 and $4,000, depending on the hardware included in the device.
## Benefits of Ethereum Staking
Ethereum staking allows you to passively earn income on your ETH holdings. These rewards are distributed periodically and have the potential to appreciate if ether's market value goes up. The amount of rewards depends on the amount of ETH you stake, the length of time you stake it, and the overall activity on the network.
Ethereum staking strengthens the network's security by incentivizing validators to act responsibly and honestly.
It also lowers the barrier to entry for participating in the Ethereum network's consensus process. Anyone can participate in staking with small amounts of ETH.
###
The estimated rate of return for ETH staking, as of May 2024, is about 3.2%.
## Risks of Ethereum Staking
Staking ETH comes with potential [volatility](https://www.investopedia.com/terms/v/volatility.asp) and [liquidity](https://www.investopedia.com/terms/i/illiquid.asp) risks, maintenance and technical issues with equipment, and financial penalties. The price of ETH could drop or the validator could stop working as intended due to malfunctions, errors, or hacks, causing you to lose some of your investment. Your staked ETH will be locked up for the duration of the staking period, and you will not be able to access it during that time. Your staked ETH could be fined or slashed if you don't vote, or behave maliciously.
###
You are allowed downtime for equipment maintenance without penalty. The network is designed to catch you back up to where you should have been were your equipment not under maintenance. However, you won't get rewards you may have received if your equipment had been operating.
In the Ethereum network, validators who miss source and target voting deadlines face penalties equal to the rewards they would have received had they submitted their votes. Source and target votes are crucial aspects of the PoS consensus mechanism and play a significant role in approving new [blocks](https://www.investopedia.com/terms/b/block-bitcoin-block.asp) in the Ethereum blockchain:
* **Source vote**: A validator's attestation of the most recent justified checkpoint of the chain. A checkpoint is a snapshot of the blockchain at a specific point in time. Justified checkpoints represent blocks that have been sufficiently finalized and are unlikely to be reverted. Source votes help establish that checkpoints are justified.
* **Target vote**: A validator's attestation on the first block of the current epoch. An epoch is a fixed period in which validators are assigned to committees. Target votes help to ensure that all validators are on the same page regarding the start of the current epoch.
###
Head votes, while important, do not cause penalties if missed.
Slashing is a rare severe penalty in which a validator is removed altogether from the Ethereum network and loses their staked ETH. Slashing can occur when a validator behaves maliciously by:
* **Proposing and signing two different blocks for the same slot**: The act of a validator submitting two conflicting block proposals for the same slot in the chain. This behavior creates a fork in the chain, jeopardizing the network's consensus and potentially leading to double spending attacks.
* **Attesting to a block that surrounds another block**: The act of a validator attesting to a block that includes another block already finalized in the chain. This behavior violates the chain's structure and could lead to inconsistencies in the block history.
* **Double voting by attesting to two candidates for the same block**: The act of a validator attesting to two different validators as the proposers of the same block. This behavior creates ambiguity regarding the block's proposer and could undermine the network's consensus mechanism.
When a validator is slashed, 1/32 of their staked ETH is immediately burned, permanently removing it from the Ethereum network, while a 36-day removal period gradually removes their remaining staked ETH. The dual penalty structure of slashing is designed to punish the validator for misbehavior, deter others from doing the same, and prevent the validator from immediately rejoining the network and continuing to cause problems.
Halfway through the removal period, an additional penalty, the "correlation penalty," is applied. The correlation penalty is designed to discourage validators from colluding to slash each other. The magnitude of the correlation penalty scales upward with the total staked ETH of all slashed validators in the 36 days prior to the slashing event.
## Factors to Consider When Choosing a Staking Method
Deposit requirements, staking fees, coding ability, service provider quality, hardware costs, and cybersecurity are important when choosing how and where to stake Ethereum. Here are some of these factors:
* **Deposit Requirements**: Minimum deposit requirements influence the flexibility of staking strategies. Higher minimum deposits may require longer staking periods to break even and take away capital from an investment portfolio. Lower minimum deposits may encourage shorter staking periods and free up capital allocations for other investment areas.
* **Cybersecurity**:Staking involves locking up a significant amount of cryptocurrency for an extended period of time. Selecting a platform with top-notch [cybersecurity](https://www.investopedia.com/terms/c/cybersecurity.asp), digital safety, and technological resilience can mitigate the risk of loss and theft.
* **Staking Fees**:Staking fees vary widely between different wallets and exchanges and significantly impact overall returns. It is important to carefully calculate commission fees charged to your staking participation and choose a provider offering competitive fees.
* **Quality Assurance**:A high-quality wallet or exchange with a strong track record of software engineering and product development can provide added security and peace of mind when staking, especially if you've locked up the maximum amount of ETH per node. Larger companies tend to have stronger talent and standards than smaller startups that run staking services.
* **Customer Service**:If you run into any issues or have questions about staking, it is better to have access to responsive and helpful customer service. A wallet provider or an exchange with dependable customer support can make the process smoother and less stressful.
* **Waiting Periods**:Some third-party staking methods have long waiting periods before rewards are distributed. If you are delegating your staking, it is important to find a service that offers fast distribution times to minimize illiquidity and maximize returns, which can be reinvested.
* **Coding Ability**: Setting up and interacting with a validator node for solo Ethereum staking requires basic coding knowledge. While some aspects of the setup can be done through graphical user interfaces, some steps require command-line interactions and familiarity with coding concepts.
* **Hardware Costs**: For solo staking, you must purchase and maintain specialized hardware. The upfront hardware cost and ongoing maintenance can be significant, ranging into the thousands of dollars.
### Staking Independently
Here's a breakdown of the steps to run an Ethereum validator node on your own:
1. **Purchase the hardware**: Consistently reliable hardware for solo staking typically includes an up-to-date personal computer. For best performance, a higher-end CPU such as an Intel Core i7 or AMD Ryzen 7, 16GB to 32GB of RAM, sufficient storage of at least a 2TB SSD and a stable Internet connection with high bandwidth and low latency.
2. **Install the necessary software**: The software for Ethereum staking includes the execution client, a consensus client, a validator client, and any additional tools. It typically involves downloading and running the software, compiling the software from source code, or using package managers like apt or yum. This requires some familiarity with command-line environments and basic Linux/Unix commands.
3. **Configure the validator node**: Edit the node's configuration files, set up its network settings, and generate its cryptographic keys. This requires understanding the structure of configuration files, syntax of specific commands, and the usage of tools like "geth" and "geth attach" for interacting with the Ethereum network.
5. **Monitor and maintain the validator node**: Check logs, update software, troubleshoot issues, and ensure consistent uptime. This requires familiarity with log analysis tools, understanding error messages, and applying software updates through command-line tools or package managers.
### Staking Via Cryptocurrency Exchanges
Here are the steps to stake Ethereum via a crypto exchange:
1. **Sign up for an account**:The first step is to sign up for an account on the exchange. This typically involves providing personal information, verifying your identity, and setting up a payment method to purchase ETH.
2. **Purchase ETH**: Once your account is set up, you will need to purchase Ethereum. This can usually be done through a variety of payment methods available on the exchange, such as bank transfer, credit card, or debit card.
3. **Transfer ETH to the exchange's staking program**:Once you have ETH in your exchange's wallet, you should be able to find an option to stake ETH within the wallet itself. The specific steps may vary depending on the exchange, but typically you will need to navigate to the staking section of the wallet and follow the instructions to stake your ETH.
4. **Choose your staking options**: The next step is to choose your staking parameters, such as the amount of ETH you want to stake and the length of time you want to stake it for.
5. **Stake your ETH**: The rewards will typically be added to your account periodically, depending on the specific staking program and its payout schedule.
###
Unlike traditional [brokerage firms](https://www.investopedia.com/terms/b/brokerage-company.asp), cryptocurrency exchanges are not members of the [Securities Investor Protection Corporation (SIPC)](https://www.investopedia.com/terms/s/sipc.asp), a [not-for-profit](https://www.investopedia.com/terms/n/not-for-profit.asp), member-funded corporation created by an act of Congress to protect the clients of brokerage firms that are forced into [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp). Unless user terms specify otherwise, investors with cryptocurrency assets commingled on a [custodial](https://www.investopedia.com/terms/c/custodian.asp) cryptocurrency exchange could potentially lose their funds as unsecured creditors.
### Staking Via Cryptocurrency Wallets
Here are the steps to stake Ethereum via a crypto wallet:
1. **Choose a compatible wallet**:Select a wallet that is compatible with Ethereum staking. Some popular options include Ledger, Trezor, and MetaMask.
2. **Transfer ETH to your wallet**:Once you have selected a wallet, you will need to transfer ETH to it from an exchange or another wallet.
3. **Navigate to the staking section**: Once you have ETH in your wallet, navigate to the staking section of the wallet. This may involve clicking on a specific button or tab within the wallet's interface.
4. **Follow the instructions to stake**: Once you have located the staking section, follow the instructions provided by the wallet to stake your ETH.
## Is It a Good Idea to Stake Etherum?
It depends on how much ether you have and if you think you'll generate enough returns from staking it. If you only want to participate in the network and are not concerned with returns, you don't need to stake your ether. You can run a node without staking, you just won't get any rewards.
## How Much Do You Earn by Staking ETH?
In May 2024, validators were earning about 3.2% on their stakes.
## Can I Stake ETH on Coinbase?
You can stake your ether on Coinbase. You'll receive Coinbase Wrapped Staked Ether (cbETH) that represents it and receive ETH rewards.
## The Bottom Line
Ethereum staking is the process of locking up ETH and joining the validation process as a full node or as part of a pool. You can create your own node and stake 32 ETH, join a staking service provider, or join a pool.
Whichever you choose, make sure you thoroughly research the method because there are no 100% fool-proof and secure ways to use cryptocurrency. Lastly, remember that your funds are not insured, and there is generally no recourse for lost or stolen cryptocurrency.
*The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1714920039300190&usg=AOvVaw135zDT3YRqNOO1clqiKEHb) for more info. As of the date this article was written, the author does not own cryptocurrency.*
| What Is Staking Ethereum?
Staking ether (ETH) is locking some cryptocurrency in a smart contract and offering your services to the network as a validator. Validators with 32 ETH are randomly chosen by the network to verify transactions and add new blocks to the blockchain. In exchange for the work, they earn freshly minted ETH and portions of network transaction fees.
This article will explore Ethereum staking, its benefits and risks, and share tips for finding a reliable and trustworthy staking platform based on criteria such as security, fees, and reputation.
Key Takeaways
Ethereum staking involves committing ether as collateral to validate transactions on the Ethereum network and earn ETH.Ethereum can be staked independently or through a third party such as a crypto wallet, exchange, or staking pool.Ethereum replaced its energy-intensive, computation-driven Proof-of-Work (PoW) mining mechanism with a financially-governed Proof-of-Stake (PoS) mechanism.Ethereum staking offers the benefits of passive income, network security contribution, governance influence, ecological sustainability, and capital appreciation.It also carries the risks of hardware expenses, cybersecurity threats, opportunity costs, and capital depreciation.
Understanding Ethereum Staking
Ethereum's native token ether is used on the blockchain as a payment, a reward, and as collateral. Its use as collateral is what staking is all about.
Why Stake?
To operate, the blockchain and network need participants it can trust to honestly verify that a user has enough ether to send a transaction and has signed it with the right private key. The network sends the transaction to a randomly-selected node's pool, which broadcasts it to other nodes. These nodes add it to their pools and broadcast it also, in a process called "gossiping." To host a node and become a validator, a user must stake 32 ether.
The selected node processes transactions into a block and broadcasts it to other nodes, who also process the block to verify its validity and add it to their stored blockchain if it is. The randomly selected node receives a reward proportional to the number of validators on the network, the validator's effective balance, and the total amount of ether staked on the network. Other validators also receive rewards for participating in block validation.
Staked Ether Is Locked
The validator who proposed the block had 32 ETH locked into a smart contract for the chance to be chosen. This ETH cannot be used or transferred until the validator requests that the network release (unstake) it. This process can take several days to complete, as the network is limited to 16 withdrawals per block or 115,200 validator withdrawals per day.
The ether committed to staking is the participant's guarantee that they will not act unethically as a validator.
Staking Penalties
The network is programmed to take staked ETH away if a validator acts dishonestly (a very rare occurrence). Validators are also required to ensure that their hardware remains functional, they stay connected, and don't miss their target and source voting. In certain circumstances, they may face penalties, such as having the rewards they would have received removed from their balance.
How to Stake Ethereum
Participants have options to solo stake, participate in staking-as-a-service, or join a staking pool. The tradeoffs and trust assumptions of staking independently or through an intermediary vary:
Solo staking: The most secure option, you'll need to 32 ETH to stake and have a dedicated computer with a reliable and constant connection.Staking pools: You join a pool using any amount of ETH, which is used to create a node of 32 ETH. Rewards are distributed based on the pool rules, most of which are based on how much you stake. Some pools lock your ETH in a smart contract and offer you an ERC20 token that represents it.Staking-as-a-service: The least secure option because you're trusting others to act honestly, you'll need to delegate your ether to a service provider and trust that they'll act in your best interests.
Investopedia / Mira Norian
Minimum deposit requirements for staking-as-a-service and pooled staking, if there are any, are lower than for solo taking. Some providers may require a minimum deposit of 0.01 ETH to .05 ETH.
Hardware
Hardware costs for the Ethereum validator node depend on what you use. Building a computer to serve as a node can cost between $1000 to $2000 and can go up from there, depending on the specific components, their quality, and replacement schedules. Staking is not nearly as computationally intense as mining, so the hardware should last quite some time. However, if you intend to stake for a few years, you'll need a large hard drive or be comfortable adding storage because the blockchain grows over time.
There are a few staking device manufacturers that sell plug-and-play products designed specifically for staking. These devices generally cost between $1,000 and $4,000, depending on the hardware included in the device.
Benefits of Ethereum Staking
Ethereum staking allows you to passively earn income on your ETH holdings. These rewards are distributed periodically and have the potential to appreciate if ether's market value goes up. The amount of rewards depends on the amount of ETH you stake, the length of time you stake it, and the overall activity on the network.
Ethereum staking strengthens the network's security by incentivizing validators to act responsibly and honestly.
It also lowers the barrier to entry for participating in the Ethereum network's consensus process. Anyone can participate in staking with small amounts of ETH.
The estimated rate of return for ETH staking, as of May 2024, is about 3.2%.
Risks of Ethereum Staking
Staking ETH comes with potential volatility and liquidity risks, maintenance and technical issues with equipment, and financial penalties. The price of ETH could drop or the validator could stop working as intended due to malfunctions, errors, or hacks, causing you to lose some of your investment. Your staked ETH will be locked up for the duration of the staking period, and you will not be able to access it during that time. Your staked ETH could be fined or slashed if you don't vote, or behave maliciously.
You are allowed downtime for equipment maintenance without penalty. The network is designed to catch you back up to where you should have been were your equipment not under maintenance. However, you won't get rewards you may have received if your equipment had been operating.
In the Ethereum network, validators who miss source and target voting deadlines face penalties equal to the rewards they would have received had they submitted their votes. Source and target votes are crucial aspects of the PoS consensus mechanism and play a significant role in approving new blocks in the Ethereum blockchain:
Source vote: A validator's attestation of the most recent justified checkpoint of the chain. A checkpoint is a snapshot of the blockchain at a specific point in time. Justified checkpoints represent blocks that have been sufficiently finalized and are unlikely to be reverted. Source votes help establish that checkpoints are justified.Target vote: A validator's attestation on the first block of the current epoch. An epoch is a fixed period in which validators are assigned to committees. Target votes help to ensure that all validators are on the same page regarding the start of the current epoch.
Head votes, while important, do not cause penalties if missed.
Slashing is a rare severe penalty in which a validator is removed altogether from the Ethereum network and loses their staked ETH. Slashing can occur when a validator behaves maliciously by:
Proposing and signing two different blocks for the same slot: The act of a validator submitting two conflicting block proposals for the same slot in the chain. This behavior creates a fork in the chain, jeopardizing the network's consensus and potentially leading to double spending attacks.Attesting to a block that surrounds another block: The act of a validator attesting to a block that includes another block already finalized in the chain. This behavior violates the chain's structure and could lead to inconsistencies in the block history.Double voting by attesting to two candidates for the same block: The act of a validator attesting to two different validators as the proposers of the same block. This behavior creates ambiguity regarding the block's proposer and could undermine the network's consensus mechanism.
When a validator is slashed, 1/32 of their staked ETH is immediately burned, permanently removing it from the Ethereum network, while a 36-day removal period gradually removes their remaining staked ETH. The dual penalty structure of slashing is designed to punish the validator for misbehavior, deter others from doing the same, and prevent the validator from immediately rejoining the network and continuing to cause problems.
Halfway through the removal period, an additional penalty, the "correlation penalty," is applied. The correlation penalty is designed to discourage validators from colluding to slash each other. The magnitude of the correlation penalty scales upward with the total staked ETH of all slashed validators in the 36 days prior to the slashing event.
Factors to Consider When Choosing a Staking Method
Deposit requirements, staking fees, coding ability, service provider quality, hardware costs, and cybersecurity are important when choosing how and where to stake Ethereum. Here are some of these factors:
Deposit Requirements: Minimum deposit requirements influence the flexibility of staking strategies. Higher minimum deposits may require longer staking periods to break even and take away capital from an investment portfolio. Lower minimum deposits may encourage shorter staking periods and free up capital allocations for other investment areas.
Cybersecurity: Staking involves locking up a significant amount of cryptocurrency for an extended period of time. Selecting a platform with top-notch cybersecurity, digital safety, and technological resilience can mitigate the risk of loss and theft.
Staking Fees: Staking fees vary widely between different wallets and exchanges and significantly impact overall returns. It is important to carefully calculate commission fees charged to your staking participation and choose a provider offering competitive fees.
Quality Assurance: A high-quality wallet or exchange with a strong track record of software engineering and product development can provide added security and peace of mind when staking, especially if you've locked up the maximum amount of ETH per node. Larger companies tend to have stronger talent and standards than smaller startups that run staking services.
Customer Service: If you run into any issues or have questions about staking, it is better to have access to responsive and helpful customer service. A wallet provider or an exchange with dependable customer support can make the process smoother and less stressful.
Waiting Periods: Some third-party staking methods have long waiting periods before rewards are distributed. If you are delegating your staking, it is important to find a service that offers fast distribution times to minimize illiquidity and maximize returns, which can be reinvested.
Coding Ability: Setting up and interacting with a validator node for solo Ethereum staking requires basic coding knowledge. While some aspects of the setup can be done through graphical user interfaces, some steps require command-line interactions and familiarity with coding concepts.
Hardware Costs: For solo staking, you must purchase and maintain specialized hardware. The upfront hardware cost and ongoing maintenance can be significant, ranging into the thousands of dollars.
Staking Independently
Here's a breakdown of the steps to run an Ethereum validator node on your own:
Purchase the hardware: Consistently reliable hardware for solo staking typically includes an up-to-date personal computer. For best performance, a higher-end CPU such as an Intel Core i7 or AMD Ryzen 7, 16GB to 32GB of RAM, sufficient storage of at least a 2TB SSD and a stable Internet connection with high bandwidth and low latency.Install the necessary software: The software for Ethereum staking includes the execution client, a consensus client, a validator client, and any additional tools. It typically involves downloading and running the software, compiling the software from source code, or using package managers like apt or yum. This requires some familiarity with command-line environments and basic Linux/Unix commands.Configure the validator node: Edit the node's configuration files, set up its network settings, and generate its cryptographic keys. This requires understanding the structure of configuration files, syntax of specific commands, and the usage of tools like "geth" and "geth attach" for interacting with the Ethereum network.Monitor and maintain the validator node: Check logs, update software, troubleshoot issues, and ensure consistent uptime. This requires familiarity with log analysis tools, understanding error messages, and applying software updates through command-line tools or package managers.
Staking Via Cryptocurrency Exchanges
Here are the steps to stake Ethereum via a crypto exchange:
Sign up for an account: The first step is to sign up for an account on the exchange. This typically involves providing personal information, verifying your identity, and setting up a payment method to purchase ETH.Purchase ETH: Once your account is set up, you will need to purchase Ethereum. This can usually be done through a variety of payment methods available on the exchange, such as bank transfer, credit card, or debit card.Transfer ETH to the exchange's staking program: Once you have ETH in your exchange's wallet, you should be able to find an option to stake ETH within the wallet itself. The specific steps may vary depending on the exchange, but typically you will need to navigate to the staking section of the wallet and follow the instructions to stake your ETH.Choose your staking options: The next step is to choose your staking parameters, such as the amount of ETH you want to stake and the length of time you want to stake it for.Stake your ETH: The rewards will typically be added to your account periodically, depending on the specific staking program and its payout schedule.
Unlike traditional brokerage firms, cryptocurrency exchanges are not members of the Securities Investor Protection Corporation (SIPC), a not-for-profit, member-funded corporation created by an act of Congress to protect the clients of brokerage firms that are forced into bankruptcy. Unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as unsecured creditors.
Staking Via Cryptocurrency Wallets
Here are the steps to stake Ethereum via a crypto wallet:
Choose a compatible wallet: Select a wallet that is compatible with Ethereum staking. Some popular options include Ledger, Trezor, and MetaMask.Transfer ETH to your wallet: Once you have selected a wallet, you will need to transfer ETH to it from an exchange or another wallet.Navigate to the staking section: Once you have ETH in your wallet, navigate to the staking section of the wallet. This may involve clicking on a specific button or tab within the wallet's interface.Follow the instructions to stake: Once you have located the staking section, follow the instructions provided by the wallet to stake your ETH.
Is It a Good Idea to Stake Etherum?
It depends on how much ether you have and if you think you'll generate enough returns from staking it. If you only want to participate in the network and are not concerned with returns, you don't need to stake your ether. You can run a node without staking, you just won't get any rewards.
How Much Do You Earn by Staking ETH?
In May 2024, validators were earning about 3.2% on their stakes.
Can I Stake ETH on Coinbase?
You can stake your ether on Coinbase. You'll receive Coinbase Wrapped Staked Ether (cbETH) that represents it and receive ETH rewards.
The Bottom Line
Ethereum staking is the process of locking up ETH and joining the validation process as a full node or as part of a pool. You can create your own node and stake 32 ETH, join a staking service provider, or join a pool.
Whichever you choose, make sure you thoroughly research the method because there are no 100% fool-proof and secure ways to use cryptocurrency. Lastly, remember that your funds are not insured, and there is generally no recourse for lost or stolen cryptocurrency.
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 cryptocurrency.
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https://www.investopedia.com/financial-edge/0812/why-an-emergency-fund-is-important.aspx | Why an Emergency Fund Is More Important Than Ever | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> People who’ve had large and unforeseen expenses arise can probably tell you one of two things: how happy they were that they had 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> or how difficult it was to find the money they suddenly needed. As with most finance-related issues, preplanning is a key factor in successfully weathering the storms we are all sure to face in life. According to the 21st Annual Transamerica Retirement Survey, the median emergency fund balance among workers is only $5,000, and only one in four Americans have no retirement savings either.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>An emergency fund allows you to live for a few months if you lose your job.</li><li>Many financial experts suggest that you should save anywhere from three to six months’ worth of salary in your emergency fund but most Americans do not.</li><li>It is hard to save if you are working a low-wage job. </li><li>A low-income wage can make it difficult to save. </li><li>Emergency funds should be used to finance actual emergencies, such as periods of unemployment or sudden medical challenges.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-an-emergency-fund"></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 an Emergency Fund? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> An emergency fund is essentially money that’s been set aside to cover life’s unexpected events. The money will allow you to live for a few months should you happen to lose your job or pay for something unexpected that comes up without going into debt.
</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"> Think of it as an insurance policy. Rather than paying premiums to a company, you’re paying yourself money that you can use at a later date. The cash can be accessed quickly and easily if some unfortunate event happens to occur.
</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-pandemic-lessons"></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"> Pandemic Lessons </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The COVID-19 pandemic increased a need for an emergency fund. An April 2021 Forbes survey conducted by YouGov found that the pandemic triggered nearly 40% of people who had emergency funds to access them, with 73.3% using up half or more of the fund and 29% all of it.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> When the whole country suddenly went into virtual lockdown, many people lost their jobs and their income. What didn’t stop were their living expenses. The government did step in to help, but that took time and not everyone qualified for it.
</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"> How did the pandemic change the pre-pandemic statistics mentioned above? Bankrate released another survey when the pandemic was six months old and discovered that 35% of Americans said that their emergency savings were lower than before, with only 13% reporting an increase. Overall, only 16% of Americans said they were “very comfortable” with their emergency funds.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The latest Bankrate survey, released on July 21, 2021, found that 51% of Americans have less than three months’ of expenses covered in their emergency fund, including 25% who don’t even have a fund.<span class="ql-inline-citation" data-cite="11"></span> Just 17% have more money stashed away than before the pandemic, while 34% have less. As for being “comfortable” with their emergency savings, 48% were not.
</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"> It makes sense to track how costs went during this pandemic and factor that into how much could be needed going forward. This is probably not the last one. Indeed, the Center for Global Development puts the chances of pandemic at 22% to 28% in the next 10 years, and 47% to 57% in the next 25 years.<span class="ql-inline-citation" data-cite="1"></span> And plenty of less dire things can happen that create a demand for emergency funds, from a broken car to a broken arm.
</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"> So how much cash, exactly, should an emergency fund contain?<br/>
</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-determining-an-amount"></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"> Determining an Amount </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Many banks and financial experts suggest that you should save at least three months’ worth of salary in your emergency fund. That way if you do lose a job, you’ll have enough money to get by for a few months until you can find replacement work. However, depending on your preferences and income level, the amount can vary.
</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"> Start by calculating your living expenses. Tally up how much you spend each month on mortgage or rent, utility bills, groceries, and vehicle expenses. You should have at least enough to cover your living expenses for three months, and probably even more, say up to six months.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you’re in a double-income household and are unlikely to find both income earners unemployed at one time, you may be able to rely on the assistance of a financially stable family member. If you have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/loan-protection-insurance.asp">insurance policies that will cover you for unexpected emergencies</a>, you may be able to get by with the bare minimum. However, everyone should make a point of setting aside at least something for unforeseen expenses.
</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-sticking-to-your-goals"></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"> Sticking to Your Goals </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Setting a plan and sticking to it is the surest way to achieve most goals. Open an account that can’t be accessed with your debit card, such as an online-only eSavings account.<span class="ql-inline-citation" data-cite="5"></span> Automate transfers to this designated account from your primary bank account to match up with your paydays, so that you won’t even see the money in your primary account.
</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"> Once you have a large enough sum saved in this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/illiquid.asp">liquid</a> account, you can transfer some money to short-term <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a> or a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings account</a>, from where you can still access it fairly easily in times of need.
</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-knowing-when-to-use-it"></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"> Knowing When to Use It </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> There may be times when it will be tempting to use the money toward taking a vacation, paying off significant debts, putting a down payment on a new home, funding a lavish wedding, or any other significant expense that arises. That’s why you should always create a list of acceptable expenses for your fund. Ensure that they are actual emergencies—things such as your living costs during periods of unemployment, sudden medical problems, repairs to your home because of a natural disaster or fire (or serious furnace-type breakdown), unanticipated veterinarian bills, unforeseen vehicle repairs, or surprise tax bills.
</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 whole point of an emergency fund is to prevent you from having to add to your debt in times of need or to scramble to wrangle money at the last minute. You want to be able to focus on the crisis, not raising money to cover it.
</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-saving-vs-paying-down-debt"></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"> Saving vs. Paying Down Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> There is much debate on which approach should be prioritized: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0212/saving-vs.-paying-off-debt.aspx">paying down debt or building up your emergency savings</a>. There are pros and cons to each. Paying down high-interest debt should always be your first priority because paying that interest is a substantial burden, but that doesn’t mean you shouldn’t be setting some money aside every month as well.
</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"> Striking a balance is the best approach. This helps to build good money habits and will prevent you from having to borrow funds if an emergency does arise. If you are paying off debt, consider how much you can reasonably afford to contribute to your emergency fund while doing so. Even if it’s only $25, this is the beginning of a good financial habit. Your fund will continue to grow, if only slowly, as your debt load diminishes.
</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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Although it can be challenging to live below your means, you’ll be happy that you did when that rainy day arrives and the overall impact on your financial well-being is minimal. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-save-money-4589942">Focus on changing your mindset</a>. The only person you can really depend on to get you out of trouble is you. Don’t rely on family, friends, government safety nets, insurance policies, or just plain luck. Bad things can happen to anyone, and working toward financial health should be just as much a priority as looking after your physical health.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-what-is-an-emergency-fund"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Emergency Fund?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>An emergency fund is a savings account containing money to be used only in the event of an emergency, such as losing your job, being faced with a sudden medical condition, or having to make an unexpected car repair.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-how-much-money-should-you-keep-in-your-emergency-fund"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Money Should You Keep in Your Emergency Fund?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Financial experts advise keeping between three and six months’ worth of living expenses in your account.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_52-0"><span class="heading-toc" id="toc-should-i-pay-off-debt-before-saving-in-an-emergency-fund"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should I Pay Off Debt Before Saving in an Emergency Fund?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are pros and cons to this. If you are paying off high-interest debt, that generally should come first, because it is such a financial hardship. That said, it’s good practice to build the sound financial habit of paying even a little toward an emergency fund while reducing high-interest debt.</p></div>
</div></div> | People who’ve had large and unforeseen expenses arise can probably tell you one of two things: how happy they were that they had an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) or how difficult it was to find the money they suddenly needed. As with most finance-related issues, preplanning is a key factor in successfully weathering the storms we are all sure to face in life. According to the 21st Annual Transamerica Retirement Survey, the median emergency fund balance among workers is only $5,000, and only one in four Americans have no retirement savings either.
### Key Takeaways
* An emergency fund allows you to live for a few months if you lose your job.
* Many financial experts suggest that you should save anywhere from three to six months’ worth of salary in your emergency fund but most Americans do not.
* It is hard to save if you are working a low-wage job.
* A low-income wage can make it difficult to save.
* Emergency funds should be used to finance actual emergencies, such as periods of unemployment or sudden medical challenges.
## What Is an Emergency Fund?
An emergency fund is essentially money that’s been set aside to cover life’s unexpected events. The money will allow you to live for a few months should you happen to lose your job or pay for something unexpected that comes up without going into debt.
Think of it as an insurance policy. Rather than paying premiums to a company, you’re paying yourself money that you can use at a later date. The cash can be accessed quickly and easily if some unfortunate event happens to occur.
## Pandemic Lessons
The COVID-19 pandemic increased a need for an emergency fund. An April 2021 Forbes survey conducted by YouGov found that the pandemic triggered nearly 40% of people who had emergency funds to access them, with 73.3% using up half or more of the fund and 29% all of it.
When the whole country suddenly went into virtual lockdown, many people lost their jobs and their income. What didn’t stop were their living expenses. The government did step in to help, but that took time and not everyone qualified for it.
How did the pandemic change the pre-pandemic statistics mentioned above? Bankrate released another survey when the pandemic was six months old and discovered that 35% of Americans said that their emergency savings were lower than before, with only 13% reporting an increase. Overall, only 16% of Americans said they were “very comfortable” with their emergency funds.
The latest Bankrate survey, released on July 21, 2021, found that 51% of Americans have less than three months’ of expenses covered in their emergency fund, including 25% who don’t even have a fund. Just 17% have more money stashed away than before the pandemic, while 34% have less. As for being “comfortable” with their emergency savings, 48% were not.
It makes sense to track how costs went during this pandemic and factor that into how much could be needed going forward. This is probably not the last one. Indeed, the Center for Global Development puts the chances of pandemic at 22% to 28% in the next 10 years, and 47% to 57% in the next 25 years. And plenty of less dire things can happen that create a demand for emergency funds, from a broken car to a broken arm.
So how much cash, exactly, should an emergency fund contain?
## Determining an Amount
Many banks and financial experts suggest that you should save at least three months’ worth of salary in your emergency fund. That way if you do lose a job, you’ll have enough money to get by for a few months until you can find replacement work. However, depending on your preferences and income level, the amount can vary.
Start by calculating your living expenses. Tally up how much you spend each month on mortgage or rent, utility bills, groceries, and vehicle expenses. You should have at least enough to cover your living expenses for three months, and probably even more, say up to six months.
If you’re in a double-income household and are unlikely to find both income earners unemployed at one time, you may be able to rely on the assistance of a financially stable family member. If you have [insurance policies that will cover you for unexpected emergencies](https://www.investopedia.com/articles/pf/08/loan-protection-insurance.asp), you may be able to get by with the bare minimum. However, everyone should make a point of setting aside at least something for unforeseen expenses.
## Sticking to Your Goals
Setting a plan and sticking to it is the surest way to achieve most goals. Open an account that can’t be accessed with your debit card, such as an online-only eSavings account. Automate transfers to this designated account from your primary bank account to match up with your paydays, so that you won’t even see the money in your primary account.
Once you have a large enough sum saved in this [liquid](https://www.investopedia.com/terms/i/illiquid.asp) account, you can transfer some money to short-term [bonds](https://www.investopedia.com/terms/b/bond.asp) or a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp), from where you can still access it fairly easily in times of need.
## Knowing When to Use It
There may be times when it will be tempting to use the money toward taking a vacation, paying off significant debts, putting a down payment on a new home, funding a lavish wedding, or any other significant expense that arises. That’s why you should always create a list of acceptable expenses for your fund. Ensure that they are actual emergencies—things such as your living costs during periods of unemployment, sudden medical problems, repairs to your home because of a natural disaster or fire (or serious furnace-type breakdown), unanticipated veterinarian bills, unforeseen vehicle repairs, or surprise tax bills.
The whole point of an emergency fund is to prevent you from having to add to your debt in times of need or to scramble to wrangle money at the last minute. You want to be able to focus on the crisis, not raising money to cover it.
## Saving vs. Paying Down Debt
There is much debate on which approach should be prioritized: [paying down debt or building up your emergency savings](https://www.investopedia.com/financial-edge/0212/saving-vs.-paying-off-debt.aspx). There are pros and cons to each. Paying down high-interest debt should always be your first priority because paying that interest is a substantial burden, but that doesn’t mean you shouldn’t be setting some money aside every month as well.
Striking a balance is the best approach. This helps to build good money habits and will prevent you from having to borrow funds if an emergency does arise. If you are paying off debt, consider how much you can reasonably afford to contribute to your emergency fund while doing so. Even if it’s only $25, this is the beginning of a good financial habit. Your fund will continue to grow, if only slowly, as your debt load diminishes.
## The Bottom Line
Although it can be challenging to live below your means, you’ll be happy that you did when that rainy day arrives and the overall impact on your financial well-being is minimal. [Focus on changing your mindset](https://www.investopedia.com/how-to-save-money-4589942). The only person you can really depend on to get you out of trouble is you. Don’t rely on family, friends, government safety nets, insurance policies, or just plain luck. Bad things can happen to anyone, and working toward financial health should be just as much a priority as looking after your physical health.
## What Is an Emergency Fund?
An emergency fund is a savings account containing money to be used only in the event of an emergency, such as losing your job, being faced with a sudden medical condition, or having to make an unexpected car repair.
## How Much Money Should You Keep in Your Emergency Fund?
Financial experts advise keeping between three and six months’ worth of living expenses in your account.
## Should I Pay Off Debt Before Saving in an Emergency Fund?
There are pros and cons to this. If you are paying off high-interest debt, that generally should come first, because it is such a financial hardship. That said, it’s good practice to build the sound financial habit of paying even a little toward an emergency fund while reducing high-interest debt.
| People who’ve had large and unforeseen expenses arise can probably tell you one of two things: how happy they were that they had an emergency fund or how difficult it was to find the money they suddenly needed. As with most finance-related issues, preplanning is a key factor in successfully weathering the storms we are all sure to face in life. According to the 21st Annual Transamerica Retirement Survey, the median emergency fund balance among workers is only $5,000, and only one in four Americans have no retirement savings either.
Key Takeaways
An emergency fund allows you to live for a few months if you lose your job.Many financial experts suggest that you should save anywhere from three to six months’ worth of salary in your emergency fund but most Americans do not.It is hard to save if you are working a low-wage job. A low-income wage can make it difficult to save. Emergency funds should be used to finance actual emergencies, such as periods of unemployment or sudden medical challenges.
What Is an Emergency Fund?
An emergency fund is essentially money that’s been set aside to cover life’s unexpected events. The money will allow you to live for a few months should you happen to lose your job or pay for something unexpected that comes up without going into debt.
Think of it as an insurance policy. Rather than paying premiums to a company, you’re paying yourself money that you can use at a later date. The cash can be accessed quickly and easily if some unfortunate event happens to occur.
Pandemic Lessons
The COVID-19 pandemic increased a need for an emergency fund. An April 2021 Forbes survey conducted by YouGov found that the pandemic triggered nearly 40% of people who had emergency funds to access them, with 73.3% using up half or more of the fund and 29% all of it.
When the whole country suddenly went into virtual lockdown, many people lost their jobs and their income. What didn’t stop were their living expenses. The government did step in to help, but that took time and not everyone qualified for it.
How did the pandemic change the pre-pandemic statistics mentioned above? Bankrate released another survey when the pandemic was six months old and discovered that 35% of Americans said that their emergency savings were lower than before, with only 13% reporting an increase. Overall, only 16% of Americans said they were “very comfortable” with their emergency funds.
The latest Bankrate survey, released on July 21, 2021, found that 51% of Americans have less than three months’ of expenses covered in their emergency fund, including 25% who don’t even have a fund. Just 17% have more money stashed away than before the pandemic, while 34% have less. As for being “comfortable” with their emergency savings, 48% were not.
It makes sense to track how costs went during this pandemic and factor that into how much could be needed going forward. This is probably not the last one. Indeed, the Center for Global Development puts the chances of pandemic at 22% to 28% in the next 10 years, and 47% to 57% in the next 25 years. And plenty of less dire things can happen that create a demand for emergency funds, from a broken car to a broken arm.
So how much cash, exactly, should an emergency fund contain?
Determining an Amount
Many banks and financial experts suggest that you should save at least three months’ worth of salary in your emergency fund. That way if you do lose a job, you’ll have enough money to get by for a few months until you can find replacement work. However, depending on your preferences and income level, the amount can vary.
Start by calculating your living expenses. Tally up how much you spend each month on mortgage or rent, utility bills, groceries, and vehicle expenses. You should have at least enough to cover your living expenses for three months, and probably even more, say up to six months.
If you’re in a double-income household and are unlikely to find both income earners unemployed at one time, you may be able to rely on the assistance of a financially stable family member. If you have insurance policies that will cover you for unexpected emergencies, you may be able to get by with the bare minimum. However, everyone should make a point of setting aside at least something for unforeseen expenses.
Sticking to Your Goals
Setting a plan and sticking to it is the surest way to achieve most goals. Open an account that can’t be accessed with your debit card, such as an online-only eSavings account. Automate transfers to this designated account from your primary bank account to match up with your paydays, so that you won’t even see the money in your primary account.
Once you have a large enough sum saved in this liquid account, you can transfer some money to short-term bonds or a high-yield savings account, from where you can still access it fairly easily in times of need.
Knowing When to Use It
There may be times when it will be tempting to use the money toward taking a vacation, paying off significant debts, putting a down payment on a new home, funding a lavish wedding, or any other significant expense that arises. That’s why you should always create a list of acceptable expenses for your fund. Ensure that they are actual emergencies—things such as your living costs during periods of unemployment, sudden medical problems, repairs to your home because of a natural disaster or fire (or serious furnace-type breakdown), unanticipated veterinarian bills, unforeseen vehicle repairs, or surprise tax bills.
The whole point of an emergency fund is to prevent you from having to add to your debt in times of need or to scramble to wrangle money at the last minute. You want to be able to focus on the crisis, not raising money to cover it.
Saving vs. Paying Down Debt
There is much debate on which approach should be prioritized: paying down debt or building up your emergency savings. There are pros and cons to each. Paying down high-interest debt should always be your first priority because paying that interest is a substantial burden, but that doesn’t mean you shouldn’t be setting some money aside every month as well.
Striking a balance is the best approach. This helps to build good money habits and will prevent you from having to borrow funds if an emergency does arise. If you are paying off debt, consider how much you can reasonably afford to contribute to your emergency fund while doing so. Even if it’s only $25, this is the beginning of a good financial habit. Your fund will continue to grow, if only slowly, as your debt load diminishes.
The Bottom Line
Although it can be challenging to live below your means, you’ll be happy that you did when that rainy day arrives and the overall impact on your financial well-being is minimal. Focus on changing your mindset. The only person you can really depend on to get you out of trouble is you. Don’t rely on family, friends, government safety nets, insurance policies, or just plain luck. Bad things can happen to anyone, and working toward financial health should be just as much a priority as looking after your physical health.
What Is an Emergency Fund?
An emergency fund is a savings account containing money to be used only in the event of an emergency, such as losing your job, being faced with a sudden medical condition, or having to make an unexpected car repair.
How Much Money Should You Keep in Your Emergency Fund?
Financial experts advise keeping between three and six months’ worth of living expenses in your account.
Should I Pay Off Debt Before Saving in an Emergency Fund?
There are pros and cons to this. If you are paying off high-interest debt, that generally should come first, because it is such a financial hardship. That said, it’s good practice to build the sound financial habit of paying even a little toward an emergency fund while reducing high-interest debt.
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https://www.investopedia.com/ask/answers/121714/what-are-differences-between-divergence-and-convergence.asp | Divergence vs. Convergence 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-divergence-vs-convergence-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"> Divergence vs. Convergence: An Overview </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> There are numerous trends and tools in the world of economics and finance. Some of them describe opposing forces, such as divergence and convergence. Divergence generally means two things are moving apart while convergence implies that two forces are moving together. In the world of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economics.asp">economics</a>, finance, and trading, divergence and convergence are terms used to describe the directional relationship of two <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trend.asp">trends</a>, prices, or indicators. But as the general definitions imply, these two terms refer to how these relationships move. Divergence indicates that two trends move further away from each other while convergence indicates how they move closer together.
</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>Divergence occurs when the price of an asset and an indicator move away from each other.</li><li>Convergence happens when the price of an asset and an indicator move toward each other.</li><li>Divergence can be either positive or negative. </li><li>Convergence occurs because an efficient market won't allow something to trade for two prices at the same time</li><li>Technical traders are more interested in divergence as a signal to trade while the absence of convergence is an opportunity for arbitrage.</li></ul></div></div></div>
<span class="heading-toc" id="toc-divergence"></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"> Divergence </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> When the value of an asset, indicator, or index moves, the related asset, indicator, or index moves in the other direction. This is what is referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divergence.asp">divergence</a>. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Divergence can be either positive or negative. For example, positive divergence occurs when a stock is nearing a low but its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indicator.asp">indicators</a> start to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rally.asp">rally</a>. This would be a sign of trend reversal, potentially opening up an entry opportunity for the trader. On the other hand, negative divergence happens when prices go higher while the indicator signals a new low.<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"> When divergence does occur, it does not mean the price will reverse or that a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reversal.asp">reversal</a> will occur soon. In fact, divergence can last a long time, so acting on it alone could be mean substantial losses if the price does not react as expected. Traders generally don't exclusively rely on divergence in their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading-4427765">trading</a> activities. That's because it doesn't provide timely trade signals on its own.
</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>Technical analysis focuses on patterns of price movements, trading signals, and various other analytical signals to inform trades, as opposed to fundamental analysis, which tries to find an asset's intrinsic value.</p></div></div></div>
<span class="heading-toc" id="toc-convergence"></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"> Convergence </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convergence.asp">convergence</a> is the opposite of divergence. It is used to describe the phenomenon of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a> price and the cash price of the underlying <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodity</a> moving closer together over time. In most cases, traders refer to convergence as a way to describe the price action of a futures 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_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Theoretically, convergence happens because an efficient market won't allow something to trade for two prices at the same time. The actual <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 a futures contract is lower than the contract price at issue because traders have to factor in the time value of the security. As the expiration date on the contract approaches, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/premium.asp">premium</a> on the time value shrinks, and the two prices converge.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If the prices did not converge, traders would take advantage of the price difference to make a quick <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit.asp">profit</a>. This would continue until prices converged. When prices don't converge, there is an opportunity for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrage.asp">arbitrage</a>. Arbitrage is when an asset is bought and sold at the same time, in different markets, to take advantage of a temporary price difference. This situation takes advantage of inefficiencies in the market.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<span class="heading-toc" id="toc-key-differences"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Key Differences </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Technical traders are much more concerned with divergence than convergence, largely because convergence is assumed to occur in a normal market. Many technical indicators commonly use divergence as tools, primarily <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oscillator.asp">oscillators</a>. They map out bands (both high and low ones) that occur between two extreme values. They then build trend indicators that flow within those boundaries.<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"> Divergence is a phenomenon that is commonly interpreted to mean that a trend is weak or potentially unsustainable. Traders who employ <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> as part of their trading strategies use divergence to read the underlying <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/momentum.asp">momentum</a> of an asset.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Convergence occurs when the price of an asset, indicator, or index moves in the same direction as a related asset, indicator, or index in technical analysis. For example, there is convergence when 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</a> (DJIA) shows gains at the same time that its accumulation/distribution line is increasing.
</p></div> | ## Divergence vs. Convergence: An Overview
There are numerous trends and tools in the world of economics and finance. Some of them describe opposing forces, such as divergence and convergence. Divergence generally means two things are moving apart while convergence implies that two forces are moving together. In the world of [economics](https://www.investopedia.com/terms/e/economics.asp), finance, and trading, divergence and convergence are terms used to describe the directional relationship of two [trends](https://www.investopedia.com/terms/t/trend.asp), prices, or indicators. But as the general definitions imply, these two terms refer to how these relationships move. Divergence indicates that two trends move further away from each other while convergence indicates how they move closer together.
### Key Takeaways
* Divergence occurs when the price of an asset and an indicator move away from each other.
* Convergence happens when the price of an asset and an indicator move toward each other.
* Divergence can be either positive or negative.
* Convergence occurs because an efficient market won't allow something to trade for two prices at the same time
* Technical traders are more interested in divergence as a signal to trade while the absence of convergence is an opportunity for arbitrage.
## Divergence
When the value of an asset, indicator, or index moves, the related asset, indicator, or index moves in the other direction. This is what is referred to as [divergence](https://www.investopedia.com/terms/d/divergence.asp). Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.
Divergence can be either positive or negative. For example, positive divergence occurs when a stock is nearing a low but its [indicators](https://www.investopedia.com/terms/i/indicator.asp) start to [rally](https://www.investopedia.com/terms/r/rally.asp). This would be a sign of trend reversal, potentially opening up an entry opportunity for the trader. On the other hand, negative divergence happens when prices go higher while the indicator signals a new low.
When divergence does occur, it does not mean the price will reverse or that a [reversal](https://www.investopedia.com/terms/r/reversal.asp) will occur soon. In fact, divergence can last a long time, so acting on it alone could be mean substantial losses if the price does not react as expected. Traders generally don't exclusively rely on divergence in their [trading](https://www.investopedia.com/trading-4427765) activities. That's because it doesn't provide timely trade signals on its own.
###
Technical analysis focuses on patterns of price movements, trading signals, and various other analytical signals to inform trades, as opposed to fundamental analysis, which tries to find an asset's intrinsic value.
## Convergence
The term [convergence](https://www.investopedia.com/terms/c/convergence.asp) is the opposite of divergence. It is used to describe the phenomenon of the [futures](https://www.investopedia.com/terms/f/futures.asp) price and the cash price of the underlying [commodity](https://www.investopedia.com/terms/c/commodity.asp) moving closer together over time. In most cases, traders refer to convergence as a way to describe the price action of a futures contract.
Theoretically, convergence happens because an efficient market won't allow something to trade for two prices at the same time. The actual [market value](https://www.investopedia.com/terms/m/marketvalue.asp) of a futures contract is lower than the contract price at issue because traders have to factor in the time value of the security. As the expiration date on the contract approaches, the [premium](https://www.investopedia.com/terms/p/premium.asp) on the time value shrinks, and the two prices converge.
If the prices did not converge, traders would take advantage of the price difference to make a quick [profit](https://www.investopedia.com/terms/p/profit.asp). This would continue until prices converged. When prices don't converge, there is an opportunity for [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp). Arbitrage is when an asset is bought and sold at the same time, in different markets, to take advantage of a temporary price difference. This situation takes advantage of inefficiencies in the market.
## Key Differences
Technical traders are much more concerned with divergence than convergence, largely because convergence is assumed to occur in a normal market. Many technical indicators commonly use divergence as tools, primarily [oscillators](https://www.investopedia.com/terms/o/oscillator.asp). They map out bands (both high and low ones) that occur between two extreme values. They then build trend indicators that flow within those boundaries.
Divergence is a phenomenon that is commonly interpreted to mean that a trend is weak or potentially unsustainable. Traders who employ [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) as part of their trading strategies use divergence to read the underlying [momentum](https://www.investopedia.com/terms/m/momentum.asp) of an asset.
Convergence occurs when the price of an asset, indicator, or index moves in the same direction as a related asset, indicator, or index in technical analysis. For example, there is convergence when the [Dow Jones Industrial Average](https://www.investopedia.com/terms/d/djia.asp) (DJIA) shows gains at the same time that its accumulation/distribution line is increasing.
| Divergence vs. Convergence: An Overview
There are numerous trends and tools in the world of economics and finance. Some of them describe opposing forces, such as divergence and convergence. Divergence generally means two things are moving apart while convergence implies that two forces are moving together. In the world of economics, finance, and trading, divergence and convergence are terms used to describe the directional relationship of two trends, prices, or indicators. But as the general definitions imply, these two terms refer to how these relationships move. Divergence indicates that two trends move further away from each other while convergence indicates how they move closer together.
Key Takeaways
Divergence occurs when the price of an asset and an indicator move away from each other.Convergence happens when the price of an asset and an indicator move toward each other.Divergence can be either positive or negative. Convergence occurs because an efficient market won't allow something to trade for two prices at the same timeTechnical traders are more interested in divergence as a signal to trade while the absence of convergence is an opportunity for arbitrage.
Divergence
When the value of an asset, indicator, or index moves, the related asset, indicator, or index moves in the other direction. This is what is referred to as divergence. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.
Divergence can be either positive or negative. For example, positive divergence occurs when a stock is nearing a low but its indicators start to rally. This would be a sign of trend reversal, potentially opening up an entry opportunity for the trader. On the other hand, negative divergence happens when prices go higher while the indicator signals a new low.
When divergence does occur, it does not mean the price will reverse or that a reversal will occur soon. In fact, divergence can last a long time, so acting on it alone could be mean substantial losses if the price does not react as expected. Traders generally don't exclusively rely on divergence in their trading activities. That's because it doesn't provide timely trade signals on its own.
Technical analysis focuses on patterns of price movements, trading signals, and various other analytical signals to inform trades, as opposed to fundamental analysis, which tries to find an asset's intrinsic value.
Convergence
The term convergence is the opposite of divergence. It is used to describe the phenomenon of the futures price and the cash price of the underlying commodity moving closer together over time. In most cases, traders refer to convergence as a way to describe the price action of a futures contract.
Theoretically, convergence happens because an efficient market won't allow something to trade for two prices at the same time. The actual market value of a futures contract is lower than the contract price at issue because traders have to factor in the time value of the security. As the expiration date on the contract approaches, the premium on the time value shrinks, and the two prices converge.
If the prices did not converge, traders would take advantage of the price difference to make a quick profit. This would continue until prices converged. When prices don't converge, there is an opportunity for arbitrage. Arbitrage is when an asset is bought and sold at the same time, in different markets, to take advantage of a temporary price difference. This situation takes advantage of inefficiencies in the market.
Key Differences
Technical traders are much more concerned with divergence than convergence, largely because convergence is assumed to occur in a normal market. Many technical indicators commonly use divergence as tools, primarily oscillators. They map out bands (both high and low ones) that occur between two extreme values. They then build trend indicators that flow within those boundaries.
Divergence is a phenomenon that is commonly interpreted to mean that a trend is weak or potentially unsustainable. Traders who employ technical analysis as part of their trading strategies use divergence to read the underlying momentum of an asset.
Convergence occurs when the price of an asset, indicator, or index moves in the same direction as a related asset, indicator, or index in technical analysis. For example, there is convergence when the Dow Jones Industrial Average (DJIA) shows gains at the same time that its accumulation/distribution line is increasing.
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"oscillators",
"https://www.investopedia.com/terms/o/oscillator.asp"
],
[
"technical analysis",
"https://www.investopedia.com/terms/t/technicalanalysis.asp"
],
[
"momentum",
"https://www.investopedia.com/terms/m/momentum.asp"
],
[
"Dow Jones Industrial Average",
"https://www.investopedia.com/terms/d/djia.asp"
]
] |
https://www.investopedia.com/articles/fundamental-analysis/11/supernormal-growth-analysis.asp | Valuing a Stock With Supernormal Dividend Growth Rates | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> One of the most important skills an investor can learn is how to value a stock. It can be a big challenge though, especially when it comes to stocks that have supernormal growth rates. These are stocks that go through rapid growth for an extended period of time, say, for a year or more.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Many formulas in investing, though, are a little too simplistic given the constantly changing markets and evolving companies. Sometimes when you're presented with a growth company, you can't use a constant growth rate. In these cases, you need to know how to calculate value through both the company's early, high growth years, and its later, lower constant growth years. It can mean the difference between getting the right value or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/losingyourshirt.asp">losing your shirt</a>.
</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>Supernormal growth, in finance, refers to dividends that increase at a rate that is considered faster than usual.</li><li>Such supernormal growth of dividends is not often sustainable for prolonged periods.</li><li>Supernormal growth can lead standard dividend discount models to give incorrect estimates, and it should be taken into account when it exists.</li></ul></div></div></div>
<span class="heading-toc" id="toc-supernormal-growth-model"></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"> Supernormal Growth Model </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The supernormal growth model is most commonly seen in finance classes or more advanced investing certificate exams. It is based on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dcf.asp">discounting cash flows</a>. The purpose of the supernormal growth model is to value a stock that is expected to have higher than normal growth in dividend payments for some period in the future. After this supernormal growth, the dividend is expected to go back to normal with constant growth.
</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 understand the supernormal growth model we will go through three steps:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/ddm.asp">Dividend discount model</a> (no growth in dividend payments)</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/04/072304.asp">Dividend growth</a> model with constant growth (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gordongrowthmodel.asp">Gordon Growth Model</a>)</li>
<li>Dividend discount model with supernormal growth</li>
</ol>
<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-dividend-discount-model-no-dividend-payments-growth"></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"> Dividend Discount Model: No Dividend Payments Growth </span> </h2>
<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/p/preferredstock.asp">Preferred equity</a> will usually pay the stockholder a fixed dividend, unlike common shares. If you take this payment and find the present value of the perpetuity, you will find the implied value of the stock.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> For example, if ABC Company is set to pay a $1.45 dividend during the next period and the required rate of return is 9%, then the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expected-value.asp">expected value</a> of the stock using this method would be $1.45/0.09 = $16.11. Every dividend payment in the future was discounted back to the present and added together.
</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"> We can use the following formula to determine this model:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <span data-value="\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \cdots + \frac{ D_n }{ (1 + k)^n }\\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D_n = \text{Dividend in the next period}\\ &k = \text{Required rate of return}\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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</mtext>
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</mtext>
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \cdots + \frac{ D_n }{ (1 + k)^n }\\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D_n = \text{Dividend in the next period}\\ &k = \text{Required rate of return}\\ \end{aligned}
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="strut"></span><span class="strut bottom"></span><span class="base"><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span 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">V</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose">)</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"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">1</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 class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span 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class="mbin">+</span><span class="mord mathit">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</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 class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</span><span class="minner">⋯</span><span class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathit mtight">n</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathit mtight">n</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 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 class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">V</span></span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Value</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathit mtight">n</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span></span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Dividend in the next period</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathit">k</span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Required rate of return</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_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:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <span data-value="\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } + \frac{ \$1.45} { (1.09)^2 } + \frac{ \$1.45 }{ (1.09)^3 } + \cdots + \frac{ \$1.45 }{ (1.09)^n }\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } + \frac{ \$1.45} { (1.09)^2 } + \frac{ \$1.45 }{ (1.09)^3 } + \cdots + \frac{ \$1.45 }{ (1.09)^n }\\ \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">V</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="mopen">(</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">9</span><span class="mclose">)</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 mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</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 class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">9</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mopen">(</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">9</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</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 class="mbin">+</span><span class="minner">⋯</span><span class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">9</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathit mtight">n</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <span data-value="\begin{aligned} &\text{V} = \$1.33 + 1.22 + 1.12 + \cdots = \$16.11\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \$1.33 + 1.22 + 1.12 + \cdots = \$16.11\\ \end{aligned}
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</math></span><span class="katex-html"><span class="strut"></span><span class="strut bottom"></span><span class="base"><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">V</span></span><span class="mrel">=</span><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">3</span><span class="mord mathrm">3</span><span class="mbin">+</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">2</span><span class="mord mathrm">2</span><span class="mbin">+</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">1</span><span class="mord mathrm">2</span><span class="mbin">+</span><span class="minner">⋯</span><span class="mrel">=</span><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">6</span><span class="mord mathrm">.</span><span class="mord mathrm">1</span><span class="mord mathrm">1</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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Because every dividend is the same we can reduce this equation down to:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <span data-value="\begin{aligned} &\text{V} = \frac{ D }{ k } \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ D }{ k } \\ \end{aligned}
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</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">V</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 mathit">k</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 mathit">D</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_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <span data-value="\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } \\ \end{aligned}
</annotation>
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</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">V</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="mopen">(</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">9</span><span class="mclose">)</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 mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</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_34-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> <span data-value="\begin{aligned} &\text{V} = \$16.11\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \$16.11\\ \end{aligned}
</annotation>
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</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">V</span></span><span class="mrel">=</span><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">6</span><span class="mord mathrm">.</span><span class="mord mathrm">1</span><span class="mord mathrm">1</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_36-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> With <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commonstock.asp">common shares</a> you will not have the predictability in the dividend distribution. To find the value of a common share, take the dividends you expect to receive during your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdingperiod.asp">holding period</a> and discount it back to the present period. But there is one additional calculation: When you sell the common shares, you will have a lump sum in the future which will have to be discounted back as well.
</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"> We will use "P" to represent the future price of the shares when you sell them. Take this expected price (P) of the stock at the end of the holding period and discount it back at the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountrate.asp">discount rate</a>. You can already see there are more assumptions you need to make which increases the odds of miscalculating.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> For example, if you were thinking about holding a stock for three years and expected the price to be $35 after the third year, the expected dividend is $1.45 per year.
</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"> <span data-value="\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \frac{ P }{ (1 + k)^3 }\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \frac{ P }{ (1 + k)^3 }\\ \end{aligned}
</annotation>
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</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">V</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose">)</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"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">1</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 class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">2</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 class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathit">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</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 class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</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="mopen">(</span><span class="mord mathrm">1</span><span class="mbin">+</span><span class="mord mathit">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathit">P</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_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <span data-value="\begin{aligned} &\text{V} = \frac{ \$1.45 }{ 1.09 } + \frac{ \$1.45} { 1.09^2 } + \frac{ \$1.45 }{ 1.09^3 } + \frac{ \$35 }{ 1.09^3 }\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ 1.09 } + \frac{ \$1.45} { 1.09^2 } + \frac{ \$1.45 }{ 1.09^3 } + \frac{ \$35 }{ 1.09^3 }\\ \end{aligned}
</annotation>
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</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">V</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 mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">9</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 mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</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 class="mbin">+</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 mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord"><span class="mord mathrm">9</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mbin">+</span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord"><span class="mord mathrm">9</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">$</span><span class="mord mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">4</span><span class="mord mathrm">5</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 class="mbin">+</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 mathrm">1</span><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord"><span class="mord mathrm">9</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">$</span><span class="mord mathrm">3</span><span class="mord mathrm">5</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_46-0"></div>
<span class="heading-toc" id="toc-constant-growth-model-gordon-growth-model"></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"> Constant Growth Model: Gordon Growth Model </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Next, let's assume there is a constant growth in the dividend. This would be best suited for evaluating larger, stable dividend-paying stocks. Look to the history of consistent dividend payments and predict the growth rate given the economy, the industry, and the company's policy on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retainedearnings.asp">retained earnings</a>.
</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"> Again, we base the value on the present value of future cash flows:
</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"> <span data-value="\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \cdots + \frac{ D_n }{ (1 + k)^n }\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \cdots + \frac{ D_n }{ (1 + k)^n }\\ \end{aligned}
</annotation>
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose">)</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"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">1</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><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="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><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="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">3</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">3</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="minner">⋯</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> But we add a growth rate to each of the dividends (D<sub>1</sub>, D<sub>2</sub>, D<sub>3</sub>, etc.) In this example, we will assume a 3% growth rate.
</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"> <span data-value="\begin{aligned} &\text{So } D_1 \text{ would be } \$1.45 \times 1.03 = \$1.49 \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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\begin{aligned} &\text{So } D_1 \text{ would be } \$1.45 \times 1.03 = \$1.49 \\ \end{aligned}
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</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"> <span data-value="\begin{aligned} &D_2 = \$1.45 \times 1.03^2 = \$1.54 \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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\begin{aligned} &D_2 = \$1.45 \times 1.03^2 = \$1.54 \\ \end{aligned}
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">4</span><span class="mord">5</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">3</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">5</span><span class="mord">4</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> <span data-value="\begin{aligned} &D_3 = \$1.45 \times 1.03^3 = \$1.58 \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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=
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1.45
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<annotation encoding="application/x-tex">
\begin{aligned} &D_3 = \$1.45 \times 1.03^3 = \$1.58 \\ \end{aligned}
</annotation>
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">3</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">4</span><span class="mord">5</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">3</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">3</span></span></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">5</span><span class="mord">8</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> This changes our original equation to :
</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"> <span data-value="\begin{aligned} &\text{V} = \frac{ D_1 \times 1.03 }{ (1 + k) } + \frac{ D_2 \times 1.03^2 }{ (1 + k)^2 } + \cdots + \frac{ D_n \times 1.03^n }{ (1 + k)^n }\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ D_1 \times 1.03 }{ (1 + k) } + \frac{ D_2 \times 1.03^2 }{ (1 + k)^2 } + \cdots + \frac{ D_n \times 1.03^n }{ (1 + k)^n }\\ \end{aligned}
</annotation>
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose">)</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"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">1</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord">3</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><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="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">3</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="minner">⋯</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mopen">(</span><span class="mord">1</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord mathdefault">k</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">3</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> <span data-value="\begin{aligned} &\text{V} = \frac{ \$1.45 \times 1.03 }{ \$1.09 } + \frac{ \$1.45 \times 1.03^2 }{ 1.09^2 } + \cdots + \frac{ \$1.45 \times 1.03^n }{ 1.09^n }\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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V
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1.45
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1.03
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3
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1.0
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9
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ \$1.45 \times 1.03 }{ \$1.09 } + \frac{ \$1.45 \times 1.03^2 }{ 1.09^2 } + \cdots + \frac{ \$1.45 \times 1.03^n }{ 1.09^n }\\ \end{aligned}
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord">9</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">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">4</span><span class="mord">5</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord">3</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">9</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">4</span><span class="mord">5</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">3</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="minner">⋯</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">9</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">4</span><span class="mord">5</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">1</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">3</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">n</span></span></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> <span data-value="\begin{aligned} &\text{V} = \$1.37 + \$1.29 + \$1.22 + \cdots\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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V
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=
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$
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1.37
</mn>
<mo>
+
</mo>
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$
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1.29
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<mo>
+
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$
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1.22
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+
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⋯
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \$1.37 + \$1.29 + \$1.22 + \cdots\\ \end{aligned}
</annotation>
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">3</span><span class="mord">7</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">2</span><span class="mord">9</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord">$</span><span class="mord">1</span><span class="mord">.</span><span class="mord">2</span><span class="mord">2</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="minner">⋯</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <span data-value="\begin{aligned} &\text{V} = \$24.89\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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V
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$
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24.89
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \$24.89\\ \end{aligned}
</annotation>
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">$</span><span class="mord">2</span><span class="mord">4</span><span class="mord">.</span><span class="mord">8</span><span class="mord">9</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> This reduces down to:
</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"> <span data-value="\begin{aligned} &\text{V} = \frac{ D_1 }{ (k - g) } \\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D_1 = \text{Dividend in the first period}\\ &k = \text{Required rate of return}\\ &g = \text{Dividend growth rate}\\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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V
</mtext>
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=
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D
</mi>
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1
</mn>
</msub>
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(
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k
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−
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g
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)
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where:
</mtext>
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V
</mtext>
<mo>
=
</mo>
<mtext>
Value
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<mtr>
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<mrow></mrow>
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<msub>
<mi>
D
</mi>
<mn>
1
</mn>
</msub>
<mo>
=
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<mtext>
Dividend in the first period
</mtext>
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<mstyle>
<mrow></mrow>
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<mi>
k
</mi>
<mo>
=
</mo>
<mtext>
Required rate of return
</mtext>
</mrow>
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<mstyle>
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</mstyle>
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<mi>
g
</mi>
<mo>
=
</mo>
<mtext>
Dividend growth rate
</mtext>
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<annotation encoding="application/x-tex">
\begin{aligned} &\text{V} = \frac{ D_1 }{ (k - g) } \\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D_1 = \text{Dividend in the first period}\\ &k = \text{Required rate of return}\\ &g = \text{Dividend growth rate}\\ \end{aligned}
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mopen">(</span><span class="mord mathdefault">k</span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord mathdefault">g</span><span class="mclose">)</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"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">1</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord textbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">V</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Value</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathdefault">D</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">1</span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Dividend in the first period</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathdefault">k</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Required rate of return</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathdefault">g</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Dividend growth rate</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<span class="heading-toc" id="toc-dividend-discount-model-with-supernormal-growth"></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"> Dividend Discount Model with Supernormal Growth </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Now that we know how to calculate the value of a stock with a constantly growing dividend, we can move on to a supernormal growth dividend.
</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"> One way to think about the dividend payments is in two parts: A and B. Part A has a higher growth dividend, while Part B has a constant growth dividend.
</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"> A. Higher Growth </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> This part is pretty straight forward. Calculate each dividend amount at the higher growth rate and discount it back to the present period. This takes care of the supernormal growth period. All that is left is the value of the dividend payments which will grow at a continuous rate.
</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"> B. Regular Growth </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Still working with the last period of higher growth, calculate the value of the remaining dividends using the V = D<sub>1 </sub>÷ (k - g) equation from the previous section. But D<sub>1</sub>, in this case, would be next year's dividend, expected to be growing at the constant rate. Now the discount goes back to the present value through four periods.
</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"> A common mistake is discounting back five periods instead of four. But we use the fourth period because the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuation.asp">valuation</a> of the perpetuity of dividends is based on the end of year dividend in period four, which takes into account dividends in year five and on.
</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"> The values of all discounted dividend payments are added up to get the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/npv.asp">net present value</a>. For example, if you have a stock that pays a $1.45 dividend which is expected to grow at 15% for four years, then at a constant 6% into the future, the discount rate is 11%.
</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"> Steps </span> </h3>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> <li>Find the four high growth dividends.</li><li>Find the value of the constant growth dividends from the fifth dividend onward.</li><li>Discount each value.</li><li>Add up the total amount.</li>
</ol>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_94-0"> <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><b>Period</b></th>
<th><b>Dividend</b></th>
<th><b>Calculation</b></th>
<th><b>Amount</b></th>
<th><b>Present Value</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>1</td>
<td>D<sub>1</sub></td>
<td>$1.45 x 1.15<sup>1</sup></td>
<td>$1.67</td>
<td>$1.50</td>
</tr>
<tr>
<td>2</td>
<td>D<sub>2</sub></td>
<td>$1.45 x 1.15<sup>2</sup></td>
<td>$1.92</td>
<td>$1.56</td>
</tr>
<tr>
<td>3</td>
<td>D<sub>3</sub></td>
<td>$1.45 x 1.15<sup>3</sup></td>
<td>$2.21</td>
<td>$1.61</td>
</tr>
<tr>
<td>4</td>
<td>D<sub>4</sub></td>
<td>$1.45 x 1.15<sup>4</sup></td>
<td>$2.54</td>
<td>$1.67</td>
</tr>
<tr>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr>
<td>5</td>
<td>D<sub>5 </sub>…</td>
<td>$2.536 x 1.06</td>
<td>$2.69</td>
<td> </td>
</tr>
<tr>
<td> </td>
<td> </td>
<td>$2.688 / (0.11 - 0.06)</td>
<td>$53.76</td>
<td> </td>
</tr>
<tr>
<td> </td>
<td> </td>
<td>$53.76 / 1.11<sup>4</sup></td>
<td> </td>
<td>$35.42</td>
</tr>
<tr>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr>
<td> </td>
<td> </td>
<td> </td>
<td><b>NPV</b></td>
<td><b>$41.76</b></td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div>
<span class="heading-toc" id="toc-implementation"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_96-0"> <span class="mntl-sc-block-heading__text"> Implementation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> When doing a discount calculation, you are usually attempting to estimate the value of the future payments. Then you can compare this calculated <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intrinsicvalue.asp">intrinsic value</a> to the market price to see if the stock is over or undervalued compared to your calculations.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> In theory, this technique would be used on growth companies expecting higher than normal growth, but the assumptions and expectations are hard to predict. Companies could not maintain a high growth rate over long periods of time. In a competitive market, new entrants and alternatives will compete for the same returns thus bringing the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnonequity.asp">return on equity</a> (ROE) down.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_101-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> Calculations using the supernormal growth model are difficult because of the assumptions involved, such as the required rate of return, growth or length of higher returns. If this is off it could drastically change the value of the shares. In most cases, such as tests or homework, these numbers will be given. But in the real world, we are left to calculate and estimate each of the metrics and evaluate the current asking price for shares. Supernormal growth is based on a simple idea, but can even give veteran investors trouble.
</p></div> | One of the most important skills an investor can learn is how to value a stock. It can be a big challenge though, especially when it comes to stocks that have supernormal growth rates. These are stocks that go through rapid growth for an extended period of time, say, for a year or more.
Many formulas in investing, though, are a little too simplistic given the constantly changing markets and evolving companies. Sometimes when you're presented with a growth company, you can't use a constant growth rate. In these cases, you need to know how to calculate value through both the company's early, high growth years, and its later, lower constant growth years. It can mean the difference between getting the right value or [losing your shirt](https://www.investopedia.com/terms/l/losingyourshirt.asp).
### Key Takeaways
* Supernormal growth, in finance, refers to dividends that increase at a rate that is considered faster than usual.
* Such supernormal growth of dividends is not often sustainable for prolonged periods.
* Supernormal growth can lead standard dividend discount models to give incorrect estimates, and it should be taken into account when it exists.
## Supernormal Growth Model
The supernormal growth model is most commonly seen in finance classes or more advanced investing certificate exams. It is based on [discounting cash flows](https://www.investopedia.com/terms/d/dcf.asp). The purpose of the supernormal growth model is to value a stock that is expected to have higher than normal growth in dividend payments for some period in the future. After this supernormal growth, the dividend is expected to go back to normal with constant growth.
To understand the supernormal growth model we will go through three steps:
1. [Dividend discount model](https://www.investopedia.com/terms/d/ddm.asp) (no growth in dividend payments)
2. [Dividend growth](https://www.investopedia.com/articles/basics/04/072304.asp) model with constant growth ([Gordon Growth Model](https://www.investopedia.com/terms/g/gordongrowthmodel.asp))
3. Dividend discount model with supernormal growth
## Dividend Discount Model: No Dividend Payments Growth
[Preferred equity](https://www.investopedia.com/terms/p/preferredstock.asp) will usually pay the stockholder a fixed dividend, unlike common shares. If you take this payment and find the present value of the perpetuity, you will find the implied value of the stock.
For example, if ABC Company is set to pay a $1.45 dividend during the next period and the required rate of return is 9%, then the [expected value](https://www.investopedia.com/terms/e/expected-value.asp) of the stock using this method would be $1.45/0.09 = $16.11. Every dividend payment in the future was discounted back to the present and added together.
We can use the following formula to determine this model:
V
=
D
1
(
1
+
k
)
+
D
2
(
1
+
k
)
2
+
D
3
(
1
+
k
)
3
+
⋯
+
D
n
(
1
+
k
)
n
where:
V
=
Value
D
n
=
Dividend in the next period
k
=
Required rate of return
\begin{aligned} &\text{V} = \frac{ D\_1 }{ (1 + k) } + \frac{ D\_2 }{ (1 + k)^2 } + \frac{ D\_3 }{ (1 + k)^3 } + \cdots + \frac{ D\_n }{ (1 + k)^n }\\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D\_n = \text{Dividend in the next period}\\ &k = \text{Required rate of return}\\ \end{aligned}
V=(1+k)D1+(1+k)2D2+(1+k)3D3+⋯+(1+k)nDnwhere:V=ValueDn=Dividend in the next periodk=Required rate of return
For example:
V
=
$
1
.
4
5
(
1
.
0
9
)
+
$
1
.
4
5
(
1
.
0
9
)
2
+
$
1
.
4
5
(
1
.
0
9
)
3
+
⋯
+
$
1
.
4
5
(
1
.
0
9
)
n
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } + \frac{ \$1.45} { (1.09)^2 } + \frac{ \$1.45 }{ (1.09)^3 } + \cdots + \frac{ \$1.45 }{ (1.09)^n }\\ \end{aligned}
V=(1.09)$1.45+(1.09)2$1.45+(1.09)3$1.45+⋯+(1.09)n$1.45
V
=
$
1
.
3
3
+
1
.
2
2
+
1
.
1
2
+
⋯
=
$
1
6
.
1
1
\begin{aligned} &\text{V} = \$1.33 + 1.22 + 1.12 + \cdots = \$16.11\\ \end{aligned}
V=$1.33+1.22+1.12+⋯=$16.11
Because every dividend is the same we can reduce this equation down to:
V
=
D
k
\begin{aligned} &\text{V} = \frac{ D }{ k } \\ \end{aligned}
V=kD
V
=
$
1
.
4
5
(
1
.
0
9
)
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } \\ \end{aligned}
V=(1.09)$1.45
V
=
$
1
6
.
1
1
\begin{aligned} &\text{V} = \$16.11\\ \end{aligned}
V=$16.11
With [common shares](https://www.investopedia.com/terms/c/commonstock.asp) you will not have the predictability in the dividend distribution. To find the value of a common share, take the dividends you expect to receive during your [holding period](https://www.investopedia.com/terms/h/holdingperiod.asp) and discount it back to the present period. But there is one additional calculation: When you sell the common shares, you will have a lump sum in the future which will have to be discounted back as well.
We will use "P" to represent the future price of the shares when you sell them. Take this expected price (P) of the stock at the end of the holding period and discount it back at the [discount rate](https://www.investopedia.com/terms/d/discountrate.asp). You can already see there are more assumptions you need to make which increases the odds of miscalculating.
For example, if you were thinking about holding a stock for three years and expected the price to be $35 after the third year, the expected dividend is $1.45 per year.
V
=
D
1
(
1
+
k
)
+
D
2
(
1
+
k
)
2
+
D
3
(
1
+
k
)
3
+
P
(
1
+
k
)
3
\begin{aligned} &\text{V} = \frac{ D\_1 }{ (1 + k) } + \frac{ D\_2 }{ (1 + k)^2 } + \frac{ D\_3 }{ (1 + k)^3 } + \frac{ P }{ (1 + k)^3 }\\ \end{aligned}
V=(1+k)D1+(1+k)2D2+(1+k)3D3+(1+k)3P
V
=
$
1
.
4
5
1
.
0
9
+
$
1
.
4
5
1
.
0
9
2
+
$
1
.
4
5
1
.
0
9
3
+
$
3
5
1
.
0
9
3
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ 1.09 } + \frac{ \$1.45} { 1.09^2 } + \frac{ \$1.45 }{ 1.09^3 } + \frac{ \$35 }{ 1.09^3 }\\ \end{aligned}
V=1.09$1.45+1.092$1.45+1.093$1.45+1.093$35
## Constant Growth Model: Gordon Growth Model
Next, let's assume there is a constant growth in the dividend. This would be best suited for evaluating larger, stable dividend-paying stocks. Look to the history of consistent dividend payments and predict the growth rate given the economy, the industry, and the company's policy on [retained earnings](https://www.investopedia.com/terms/r/retainedearnings.asp).
Again, we base the value on the present value of future cash flows:
V
=
D
1
(
1
+
k
)
+
D
2
(
1
+
k
)
2
+
D
3
(
1
+
k
)
3
+
⋯
+
D
n
(
1
+
k
)
n
\begin{aligned} &\text{V} = \frac{ D\_1 }{ (1 + k) } + \frac{ D\_2 }{ (1 + k)^2 } + \frac{ D\_3 }{ (1 + k)^3 } + \cdots + \frac{ D\_n }{ (1 + k)^n }\\ \end{aligned}
V=(1+k)D1+(1+k)2D2+(1+k)3D3+⋯+(1+k)nDn
But we add a growth rate to each of the dividends (D1, D2, D3, etc.) In this example, we will assume a 3% growth rate.
So
D
1
would be
$
1.45
×
1.03
=
$
1.49
\begin{aligned} &\text{So } D\_1 \text{ would be } \$1.45 \times 1.03 = \$1.49 \\ \end{aligned}
So D1 would be $1.45×1.03=$1.49
D
2
=
$
1.45
×
1.0
3
2
=
$
1.54
\begin{aligned} &D\_2 = \$1.45 \times 1.03^2 = \$1.54 \\ \end{aligned}
D2=$1.45×1.032=$1.54
D
3
=
$
1.45
×
1.0
3
3
=
$
1.58
\begin{aligned} &D\_3 = \$1.45 \times 1.03^3 = \$1.58 \\ \end{aligned}
D3=$1.45×1.033=$1.58
This changes our original equation to :
V
=
D
1
×
1.03
(
1
+
k
)
+
D
2
×
1.0
3
2
(
1
+
k
)
2
+
⋯
+
D
n
×
1.0
3
n
(
1
+
k
)
n
\begin{aligned} &\text{V} = \frac{ D\_1 \times 1.03 }{ (1 + k) } + \frac{ D\_2 \times 1.03^2 }{ (1 + k)^2 } + \cdots + \frac{ D\_n \times 1.03^n }{ (1 + k)^n }\\ \end{aligned}
V=(1+k)D1×1.03+(1+k)2D2×1.032+⋯+(1+k)nDn×1.03n
V
=
$
1.45
×
1.03
$
1.09
+
$
1.45
×
1.0
3
2
1.0
9
2
+
⋯
+
$
1.45
×
1.0
3
n
1.0
9
n
\begin{aligned} &\text{V} = \frac{ \$1.45 \times 1.03 }{ \$1.09 } + \frac{ \$1.45 \times 1.03^2 }{ 1.09^2 } + \cdots + \frac{ \$1.45 \times 1.03^n }{ 1.09^n }\\ \end{aligned}
V=$1.09$1.45×1.03+1.092$1.45×1.032+⋯+1.09n$1.45×1.03n
V
=
$
1.37
+
$
1.29
+
$
1.22
+
⋯
\begin{aligned} &\text{V} = \$1.37 + \$1.29 + \$1.22 + \cdots\\ \end{aligned}
V=$1.37+$1.29+$1.22+⋯
V
=
$
24.89
\begin{aligned} &\text{V} = \$24.89\\ \end{aligned}
V=$24.89
This reduces down to:
V
=
D
1
(
k
−
g
)
where:
V
=
Value
D
1
=
Dividend in the first period
k
=
Required rate of return
g
=
Dividend growth rate
\begin{aligned} &\text{V} = \frac{ D\_1 }{ (k - g) } \\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D\_1 = \text{Dividend in the first period}\\ &k = \text{Required rate of return}\\ &g = \text{Dividend growth rate}\\ \end{aligned}
V=(k−g)D1where:V=ValueD1=Dividend in the first periodk=Required rate of returng=Dividend growth rate
## Dividend Discount Model with Supernormal Growth
Now that we know how to calculate the value of a stock with a constantly growing dividend, we can move on to a supernormal growth dividend.
One way to think about the dividend payments is in two parts: A and B. Part A has a higher growth dividend, while Part B has a constant growth dividend.
### A. Higher Growth
This part is pretty straight forward. Calculate each dividend amount at the higher growth rate and discount it back to the present period. This takes care of the supernormal growth period. All that is left is the value of the dividend payments which will grow at a continuous rate.
### B. Regular Growth
Still working with the last period of higher growth, calculate the value of the remaining dividends using the V = D1 ÷ (k - g) equation from the previous section. But D1, in this case, would be next year's dividend, expected to be growing at the constant rate. Now the discount goes back to the present value through four periods.
A common mistake is discounting back five periods instead of four. But we use the fourth period because the [valuation](https://www.investopedia.com/terms/v/valuation.asp) of the perpetuity of dividends is based on the end of year dividend in period four, which takes into account dividends in year five and on.
The values of all discounted dividend payments are added up to get the [net present value](https://www.investopedia.com/terms/n/npv.asp). For example, if you have a stock that pays a $1.45 dividend which is expected to grow at 15% for four years, then at a constant 6% into the future, the discount rate is 11%.
### Steps
1. Find the four high growth dividends.
2. Find the value of the constant growth dividends from the fifth dividend onward.
3. Discount each value.
4. Add up the total amount.
| **Period** | **Dividend** | **Calculation** | **Amount** | **Present Value** |
| --- | --- | --- | --- | --- |
| 1 | D1 | $1.45 x 1.151 | $1.67 | $1.50 |
| 2 | D2 | $1.45 x 1.152 | $1.92 | $1.56 |
| 3 | D3 | $1.45 x 1.153 | $2.21 | $1.61 |
| 4 | D4 | $1.45 x 1.154 | $2.54 | $1.67 |
| | | | | |
| 5 | D5 … | $2.536 x 1.06 | $2.69 | |
| | | $2.688 / (0.11 - 0.06) | $53.76 | |
| | | $53.76 / 1.114 | | $35.42 |
| | | | | |
| | | | **NPV** | **$41.76** |
## Implementation
When doing a discount calculation, you are usually attempting to estimate the value of the future payments. Then you can compare this calculated [intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp) to the market price to see if the stock is over or undervalued compared to your calculations.
In theory, this technique would be used on growth companies expecting higher than normal growth, but the assumptions and expectations are hard to predict. Companies could not maintain a high growth rate over long periods of time. In a competitive market, new entrants and alternatives will compete for the same returns thus bringing the [return on equity](https://www.investopedia.com/terms/r/returnonequity.asp) (ROE) down.
## The Bottom Line
Calculations using the supernormal growth model are difficult because of the assumptions involved, such as the required rate of return, growth or length of higher returns. If this is off it could drastically change the value of the shares. In most cases, such as tests or homework, these numbers will be given. But in the real world, we are left to calculate and estimate each of the metrics and evaluate the current asking price for shares. Supernormal growth is based on a simple idea, but can even give veteran investors trouble.
| One of the most important skills an investor can learn is how to value a stock. It can be a big challenge though, especially when it comes to stocks that have supernormal growth rates. These are stocks that go through rapid growth for an extended period of time, say, for a year or more.
Many formulas in investing, though, are a little too simplistic given the constantly changing markets and evolving companies. Sometimes when you're presented with a growth company, you can't use a constant growth rate. In these cases, you need to know how to calculate value through both the company's early, high growth years, and its later, lower constant growth years. It can mean the difference between getting the right value or losing your shirt.
Key Takeaways
Supernormal growth, in finance, refers to dividends that increase at a rate that is considered faster than usual.Such supernormal growth of dividends is not often sustainable for prolonged periods.Supernormal growth can lead standard dividend discount models to give incorrect estimates, and it should be taken into account when it exists.
Supernormal Growth Model
The supernormal growth model is most commonly seen in finance classes or more advanced investing certificate exams. It is based on discounting cash flows. The purpose of the supernormal growth model is to value a stock that is expected to have higher than normal growth in dividend payments for some period in the future. After this supernormal growth, the dividend is expected to go back to normal with constant growth.
To understand the supernormal growth model we will go through three steps:
Dividend discount model (no growth in dividend payments)
Dividend growth model with constant growth (Gordon Growth Model)
Dividend discount model with supernormal growth
Dividend Discount Model: No Dividend Payments Growth
Preferred equity will usually pay the stockholder a fixed dividend, unlike common shares. If you take this payment and find the present value of the perpetuity, you will find the implied value of the stock.
For example, if ABC Company is set to pay a $1.45 dividend during the next period and the required rate of return is 9%, then the expected value of the stock using this method would be $1.45/0.09 = $16.11. Every dividend payment in the future was discounted back to the present and added together.
We can use the following formula to determine this model:
V
=
D
1
(
1
+
k
)
+
D
2
(
1
+
k
)
2
+
D
3
(
1
+
k
)
3
+
⋯
+
D
n
(
1
+
k
)
n
where:
V
=
Value
D
n
=
Dividend in the next period
k
=
Required rate of return
\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \cdots + \frac{ D_n }{ (1 + k)^n }\\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D_n = \text{Dividend in the next period}\\ &k = \text{Required rate of return}\\ \end{aligned}
V=(1+k)D1+(1+k)2D2+(1+k)3D3+⋯+(1+k)nDnwhere:V=ValueDn=Dividend in the next periodk=Required rate of return
For example:
V
=
$
1
.
4
5
(
1
.
0
9
)
+
$
1
.
4
5
(
1
.
0
9
)
2
+
$
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\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } + \frac{ \$1.45} { (1.09)^2 } + \frac{ \$1.45 }{ (1.09)^3 } + \cdots + \frac{ \$1.45 }{ (1.09)^n }\\ \end{aligned}
V=(1.09)$1.45+(1.09)2$1.45+(1.09)3$1.45+⋯+(1.09)n$1.45
V
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\begin{aligned} &\text{V} = \$1.33 + 1.22 + 1.12 + \cdots = \$16.11\\ \end{aligned}
V=$1.33+1.22+1.12+⋯=$16.11
Because every dividend is the same we can reduce this equation down to:
V
=
D
k
\begin{aligned} &\text{V} = \frac{ D }{ k } \\ \end{aligned}
V=kD
V
=
$
1
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4
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1
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)
\begin{aligned} &\text{V} = \frac{ \$1.45 }{ (1.09) } \\ \end{aligned}
V=(1.09)$1.45
V
=
$
1
6
.
1
1
\begin{aligned} &\text{V} = \$16.11\\ \end{aligned}
V=$16.11
With common shares you will not have the predictability in the dividend distribution. To find the value of a common share, take the dividends you expect to receive during your holding period and discount it back to the present period. But there is one additional calculation: When you sell the common shares, you will have a lump sum in the future which will have to be discounted back as well.
We will use "P" to represent the future price of the shares when you sell them. Take this expected price (P) of the stock at the end of the holding period and discount it back at the discount rate. You can already see there are more assumptions you need to make which increases the odds of miscalculating.
For example, if you were thinking about holding a stock for three years and expected the price to be $35 after the third year, the expected dividend is $1.45 per year.
V
=
D
1
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1
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k
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D
2
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2
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k
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P
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)
3
\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \frac{ P }{ (1 + k)^3 }\\ \end{aligned}
V=(1+k)D1+(1+k)2D2+(1+k)3D3+(1+k)3P
V
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\begin{aligned} &\text{V} = \frac{ \$1.45 }{ 1.09 } + \frac{ \$1.45} { 1.09^2 } + \frac{ \$1.45 }{ 1.09^3 } + \frac{ \$35 }{ 1.09^3 }\\ \end{aligned}
V=1.09$1.45+1.092$1.45+1.093$1.45+1.093$35
Constant Growth Model: Gordon Growth Model
Next, let's assume there is a constant growth in the dividend. This would be best suited for evaluating larger, stable dividend-paying stocks. Look to the history of consistent dividend payments and predict the growth rate given the economy, the industry, and the company's policy on retained earnings.
Again, we base the value on the present value of future cash flows:
V
=
D
1
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1
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k
)
+
D
2
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1
+
k
)
2
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D
3
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+
k
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D
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(
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)
n
\begin{aligned} &\text{V} = \frac{ D_1 }{ (1 + k) } + \frac{ D_2 }{ (1 + k)^2 } + \frac{ D_3 }{ (1 + k)^3 } + \cdots + \frac{ D_n }{ (1 + k)^n }\\ \end{aligned}
V=(1+k)D1+(1+k)2D2+(1+k)3D3+⋯+(1+k)nDn
But we add a growth rate to each of the dividends (D1, D2, D3, etc.) In this example, we will assume a 3% growth rate.
So
D
1
would be
$
1.45
×
1.03
=
$
1.49
\begin{aligned} &\text{So } D_1 \text{ would be } \$1.45 \times 1.03 = \$1.49 \\ \end{aligned}
So D1 would be $1.45×1.03=$1.49
D
2
=
$
1.45
×
1.0
3
2
=
$
1.54
\begin{aligned} &D_2 = \$1.45 \times 1.03^2 = \$1.54 \\ \end{aligned}
D2=$1.45×1.032=$1.54
D
3
=
$
1.45
×
1.0
3
3
=
$
1.58
\begin{aligned} &D_3 = \$1.45 \times 1.03^3 = \$1.58 \\ \end{aligned}
D3=$1.45×1.033=$1.58
This changes our original equation to :
V
=
D
1
×
1.03
(
1
+
k
)
+
D
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1.0
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\begin{aligned} &\text{V} = \frac{ D_1 \times 1.03 }{ (1 + k) } + \frac{ D_2 \times 1.03^2 }{ (1 + k)^2 } + \cdots + \frac{ D_n \times 1.03^n }{ (1 + k)^n }\\ \end{aligned}
V=(1+k)D1×1.03+(1+k)2D2×1.032+⋯+(1+k)nDn×1.03n
V
=
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1.45
×
1.03
$
1.09
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$
1.45
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\begin{aligned} &\text{V} = \frac{ \$1.45 \times 1.03 }{ \$1.09 } + \frac{ \$1.45 \times 1.03^2 }{ 1.09^2 } + \cdots + \frac{ \$1.45 \times 1.03^n }{ 1.09^n }\\ \end{aligned}
V=$1.09$1.45×1.03+1.092$1.45×1.032+⋯+1.09n$1.45×1.03n
V
=
$
1.37
+
$
1.29
+
$
1.22
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⋯
\begin{aligned} &\text{V} = \$1.37 + \$1.29 + \$1.22 + \cdots\\ \end{aligned}
V=$1.37+$1.29+$1.22+⋯
V
=
$
24.89
\begin{aligned} &\text{V} = \$24.89\\ \end{aligned}
V=$24.89
This reduces down to:
V
=
D
1
(
k
−
g
)
where:
V
=
Value
D
1
=
Dividend in the first period
k
=
Required rate of return
g
=
Dividend growth rate
\begin{aligned} &\text{V} = \frac{ D_1 }{ (k - g) } \\ &\textbf{where:}\\ &\text{V} = \text{Value}\\ &D_1 = \text{Dividend in the first period}\\ &k = \text{Required rate of return}\\ &g = \text{Dividend growth rate}\\ \end{aligned}
V=(k−g)D1where:V=ValueD1=Dividend in the first periodk=Required rate of returng=Dividend growth rate
Dividend Discount Model with Supernormal Growth
Now that we know how to calculate the value of a stock with a constantly growing dividend, we can move on to a supernormal growth dividend.
One way to think about the dividend payments is in two parts: A and B. Part A has a higher growth dividend, while Part B has a constant growth dividend.
A. Higher Growth
This part is pretty straight forward. Calculate each dividend amount at the higher growth rate and discount it back to the present period. This takes care of the supernormal growth period. All that is left is the value of the dividend payments which will grow at a continuous rate.
B. Regular Growth
Still working with the last period of higher growth, calculate the value of the remaining dividends using the V = D1 ÷ (k - g) equation from the previous section. But D1, in this case, would be next year's dividend, expected to be growing at the constant rate. Now the discount goes back to the present value through four periods.
A common mistake is discounting back five periods instead of four. But we use the fourth period because the valuation of the perpetuity of dividends is based on the end of year dividend in period four, which takes into account dividends in year five and on.
The values of all discounted dividend payments are added up to get the net present value. For example, if you have a stock that pays a $1.45 dividend which is expected to grow at 15% for four years, then at a constant 6% into the future, the discount rate is 11%.
Steps
Find the four high growth dividends.Find the value of the constant growth dividends from the fifth dividend onward.Discount each value.Add up the total amount.
Period
Dividend
Calculation
Amount
Present Value
1
D1
$1.45 x 1.151
$1.67
$1.50
2
D2
$1.45 x 1.152
$1.92
$1.56
3
D3
$1.45 x 1.153
$2.21
$1.61
4
D4
$1.45 x 1.154
$2.54
$1.67
5
D5 …
$2.536 x 1.06
$2.69
$2.688 / (0.11 - 0.06)
$53.76
$53.76 / 1.114
$35.42
NPV
$41.76
Implementation
When doing a discount calculation, you are usually attempting to estimate the value of the future payments. Then you can compare this calculated intrinsic value to the market price to see if the stock is over or undervalued compared to your calculations.
In theory, this technique would be used on growth companies expecting higher than normal growth, but the assumptions and expectations are hard to predict. Companies could not maintain a high growth rate over long periods of time. In a competitive market, new entrants and alternatives will compete for the same returns thus bringing the return on equity (ROE) down.
The Bottom Line
Calculations using the supernormal growth model are difficult because of the assumptions involved, such as the required rate of return, growth or length of higher returns. If this is off it could drastically change the value of the shares. In most cases, such as tests or homework, these numbers will be given. But in the real world, we are left to calculate and estimate each of the metrics and evaluate the current asking price for shares. Supernormal growth is based on a simple idea, but can even give veteran investors trouble.
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https://www.investopedia.com/terms/c/cashierscheck.asp | Cashier's Check: Definition, Benefits, and Alternative Options | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-cashiers-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 Cashier’s Check? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A cashier’s check is a secure way to make large payments. The check itself is written by a financial institution such as a bank or credit union against its own funds. When you request a cashier's check from your bank, money is moved out of your account and into the bank's account, and then a bank representative (usually a teller) signs it over to a named third party. (The check will include the names of both the recipient and remitter.) A customer who purchases a cashier’s check pays for the full face value of the check and generally also pays a small premium for the service.
</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 some scenarios, the benefits and protections that a cashier's check offer make it a better choice than a personal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/check.asp" rel="noopener noreferrer">check</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A cashier’s check cannot bounce.</li><li>Due to watermarks and required bank signatures, a cashier’s check is hard to counterfeit. However, there are certain cashier's check scams to look out for.</li><li>With a cashier’s check, the funds are usually available to the payee by the next business day.</li><li>Cashier's checks may be issued by a bank in which you don't have an account at; however, there may be additional fees. </li><li>Cashier's checks are a preferred payment method where security is a higher priority.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-cashiers-checks-work"></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 Cashier’s Checks Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> An individual can use a cashier’s check instead of a personal check to guarantee that funds are available for payment. A cashier’s check is secure because the individual must first deposit the amount of the check into the issuing institution’s own account. The person or entity to whom the check is made out is guaranteed to receive the money when cashing the check.
</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 cashier’s check is typically associated with a large payment that warrants extra protection. For example, you might use a cashier’s check to:
</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>Make a down payment on a home</li><li>Pay closing costs for a mortgage</li><li>Buy a car or boat</li><li>Purchase a piece of land</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"> In other words, they’re not generally used for everyday spending.
</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>Always get a receipt for a cashier's check to protect yourself in case it is lost or stolen.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Cashier’s checks provide a number of advantages. The payee—the person receiving the funds—knows that the check won’t bounce, as it’s being drawn from the bank’s account. Because cashier’s checks usually have watermarks and require signatures from one or more bank employees, the bank has a reassurance that the check won’t be counterfeited. You don’t have to worry about sharing your personal checking account information with the payee, as the check isn’t drawn from your account.
</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"> Finally, the funds are usually available by the next business day. With a large personal check, the bank might place a hold of several days to allow the check time to clear.
</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"> Always get a paper or digital receipt for a cashier’s check. Your receipt verifies proof of payment, and it’s something you’ll want to have if a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/how-handle-lost-cashiers-check/">cashier’s check is lost </a>or stolen. If it is, you can ask the bank to reissue the check. However, the bank may ask for an indemnity bond first, which makes you liable for the check’s replacement. And it’s not an instant process. Depending on the bank, you may have to wait 30 to 90 days to receive a replacement cashier’s check.<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_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 no-title" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>A cashier's check may also be known as an official bank check.</p></div></div></div>
<span class="heading-toc" id="toc-cashiers-check-vs-other-forms-of-payment"></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"> Cashier’s Check vs. Other Forms of Payment </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Some banks will only issue a cashier's check to someone who has an account with that institution. If you can't get a cashier's check, or if a payee won’t accept one, there are other options for making large payments that offer varying levels of safety.
</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"> Traditional Checks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The bank does not guarantee traditional checks. If there are not sufficient funds in the remitter’s account to cover the draft, the bank can return the check. As a result, the payee receives no funds from the bad check. Cashier’s checks remove this element of risk.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-subheading__text"> Money Orders </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-order.asp">money order</a> isn’t a check, but it is a secure form of payment. You purchase the money order for a specific dollar amount and write it out to the payee. They take it to the bank and either deposits it or cashes the check.
</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"> Compared to a cashier’s check, a money order may be less expensive. The United States Postal Service, for example, offers small money orders for less than $2.<span class="ql-inline-citation" data-cite="2"></span> They’re also more convenient to get, as you’re not limited to finding them at banks and credit unions. You can purchase money orders at the post office, supermarkets, and some gas stations. And you don’t need a bank account to get a money order; you just need to have the cash to cover the money order and the fee.
</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"> Certified Checks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certifiedcheck.asp" rel="noopener noreferrer">Certified checks</a> are like cashier’s checks, but they’re drawn directly against your account. It’s essentially still a personal check, but it’s signed by both you and the bank. The bank guarantees a certified check and may put a hold on some of the funds in the account holder’s account, but it doesn’t move the funds from that account to its own reserves. However, if there are insufficient funds in your account to cover the certified check, you’ll have to pay any associated fees the bank charges.
</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"> One <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/certified-check-vs-cashiers-check-which-safer/" rel="noopener noreferrer">difference between a certified check and a cashier's check</a> is that the former may be a less secure form of payment. These checks may not have the same watermarks, making them easier to duplicate. In general, though, a certified check is still a more secure way to pay than a money order or a personal check.
</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"> Wire Transfers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> With a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wiretransfer.asp">wire transfer</a>, money is sent electronically directly from your account to someone else’s, with no check needed. It’s a low-stress way to send money, but there are some downsides.
</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"> Wire transfers can be more expensive than cashier’s checks, certified checks, or money orders. Institutions may also charge a fee to receive a wire transfer. The other primary drawback is that wire transfers aren’t always instant. It can take several days for an international wire transfer to be completed, which may not be convenient for your payee if the money is needed quickly.
</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"> Social Payment Apps </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-payment.asp" rel="noopener noreferrer">Social payment</a> apps may be useful for sending money to friends and family. With these apps, you can send money to someone’s email address or phone number by using your bank account, debit card, credit card, or a balance you have in the app. Transfers can be instant and—depending on where the money for the transfer comes from—you may pay zero fees.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Some apps limit how much you can send in a single transaction and per day. If you have a large amount to send, you may be better off looking at a cashier’s check or one of the other options mentioned above.
</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-downsides-of-cashiers-checks"></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"> Downsides of Cashier's Checks </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> As noted earlier, cashier's checks may come with higher fees than personal checks or some electronic transactions, making them less convenient for smaller transactions or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/micropayment.asp">microtransactions</a>.
</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"> Cashier's checks also require a bank account or upfront payment, making it difficult to obtain a cashier's check if you don't have one. Limited usage or acceptance is also possible, as some individuals or businesses may not accept cashier's checks due to authenticity concerns or delays in verifying funds. Risk of fraud is also high with cashier's checks, as counterfeit cashier's checks can be created by scammers.<br/>
</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"> Last, cashier's checks are non-refundable. This means you may not be able to get a refund for the funds used to purchase them. To avoid unnecessary expenses, it's essential to be certain about the payment before obtaining a cashier's check.
</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-important" 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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>The Federal Deposit Insurance Corporation issues warnings of fake cashier's checks. Based on their guidance, if you are scammed, contact the U.S. Postal Inspection Service, your local protection agencies, or the Internet Crime Complaint Center.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div>
<span class="heading-toc" id="toc-examples-of-cashiers-check-scams"></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"> Examples of Cashier’s Check Scams </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Although cashier’s checks are a low-risk way to transfer money, thieves have developed a number of scams centered on them. In one, a buyer contacts someone who is selling something and offers to buy it with a cashier’s check written for a higher amount than the sale price. They ask the seller to wire the difference to another party. After the seller wires the money, they try to deposit the cashier's check and learns that it is fraudulent.
</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"> In another popular scam, the victim receives a letter stating they are selected to work as a mystery shopper. The letter contains a cashier’s check, and it instructs the victim to use part of the check to buy merchandise during the mystery shopping excursions, wire part of the check to a third party, and keep the remainder as pay. To be successful, the scam relies on the victim wiring the funds before discovering the cashier’s check is a fake.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-where-can-i-get-a-cashiers-check"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Can I Get a Cashier's Check?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can obtain a cashier's check at your bank, credit union, or other financial institutions where you hold an account.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-how-much-does-it-cost-to-get-a-cashiers-check"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does It Cost to Get a Cashier's Check?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The cost of obtaining a cashier's check varies depending on the institution, typically ranging from $5 to $15, although some banks may offer them for free to account holders.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-can-i-get-a-cashiers-check-if-i-dont-have-a-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Get a Cashier's Check If I Don't Have a Bank Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While having a bank account is generally required to get a cashier's check, some institutions may offer options for non-account holders for an additional fee. You may often cash a cashier's check without needing a bank account, though some institutions may charge a fee if you do not have an account with them.</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-information-do-i-need-to-provide-to-get-a-cashiers-check"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Information Do I Need to Provide to Get a Cashier's Check?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>To obtain a cashier's check, you usually need to provide the recipient's name, the amount of the check, and any other required information as specified by the issuing institution. Check with your specific bank in case they have any specific, other requirements.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_75-0"><span class="heading-toc" id="toc-how-long-is-a-cashiers-check-valid-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Is a Cashier's Check Valid For?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The validity period of a cashier's check varies by financial institution, typically ranging from 60 to 90 days. After this period, the check may be subject to expiration or additional processing requirements.</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"> A cashier's check is a secure payment instrument issued by a bank or credit union. It guarantees payment to the recipient using the institution's funds, making it similar to cash. Unlike personal checks, cashier's checks are drawn on the bank's own account rather than the payer's account, ensuring immediate availability of funds. They are widely accepted for large transactions such as real estate purchases.
</p></div> | ## What Is a Cashier’s Check?
A cashier’s check is a secure way to make large payments. The check itself is written by a financial institution such as a bank or credit union against its own funds. When you request a cashier's check from your bank, money is moved out of your account and into the bank's account, and then a bank representative (usually a teller) signs it over to a named third party. (The check will include the names of both the recipient and remitter.) A customer who purchases a cashier’s check pays for the full face value of the check and generally also pays a small premium for the service.
In some scenarios, the benefits and protections that a cashier's check offer make it a better choice than a personal [check](https://www.investopedia.com/terms/c/check.asp).
### Key Takeaways
* A cashier’s check cannot bounce.
* Due to watermarks and required bank signatures, a cashier’s check is hard to counterfeit. However, there are certain cashier's check scams to look out for.
* With a cashier’s check, the funds are usually available to the payee by the next business day.
* Cashier's checks may be issued by a bank in which you don't have an account at; however, there may be additional fees.
* Cashier's checks are a preferred payment method where security is a higher priority.
## How Cashier’s Checks Work
An individual can use a cashier’s check instead of a personal check to guarantee that funds are available for payment. A cashier’s check is secure because the individual must first deposit the amount of the check into the issuing institution’s own account. The person or entity to whom the check is made out is guaranteed to receive the money when cashing the check.
A cashier’s check is typically associated with a large payment that warrants extra protection. For example, you might use a cashier’s check to:
* Make a down payment on a home
* Pay closing costs for a mortgage
* Buy a car or boat
* Purchase a piece of land
In other words, they’re not generally used for everyday spending.
###
Always get a receipt for a cashier's check to protect yourself in case it is lost or stolen.
Cashier’s checks provide a number of advantages. The payee—the person receiving the funds—knows that the check won’t bounce, as it’s being drawn from the bank’s account. Because cashier’s checks usually have watermarks and require signatures from one or more bank employees, the bank has a reassurance that the check won’t be counterfeited. You don’t have to worry about sharing your personal checking account information with the payee, as the check isn’t drawn from your account.
Finally, the funds are usually available by the next business day. With a large personal check, the bank might place a hold of several days to allow the check time to clear.
Always get a paper or digital receipt for a cashier’s check. Your receipt verifies proof of payment, and it’s something you’ll want to have if a [cashier’s check is lost](https://www.investopedia.com/personal-finance/how-handle-lost-cashiers-check/) or stolen. If it is, you can ask the bank to reissue the check. However, the bank may ask for an indemnity bond first, which makes you liable for the check’s replacement. And it’s not an instant process. Depending on the bank, you may have to wait 30 to 90 days to receive a replacement cashier’s check.
###
A cashier's check may also be known as an official bank check.
## Cashier’s Check vs. Other Forms of Payment
Some banks will only issue a cashier's check to someone who has an account with that institution. If you can't get a cashier's check, or if a payee won’t accept one, there are other options for making large payments that offer varying levels of safety.
### Traditional Checks
The bank does not guarantee traditional checks. If there are not sufficient funds in the remitter’s account to cover the draft, the bank can return the check. As a result, the payee receives no funds from the bad check. Cashier’s checks remove this element of risk.
### Money Orders
A [money order](https://www.investopedia.com/terms/m/money-order.asp) isn’t a check, but it is a secure form of payment. You purchase the money order for a specific dollar amount and write it out to the payee. They take it to the bank and either deposits it or cashes the check.
Compared to a cashier’s check, a money order may be less expensive. The United States Postal Service, for example, offers small money orders for less than $2. They’re also more convenient to get, as you’re not limited to finding them at banks and credit unions. You can purchase money orders at the post office, supermarkets, and some gas stations. And you don’t need a bank account to get a money order; you just need to have the cash to cover the money order and the fee.
### Certified Checks
[Certified checks](https://www.investopedia.com/terms/c/certifiedcheck.asp) are like cashier’s checks, but they’re drawn directly against your account. It’s essentially still a personal check, but it’s signed by both you and the bank. The bank guarantees a certified check and may put a hold on some of the funds in the account holder’s account, but it doesn’t move the funds from that account to its own reserves. However, if there are insufficient funds in your account to cover the certified check, you’ll have to pay any associated fees the bank charges.
One [difference between a certified check and a cashier's check](https://www.investopedia.com/personal-finance/certified-check-vs-cashiers-check-which-safer/) is that the former may be a less secure form of payment. These checks may not have the same watermarks, making them easier to duplicate. In general, though, a certified check is still a more secure way to pay than a money order or a personal check.
### Wire Transfers
With a [wire transfer](https://www.investopedia.com/terms/w/wiretransfer.asp), money is sent electronically directly from your account to someone else’s, with no check needed. It’s a low-stress way to send money, but there are some downsides.
Wire transfers can be more expensive than cashier’s checks, certified checks, or money orders. Institutions may also charge a fee to receive a wire transfer. The other primary drawback is that wire transfers aren’t always instant. It can take several days for an international wire transfer to be completed, which may not be convenient for your payee if the money is needed quickly.
### Social Payment Apps
[Social payment](https://www.investopedia.com/terms/s/social-payment.asp) apps may be useful for sending money to friends and family. With these apps, you can send money to someone’s email address or phone number by using your bank account, debit card, credit card, or a balance you have in the app. Transfers can be instant and—depending on where the money for the transfer comes from—you may pay zero fees.
Some apps limit how much you can send in a single transaction and per day. If you have a large amount to send, you may be better off looking at a cashier’s check or one of the other options mentioned above.
## Downsides of Cashier's Checks
As noted earlier, cashier's checks may come with higher fees than personal checks or some electronic transactions, making them less convenient for smaller transactions or [microtransactions](https://www.investopedia.com/terms/m/micropayment.asp).
Cashier's checks also require a bank account or upfront payment, making it difficult to obtain a cashier's check if you don't have one. Limited usage or acceptance is also possible, as some individuals or businesses may not accept cashier's checks due to authenticity concerns or delays in verifying funds. Risk of fraud is also high with cashier's checks, as counterfeit cashier's checks can be created by scammers.
Last, cashier's checks are non-refundable. This means you may not be able to get a refund for the funds used to purchase them. To avoid unnecessary expenses, it's essential to be certain about the payment before obtaining a cashier's check.
###
The Federal Deposit Insurance Corporation issues warnings of fake cashier's checks. Based on their guidance, if you are scammed, contact the U.S. Postal Inspection Service, your local protection agencies, or the Internet Crime Complaint Center.
## Examples of Cashier’s Check Scams
Although cashier’s checks are a low-risk way to transfer money, thieves have developed a number of scams centered on them. In one, a buyer contacts someone who is selling something and offers to buy it with a cashier’s check written for a higher amount than the sale price. They ask the seller to wire the difference to another party. After the seller wires the money, they try to deposit the cashier's check and learns that it is fraudulent.
In another popular scam, the victim receives a letter stating they are selected to work as a mystery shopper. The letter contains a cashier’s check, and it instructs the victim to use part of the check to buy merchandise during the mystery shopping excursions, wire part of the check to a third party, and keep the remainder as pay. To be successful, the scam relies on the victim wiring the funds before discovering the cashier’s check is a fake.
## Where Can I Get a Cashier's Check?
You can obtain a cashier's check at your bank, credit union, or other financial institutions where you hold an account.
## How Much Does It Cost to Get a Cashier's Check?
The cost of obtaining a cashier's check varies depending on the institution, typically ranging from $5 to $15, although some banks may offer them for free to account holders.
## Can I Get a Cashier's Check If I Don't Have a Bank Account?
While having a bank account is generally required to get a cashier's check, some institutions may offer options for non-account holders for an additional fee. You may often cash a cashier's check without needing a bank account, though some institutions may charge a fee if you do not have an account with them.
## What Information Do I Need to Provide to Get a Cashier's Check?
To obtain a cashier's check, you usually need to provide the recipient's name, the amount of the check, and any other required information as specified by the issuing institution. Check with your specific bank in case they have any specific, other requirements.
## How Long Is a Cashier's Check Valid For?
The validity period of a cashier's check varies by financial institution, typically ranging from 60 to 90 days. After this period, the check may be subject to expiration or additional processing requirements.
## The Bottom Line
A cashier's check is a secure payment instrument issued by a bank or credit union. It guarantees payment to the recipient using the institution's funds, making it similar to cash. Unlike personal checks, cashier's checks are drawn on the bank's own account rather than the payer's account, ensuring immediate availability of funds. They are widely accepted for large transactions such as real estate purchases.
| What Is a Cashier’s Check?
A cashier’s check is a secure way to make large payments. The check itself is written by a financial institution such as a bank or credit union against its own funds. When you request a cashier's check from your bank, money is moved out of your account and into the bank's account, and then a bank representative (usually a teller) signs it over to a named third party. (The check will include the names of both the recipient and remitter.) A customer who purchases a cashier’s check pays for the full face value of the check and generally also pays a small premium for the service.
In some scenarios, the benefits and protections that a cashier's check offer make it a better choice than a personal check.
Key Takeaways
A cashier’s check cannot bounce.Due to watermarks and required bank signatures, a cashier’s check is hard to counterfeit. However, there are certain cashier's check scams to look out for.With a cashier’s check, the funds are usually available to the payee by the next business day.Cashier's checks may be issued by a bank in which you don't have an account at; however, there may be additional fees. Cashier's checks are a preferred payment method where security is a higher priority.
How Cashier’s Checks Work
An individual can use a cashier’s check instead of a personal check to guarantee that funds are available for payment. A cashier’s check is secure because the individual must first deposit the amount of the check into the issuing institution’s own account. The person or entity to whom the check is made out is guaranteed to receive the money when cashing the check.
A cashier’s check is typically associated with a large payment that warrants extra protection. For example, you might use a cashier’s check to:
Make a down payment on a homePay closing costs for a mortgageBuy a car or boatPurchase a piece of land
In other words, they’re not generally used for everyday spending.
Always get a receipt for a cashier's check to protect yourself in case it is lost or stolen.
Cashier’s checks provide a number of advantages. The payee—the person receiving the funds—knows that the check won’t bounce, as it’s being drawn from the bank’s account. Because cashier’s checks usually have watermarks and require signatures from one or more bank employees, the bank has a reassurance that the check won’t be counterfeited. You don’t have to worry about sharing your personal checking account information with the payee, as the check isn’t drawn from your account.
Finally, the funds are usually available by the next business day. With a large personal check, the bank might place a hold of several days to allow the check time to clear.
Always get a paper or digital receipt for a cashier’s check. Your receipt verifies proof of payment, and it’s something you’ll want to have if a cashier’s check is lost or stolen. If it is, you can ask the bank to reissue the check. However, the bank may ask for an indemnity bond first, which makes you liable for the check’s replacement. And it’s not an instant process. Depending on the bank, you may have to wait 30 to 90 days to receive a replacement cashier’s check.
A cashier's check may also be known as an official bank check.
Cashier’s Check vs. Other Forms of Payment
Some banks will only issue a cashier's check to someone who has an account with that institution. If you can't get a cashier's check, or if a payee won’t accept one, there are other options for making large payments that offer varying levels of safety.
Traditional Checks
The bank does not guarantee traditional checks. If there are not sufficient funds in the remitter’s account to cover the draft, the bank can return the check. As a result, the payee receives no funds from the bad check. Cashier’s checks remove this element of risk.
Money Orders
A money order isn’t a check, but it is a secure form of payment. You purchase the money order for a specific dollar amount and write it out to the payee. They take it to the bank and either deposits it or cashes the check.
Compared to a cashier’s check, a money order may be less expensive. The United States Postal Service, for example, offers small money orders for less than $2. They’re also more convenient to get, as you’re not limited to finding them at banks and credit unions. You can purchase money orders at the post office, supermarkets, and some gas stations. And you don’t need a bank account to get a money order; you just need to have the cash to cover the money order and the fee.
Certified Checks
Certified checks are like cashier’s checks, but they’re drawn directly against your account. It’s essentially still a personal check, but it’s signed by both you and the bank. The bank guarantees a certified check and may put a hold on some of the funds in the account holder’s account, but it doesn’t move the funds from that account to its own reserves. However, if there are insufficient funds in your account to cover the certified check, you’ll have to pay any associated fees the bank charges.
One difference between a certified check and a cashier's check is that the former may be a less secure form of payment. These checks may not have the same watermarks, making them easier to duplicate. In general, though, a certified check is still a more secure way to pay than a money order or a personal check.
Wire Transfers
With a wire transfer, money is sent electronically directly from your account to someone else’s, with no check needed. It’s a low-stress way to send money, but there are some downsides.
Wire transfers can be more expensive than cashier’s checks, certified checks, or money orders. Institutions may also charge a fee to receive a wire transfer. The other primary drawback is that wire transfers aren’t always instant. It can take several days for an international wire transfer to be completed, which may not be convenient for your payee if the money is needed quickly.
Social Payment Apps
Social payment apps may be useful for sending money to friends and family. With these apps, you can send money to someone’s email address or phone number by using your bank account, debit card, credit card, or a balance you have in the app. Transfers can be instant and—depending on where the money for the transfer comes from—you may pay zero fees.
Some apps limit how much you can send in a single transaction and per day. If you have a large amount to send, you may be better off looking at a cashier’s check or one of the other options mentioned above.
Downsides of Cashier's Checks
As noted earlier, cashier's checks may come with higher fees than personal checks or some electronic transactions, making them less convenient for smaller transactions or microtransactions.
Cashier's checks also require a bank account or upfront payment, making it difficult to obtain a cashier's check if you don't have one. Limited usage or acceptance is also possible, as some individuals or businesses may not accept cashier's checks due to authenticity concerns or delays in verifying funds. Risk of fraud is also high with cashier's checks, as counterfeit cashier's checks can be created by scammers.
Last, cashier's checks are non-refundable. This means you may not be able to get a refund for the funds used to purchase them. To avoid unnecessary expenses, it's essential to be certain about the payment before obtaining a cashier's check.
The Federal Deposit Insurance Corporation issues warnings of fake cashier's checks. Based on their guidance, if you are scammed, contact the U.S. Postal Inspection Service, your local protection agencies, or the Internet Crime Complaint Center.
Examples of Cashier’s Check Scams
Although cashier’s checks are a low-risk way to transfer money, thieves have developed a number of scams centered on them. In one, a buyer contacts someone who is selling something and offers to buy it with a cashier’s check written for a higher amount than the sale price. They ask the seller to wire the difference to another party. After the seller wires the money, they try to deposit the cashier's check and learns that it is fraudulent.
In another popular scam, the victim receives a letter stating they are selected to work as a mystery shopper. The letter contains a cashier’s check, and it instructs the victim to use part of the check to buy merchandise during the mystery shopping excursions, wire part of the check to a third party, and keep the remainder as pay. To be successful, the scam relies on the victim wiring the funds before discovering the cashier’s check is a fake.
Where Can I Get a Cashier's Check?
You can obtain a cashier's check at your bank, credit union, or other financial institutions where you hold an account.
How Much Does It Cost to Get a Cashier's Check?
The cost of obtaining a cashier's check varies depending on the institution, typically ranging from $5 to $15, although some banks may offer them for free to account holders.
Can I Get a Cashier's Check If I Don't Have a Bank Account?
While having a bank account is generally required to get a cashier's check, some institutions may offer options for non-account holders for an additional fee. You may often cash a cashier's check without needing a bank account, though some institutions may charge a fee if you do not have an account with them.
What Information Do I Need to Provide to Get a Cashier's Check?
To obtain a cashier's check, you usually need to provide the recipient's name, the amount of the check, and any other required information as specified by the issuing institution. Check with your specific bank in case they have any specific, other requirements.
How Long Is a Cashier's Check Valid For?
The validity period of a cashier's check varies by financial institution, typically ranging from 60 to 90 days. After this period, the check may be subject to expiration or additional processing requirements.
The Bottom Line
A cashier's check is a secure payment instrument issued by a bank or credit union. It guarantees payment to the recipient using the institution's funds, making it similar to cash. Unlike personal checks, cashier's checks are drawn on the bank's own account rather than the payer's account, ensuring immediate availability of funds. They are widely accepted for large transactions such as real estate purchases.
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https://www.investopedia.com/terms/c/cd-ladder.asp | CD Ladder: How to Make One, Benefits, FAQ | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-cd-ladder"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a CD Ladder? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A CD ladder is a strategy that provides the long-term benefits of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">certificates of deposit (CDs)</a> with additional liquidity. Essentially, you buy different CDs with different maturity dates. After one CD matures, you can decide whether to reinvest that CD's money into a new CD, or use the cash in a different way.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> This approach ensures that you can regularly rely on money from a CD that will mature soon. That way, you won't have to make an early withdrawal and pay a penalty if you need to access those funds. Learn more about how CD ladders work and about their pros and cons.
</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 CD ladder is a strategy of investing in CDs with different maturity dates so that you have more liquidity.</li><li>After a CD in a CD ladder matures, you can reinvest it to continue the ladder or use the cash elsewhere.</li><li>CD ladders can lower interest rate and reinvestment risks.</li><li>A CD ladder offers the advantage of regular access to your funds with no early withdrawal penalty. </li></ul></div></div></div>
<span class="heading-toc" id="toc-how-to-build-a-cd-ladder"></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 to Build a CD Ladder </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A CD is an investment product offering a fixed interest rate for a specified period of time. The invested funds, which are insured up to $250,000 by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp. (FDIC)</a>, are locked in by the issuing bank until the maturity date of the CD.<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"> Investors can follow the CD ladder strategy to take advantage of the various <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> offered for different time periods and maintain predictable access to 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"> Let’s say you have $20,000 to invest and want to build a four-year CD ladder. Here are the key steps to take for this example:
</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"> Step 1: Open Separate CDs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Maturity dates for CDs are typically set at lengths such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-month-cd-rates-5272288">3 months</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267">6 months</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650">1 year</a>, or<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473"> 5 years</a>. Rather than putting the entire $20,000 in one 5-year CD, you put $5,000 in each of four CDs. One will mature in 1 year, then another at 2 years, the third in 3 years, and the last in 4 years. Seek out the banks with the best rates on CDs before investing the funds. You start with:
</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>$5,000 in a 1-year CD</li><li>$5,000 in a 2-year CD</li><li>$5,000 in a 3-year CD</li><li>$5,000 in a 4-year CD</li>
</ul>
<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"> Step 2: Renew and Convert Each CD at Maturity </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> As each CD matures, you renew it as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-4-year-cd-rates-5272503">4-year CD</a>. By doing so, after 4 years you would've had four 4-year CDs, but only one will mature annually.
</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 you had opened all of your CDs in January 2023, setting up the ladder would look like this:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <li>January 2024: renew the maturing 1-year CD into a new 4-year CD</li><li>January 2025: renew the maturing 2-year CD into a new 4-year CD</li><li>January 2026: renew the maturing 3-year CD into a new 4-year CD</li><li>January 2027: renew the maturing 4-year CD into a new 4-year CD</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> This would allow you to leverage the higher interest rates on the longer-term CDs while building the ladder. You'd also be able to withdraw 25% ($5,000) of the overall ladder's funds annually without penalty, since one of the CDs would mature every year.
</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-mini-cd-ladders"></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"> Mini CD Ladders </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> A mini CD ladder is the same concept as a regular CD ladder but with shorter-term CDs. You could build a mini CD ladder out of 3-month, 6-month, 9-month, and 1-year CDs to deploy the same strategy.
</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"> Keep in mind, though, that by building a ladder with shorter-term CDs, the interest rates you’ll get could be lower.
</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 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>Typically, the longer the term, the higher the interest paid, but not always. In a volatile rate environment, you may find comparable or higher short-term rates. Check your bank or credit union's rates to discover what's offered at your institution.</p></div></div></div>
<span class="heading-toc" id="toc-advantages-and-disadvantages-of-a-cd-ladder"></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"> Advantages and Disadvantages of a CD Ladder </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_38-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Advantages</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Consistent cash flow</p></li>
<li><p>Exposure to higher rates on longer-term CDs</p></li>
<li><p>Lowers interest-rate risk</p></li>
<li><p>Lowers liquidity risk</p></li>
<li><p>Higher rates than savings accounts</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>Doesn't completely eliminate liquidity risk</p></li>
<li><p>Requires some active management</p></li>
<li><p>CDs don't get any special tax treatment</p></li>
<li><p>Longer terms don't always earn higher rates</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<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"> Advantages Explained </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> <strong>Consistent cash flow</strong>: A CD ladder strategy gives you a steady flow of cash as the CDs mature at different times. When they mature, you will get the interest.
</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"> <strong>Exposure to higher rates on longer-term CDs</strong>: By spreading the investment over CDs with varying maturities, you benefit from the higher interest rates of longer-term CDs. You can avoid repeatedly renewing a short-term CD that holds all your funds.
</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"> <strong>Lowers interest-rate risk</strong>: A CD ladder provides regular opportunities to reinvest cash as the CDs mature while reducing <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>. After all, if you put all your funds in one 4-year CD, you may miss out on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/10/protect-portfolio-from-interest-rates.asp">any rise in interest rates</a>. So, you can take advantage of rising short-term interest rates by reinvesting proceeds from maturing CDs into newer CDs with higher interest rates. On the other hand, if interest rates fall, you still enjoy the benefits of the stable, high interest rates of long-term CDs.
</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"> <strong>Lowers liquidity risk</strong>: A CD's FDIC insurance protects against losing up to $250,000 should a bank become insolvent. If you need your savings, the laddering strategy ensures that you consistently have a CD maturing, thereby reducing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidityrisk.asp">liquidity risk</a>. You know exactly how much you'll get back at the term's end.
</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"> <strong>Higher rates than savings accounts</strong>: Most CDs (and CD ladders) don't have fees or other charges if you follow the institution's requirements around early withdrawal and usually earn more than a savings account.<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>
<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"> Disadvantages Explained </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> <strong>Doesn't completely eliminate liquidity risk</strong>: Although your CDs will mature yearly, it still means waiting for that date. If you break your CD early, you'll pay a penalty.<span class="ql-inline-citation" data-cite="4"></span> Typically, this is several months' interest, but longer CD terms can involve higher penalties, even if you're only a few months from the CD's maturity date.
</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"> <strong>Requires some active management</strong>: This strategy may be a better fit for a more active investor. You'll need to seek out a bank with high long-term rates if your institution doesn't offer those rates and keep a careful eye on your CDs as they mature. If you don't move funds into a new, longer-term CD by a specific date, the CD could roll over into the same term that just ended, depending on your institution. Some institutions may offer "auto-roll" options but will still require some management.<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_55-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> <strong>CDs don't get any special tax treatment</strong>: CD ladders provide no special tax treatment to save money on local, state, or federal taxes. If you are in a high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxbracket.asp">tax bracket</a>, the ladders could be challenging to justify compared to other investments, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seriesibond.asp">U.S. Treasury Series I savings bonds</a>, are exempt from state and local 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_57-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_58-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_59-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>CD ladders could make more sense if you're in a low tax bracket. Speak with a tax professional to be certain about a tax ladder's pros and cons for your situation.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> <strong>Longer terms don't always earn higher rates</strong>: While longer-term CDs typically offer higher interest rates, this isn't always so. Traditional CDs at 24 months or longer may have lower rates than shorter-term promotional CDs. A mini-ladder may be a better fit at some institutions or you may want to consider another CD type, such as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp">no-penalty</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bumpupcd.asp">bump-up CD</a>. If CD interest rates decline instead of increase, rolling your funds into a new CD may not offer the higher returns of other investments.<br/>
</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-frequently-asked-questions-faqs"></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"> Frequently Asked Questions (FAQs) </span> </h2>
<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-who-should-make-a-certificate-of-deposit-cd-ladder"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Should Make a Certificate of Deposit (CD) Ladder?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Certificate of deposit (CD) ladders are a great strategy for individuals looking for a secure, fixed-rate investment to build over time. You'll need to be patient, because you'll be penalized for any early withdrawals. Additionally, because the rate is fixed and the risks are low, a CD ladder won’t necessarily have a huge return. If that's what you want, a CD ladder isn't right for you.</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-the-benefits-of-a-cd-ladder"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Benefits of a CD Ladder?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A CD ladder has all the benefits of a regular CD. It’s a secure investment that delivers an expected return over time. The advantage of a CD ladder is you get to enjoy some exposure to higher rates from longer-term CDs without as much risk of early withdrawal fees.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-is-a-cd-ladder-a-safe-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a CD Ladder a Safe Investment?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>CD ladders, when purchased through an insured bank, are a secure investment. The Federal Deposit Insurance Corp. (FDIC) protects CD ladders, up to $250,000.<span class="ql-inline-citation" data-cite="1"></span> As long as you don’t withdraw money early, most CD ladders provide a clear picture of the expected return and are considered one of the safest investments.</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"> As with any other investment, whether a CD ladder is right for you depends on your financial goals. Generally, CD ladders are great for people who want a safer investment and predictable cash flows, and have time to manage the CD ladder's rungs.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> The safest course of action with CDs is to use an FDIC-insured bank and ensure your deposits are covered by insurance limits. CDs are easy to understand, access, and structure to meet your financial goals. On the other hand, that safety means the rates of return for CDs are generally low compared to other riskier investments.
</p></div> | ## What Is a CD Ladder?
A CD ladder is a strategy that provides the long-term benefits of [certificates of deposit (CDs)](https://www.investopedia.com/best-cd-rates-4770214) with additional liquidity. Essentially, you buy different CDs with different maturity dates. After one CD matures, you can decide whether to reinvest that CD's money into a new CD, or use the cash in a different way.
This approach ensures that you can regularly rely on money from a CD that will mature soon. That way, you won't have to make an early withdrawal and pay a penalty if you need to access those funds. Learn more about how CD ladders work and about their pros and cons.
### Key Takeaways
* A CD ladder is a strategy of investing in CDs with different maturity dates so that you have more liquidity.
* After a CD in a CD ladder matures, you can reinvest it to continue the ladder or use the cash elsewhere.
* CD ladders can lower interest rate and reinvestment risks.
* A CD ladder offers the advantage of regular access to your funds with no early withdrawal penalty.
## How to Build a CD Ladder
A CD is an investment product offering a fixed interest rate for a specified period of time. The invested funds, which are insured up to $250,000 by the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp), are locked in by the issuing bank until the maturity date of the CD.
Investors can follow the CD ladder strategy to take advantage of the various [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) offered for different time periods and maintain predictable access to funds.
Let’s say you have $20,000 to invest and want to build a four-year CD ladder. Here are the key steps to take for this example:
### Step 1: Open Separate CDs
Maturity dates for CDs are typically set at lengths such as [3 months](https://www.investopedia.com/best-3-month-cd-rates-5272288), [6 months](https://www.investopedia.com/best-6-month-cd-rates-4783267), [1 year](https://www.investopedia.com/best-1-year-cd-rates-4796650), or [5 years](https://www.investopedia.com/best-5-year-cd-rates-4801473). Rather than putting the entire $20,000 in one 5-year CD, you put $5,000 in each of four CDs. One will mature in 1 year, then another at 2 years, the third in 3 years, and the last in 4 years. Seek out the banks with the best rates on CDs before investing the funds. You start with:
* $5,000 in a 1-year CD
* $5,000 in a 2-year CD
* $5,000 in a 3-year CD
* $5,000 in a 4-year CD
### Step 2: Renew and Convert Each CD at Maturity
As each CD matures, you renew it as a [4-year CD](https://www.investopedia.com/best-4-year-cd-rates-5272503). By doing so, after 4 years you would've had four 4-year CDs, but only one will mature annually.
If you had opened all of your CDs in January 2023, setting up the ladder would look like this:
* January 2024: renew the maturing 1-year CD into a new 4-year CD
* January 2025: renew the maturing 2-year CD into a new 4-year CD
* January 2026: renew the maturing 3-year CD into a new 4-year CD
* January 2027: renew the maturing 4-year CD into a new 4-year CD
This would allow you to leverage the higher interest rates on the longer-term CDs while building the ladder. You'd also be able to withdraw 25% ($5,000) of the overall ladder's funds annually without penalty, since one of the CDs would mature every year.
## Mini CD Ladders
A mini CD ladder is the same concept as a regular CD ladder but with shorter-term CDs. You could build a mini CD ladder out of 3-month, 6-month, 9-month, and 1-year CDs to deploy the same strategy.
Keep in mind, though, that by building a ladder with shorter-term CDs, the interest rates you’ll get could be lower.
### Note
Typically, the longer the term, the higher the interest paid, but not always. In a volatile rate environment, you may find comparable or higher short-term rates. Check your bank or credit union's rates to discover what's offered at your institution.
## Advantages and Disadvantages of a CD Ladder
Advantages
* Consistent cash flow
* Exposure to higher rates on longer-term CDs
* Lowers interest-rate risk
* Lowers liquidity risk
* Higher rates than savings accounts
Disadvantages
* Doesn't completely eliminate liquidity risk
* Requires some active management
* CDs don't get any special tax treatment
* Longer terms don't always earn higher rates
### Advantages Explained
**Consistent cash flow**: A CD ladder strategy gives you a steady flow of cash as the CDs mature at different times. When they mature, you will get the interest.
**Exposure to higher rates on longer-term CDs**: By spreading the investment over CDs with varying maturities, you benefit from the higher interest rates of longer-term CDs. You can avoid repeatedly renewing a short-term CD that holds all your funds.
**Lowers interest-rate risk**: A CD ladder provides regular opportunities to reinvest cash as the CDs mature while reducing [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp). After all, if you put all your funds in one 4-year CD, you may miss out on [any rise in interest rates](https://www.investopedia.com/articles/basics/10/protect-portfolio-from-interest-rates.asp). So, you can take advantage of rising short-term interest rates by reinvesting proceeds from maturing CDs into newer CDs with higher interest rates. On the other hand, if interest rates fall, you still enjoy the benefits of the stable, high interest rates of long-term CDs.
**Lowers liquidity risk**: A CD's FDIC insurance protects against losing up to $250,000 should a bank become insolvent. If you need your savings, the laddering strategy ensures that you consistently have a CD maturing, thereby reducing [liquidity risk](https://www.investopedia.com/terms/l/liquidityrisk.asp). You know exactly how much you'll get back at the term's end.
**Higher rates than savings accounts**: Most CDs (and CD ladders) don't have fees or other charges if you follow the institution's requirements around early withdrawal and usually earn more than a savings account.
### Disadvantages Explained
**Doesn't completely eliminate liquidity risk**: Although your CDs will mature yearly, it still means waiting for that date. If you break your CD early, you'll pay a penalty. Typically, this is several months' interest, but longer CD terms can involve higher penalties, even if you're only a few months from the CD's maturity date.
**Requires some active management**: This strategy may be a better fit for a more active investor. You'll need to seek out a bank with high long-term rates if your institution doesn't offer those rates and keep a careful eye on your CDs as they mature. If you don't move funds into a new, longer-term CD by a specific date, the CD could roll over into the same term that just ended, depending on your institution. Some institutions may offer "auto-roll" options but will still require some management.
**CDs don't get any special tax treatment**: CD ladders provide no special tax treatment to save money on local, state, or federal taxes. If you are in a high [tax bracket](https://www.investopedia.com/terms/t/taxbracket.asp), the ladders could be challenging to justify compared to other investments, such as [U.S. Treasury Series I savings bonds](https://www.investopedia.com/terms/s/seriesibond.asp), are exempt from state and local taxes.
###
CD ladders could make more sense if you're in a low tax bracket. Speak with a tax professional to be certain about a tax ladder's pros and cons for your situation.
**Longer terms don't always earn higher rates**: While longer-term CDs typically offer higher interest rates, this isn't always so. Traditional CDs at 24 months or longer may have lower rates than shorter-term promotional CDs. A mini-ladder may be a better fit at some institutions or you may want to consider another CD type, such as a [no-penalty](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp) or [bump-up CD](https://www.investopedia.com/terms/b/bumpupcd.asp). If CD interest rates decline instead of increase, rolling your funds into a new CD may not offer the higher returns of other investments.
## Frequently Asked Questions (FAQs)
## Who Should Make a Certificate of Deposit (CD) Ladder?
Certificate of deposit (CD) ladders are a great strategy for individuals looking for a secure, fixed-rate investment to build over time. You'll need to be patient, because you'll be penalized for any early withdrawals. Additionally, because the rate is fixed and the risks are low, a CD ladder won’t necessarily have a huge return. If that's what you want, a CD ladder isn't right for you.
## What Are the Benefits of a CD Ladder?
A CD ladder has all the benefits of a regular CD. It’s a secure investment that delivers an expected return over time. The advantage of a CD ladder is you get to enjoy some exposure to higher rates from longer-term CDs without as much risk of early withdrawal fees.
## Is a CD Ladder a Safe Investment?
CD ladders, when purchased through an insured bank, are a secure investment. The Federal Deposit Insurance Corp. (FDIC) protects CD ladders, up to $250,000. As long as you don’t withdraw money early, most CD ladders provide a clear picture of the expected return and are considered one of the safest investments.
## The Bottom Line
As with any other investment, whether a CD ladder is right for you depends on your financial goals. Generally, CD ladders are great for people who want a safer investment and predictable cash flows, and have time to manage the CD ladder's rungs.
The safest course of action with CDs is to use an FDIC-insured bank and ensure your deposits are covered by insurance limits. CDs are easy to understand, access, and structure to meet your financial goals. On the other hand, that safety means the rates of return for CDs are generally low compared to other riskier investments.
| What Is a CD Ladder?
A CD ladder is a strategy that provides the long-term benefits of certificates of deposit (CDs) with additional liquidity. Essentially, you buy different CDs with different maturity dates. After one CD matures, you can decide whether to reinvest that CD's money into a new CD, or use the cash in a different way.
This approach ensures that you can regularly rely on money from a CD that will mature soon. That way, you won't have to make an early withdrawal and pay a penalty if you need to access those funds. Learn more about how CD ladders work and about their pros and cons.
Key Takeaways
A CD ladder is a strategy of investing in CDs with different maturity dates so that you have more liquidity.After a CD in a CD ladder matures, you can reinvest it to continue the ladder or use the cash elsewhere.CD ladders can lower interest rate and reinvestment risks.A CD ladder offers the advantage of regular access to your funds with no early withdrawal penalty.
How to Build a CD Ladder
A CD is an investment product offering a fixed interest rate for a specified period of time. The invested funds, which are insured up to $250,000 by the Federal Deposit Insurance Corp. (FDIC), are locked in by the issuing bank until the maturity date of the CD.
Investors can follow the CD ladder strategy to take advantage of the various interest rates offered for different time periods and maintain predictable access to funds.
Let’s say you have $20,000 to invest and want to build a four-year CD ladder. Here are the key steps to take for this example:
Step 1: Open Separate CDs
Maturity dates for CDs are typically set at lengths such as 3 months, 6 months, 1 year, or 5 years. Rather than putting the entire $20,000 in one 5-year CD, you put $5,000 in each of four CDs. One will mature in 1 year, then another at 2 years, the third in 3 years, and the last in 4 years. Seek out the banks with the best rates on CDs before investing the funds. You start with:
$5,000 in a 1-year CD$5,000 in a 2-year CD$5,000 in a 3-year CD$5,000 in a 4-year CD
Step 2: Renew and Convert Each CD at Maturity
As each CD matures, you renew it as a 4-year CD. By doing so, after 4 years you would've had four 4-year CDs, but only one will mature annually.
If you had opened all of your CDs in January 2023, setting up the ladder would look like this:
January 2024: renew the maturing 1-year CD into a new 4-year CDJanuary 2025: renew the maturing 2-year CD into a new 4-year CDJanuary 2026: renew the maturing 3-year CD into a new 4-year CDJanuary 2027: renew the maturing 4-year CD into a new 4-year CD
This would allow you to leverage the higher interest rates on the longer-term CDs while building the ladder. You'd also be able to withdraw 25% ($5,000) of the overall ladder's funds annually without penalty, since one of the CDs would mature every year.
Mini CD Ladders
A mini CD ladder is the same concept as a regular CD ladder but with shorter-term CDs. You could build a mini CD ladder out of 3-month, 6-month, 9-month, and 1-year CDs to deploy the same strategy.
Keep in mind, though, that by building a ladder with shorter-term CDs, the interest rates you’ll get could be lower.
Note
Typically, the longer the term, the higher the interest paid, but not always. In a volatile rate environment, you may find comparable or higher short-term rates. Check your bank or credit union's rates to discover what's offered at your institution.
Advantages and Disadvantages of a CD Ladder
Advantages
Consistent cash flow
Exposure to higher rates on longer-term CDs
Lowers interest-rate risk
Lowers liquidity risk
Higher rates than savings accounts
Disadvantages
Doesn't completely eliminate liquidity risk
Requires some active management
CDs don't get any special tax treatment
Longer terms don't always earn higher rates
Advantages Explained
Consistent cash flow: A CD ladder strategy gives you a steady flow of cash as the CDs mature at different times. When they mature, you will get the interest.
Exposure to higher rates on longer-term CDs: By spreading the investment over CDs with varying maturities, you benefit from the higher interest rates of longer-term CDs. You can avoid repeatedly renewing a short-term CD that holds all your funds.
Lowers interest-rate risk: A CD ladder provides regular opportunities to reinvest cash as the CDs mature while reducing interest rate risk. After all, if you put all your funds in one 4-year CD, you may miss out on any rise in interest rates. So, you can take advantage of rising short-term interest rates by reinvesting proceeds from maturing CDs into newer CDs with higher interest rates. On the other hand, if interest rates fall, you still enjoy the benefits of the stable, high interest rates of long-term CDs.
Lowers liquidity risk: A CD's FDIC insurance protects against losing up to $250,000 should a bank become insolvent. If you need your savings, the laddering strategy ensures that you consistently have a CD maturing, thereby reducing liquidity risk. You know exactly how much you'll get back at the term's end.
Higher rates than savings accounts: Most CDs (and CD ladders) don't have fees or other charges if you follow the institution's requirements around early withdrawal and usually earn more than a savings account.
Disadvantages Explained
Doesn't completely eliminate liquidity risk: Although your CDs will mature yearly, it still means waiting for that date. If you break your CD early, you'll pay a penalty. Typically, this is several months' interest, but longer CD terms can involve higher penalties, even if you're only a few months from the CD's maturity date.
Requires some active management: This strategy may be a better fit for a more active investor. You'll need to seek out a bank with high long-term rates if your institution doesn't offer those rates and keep a careful eye on your CDs as they mature. If you don't move funds into a new, longer-term CD by a specific date, the CD could roll over into the same term that just ended, depending on your institution. Some institutions may offer "auto-roll" options but will still require some management.
CDs don't get any special tax treatment: CD ladders provide no special tax treatment to save money on local, state, or federal taxes. If you are in a high tax bracket, the ladders could be challenging to justify compared to other investments, such as U.S. Treasury Series I savings bonds, are exempt from state and local taxes.
CD ladders could make more sense if you're in a low tax bracket. Speak with a tax professional to be certain about a tax ladder's pros and cons for your situation.
Longer terms don't always earn higher rates: While longer-term CDs typically offer higher interest rates, this isn't always so. Traditional CDs at 24 months or longer may have lower rates than shorter-term promotional CDs. A mini-ladder may be a better fit at some institutions or you may want to consider another CD type, such as a no-penalty or bump-up CD. If CD interest rates decline instead of increase, rolling your funds into a new CD may not offer the higher returns of other investments.
Frequently Asked Questions (FAQs)
Who Should Make a Certificate of Deposit (CD) Ladder?
Certificate of deposit (CD) ladders are a great strategy for individuals looking for a secure, fixed-rate investment to build over time. You'll need to be patient, because you'll be penalized for any early withdrawals. Additionally, because the rate is fixed and the risks are low, a CD ladder won’t necessarily have a huge return. If that's what you want, a CD ladder isn't right for you.
What Are the Benefits of a CD Ladder?
A CD ladder has all the benefits of a regular CD. It’s a secure investment that delivers an expected return over time. The advantage of a CD ladder is you get to enjoy some exposure to higher rates from longer-term CDs without as much risk of early withdrawal fees.
Is a CD Ladder a Safe Investment?
CD ladders, when purchased through an insured bank, are a secure investment. The Federal Deposit Insurance Corp. (FDIC) protects CD ladders, up to $250,000. As long as you don’t withdraw money early, most CD ladders provide a clear picture of the expected return and are considered one of the safest investments.
The Bottom Line
As with any other investment, whether a CD ladder is right for you depends on your financial goals. Generally, CD ladders are great for people who want a safer investment and predictable cash flows, and have time to manage the CD ladder's rungs.
The safest course of action with CDs is to use an FDIC-insured bank and ensure your deposits are covered by insurance limits. CDs are easy to understand, access, and structure to meet your financial goals. On the other hand, that safety means the rates of return for CDs are generally low compared to other riskier investments.
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https://www.investopedia.com/terms/s/sp500.asp | S&P 500 Index: What It’s for and Why It’s Important in Investing | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-sp-500-index"></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 S&P 500 Index? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The S&P 500 Index, or Standard & Poor's 500 Index, is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalizationweightedindex.asp">market-capitalization-weighted index</a> of 500 leading publicly traded companies in the U.S. The index actually has 503 components because three of them have two share classes listed.
</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"> It is not an exact list of the top 500 U.S. companies by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market cap</a> because there are other criteria that the index includes. Still, the S&P 500 index is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.
</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 S&P 500 Index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization.</li><li>The S&P 500 Index was launched in 1957 by the credit rating agency Standard and Poor's.</li><li>The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading.</li><li>Because of its depth and diversity, the S&P 500 is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market.</li><li>You can't directly invest in the S&P 500 because it's an index, but you can invest in one of the many funds that use it as a benchmark, tracking its composition and performance.</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%;">
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Julie Bang</p></span>
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<span class="heading-toc" id="toc-weighting-formula-and-calculation-of-the-sp-500"></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"> Weighting Formula and Calculation of the S&P 500 </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The S&P 500 uses a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalizationweightedindex.asp">market-cap weighting method</a>, giving a higher percentage allocation to companies with the largest market capitalizations.<span class="ql-inline-citation" data-cite="19"></span></p>
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<span data-value="\text{Company Weighting in S \& P}= \frac{\text{Company market cap}}{\text{Total of all market caps}}"><span class="katex"><span class="katex-mathml">
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\text{Company Weighting in S \& P}= \frac{\text{Company market cap}}{\text{Total of all market caps}}
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</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">Company Weighting in S & P</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord text mtight"><span class="mord mtight">Total of all market caps</span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord text mtight"><span class="mord mtight">Company market cap</span></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span></span>
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<p>Determining the weighting of each component of the S&P 500 begins with adding up the total market cap for the index by adding together the market cap of every company in the index.</p>
<p>To review, the market cap of a company is calculated by taking the current stock price and multiplying it by the company's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outstandingshares.asp">outstanding shares</a>. Fortunately, the total market cap for the S&P 500 as well as the market caps of individual companies are published frequently on financial websites, saving investors the need to calculate them.</p><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<p>The weighting of each company in the index is calculated by taking the company's market cap and dividing it by the total market cap of the index.<span class="ql-inline-citation" data-cite="36"></span><br/>
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<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"> Other S&P Indices </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The S&P 500 is a part of the S&P Global 1200 family of indices. Other indices included are the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp-midcap-400-index.asp">S&P MidCap 400</a>, which represents the mid-cap range of companies, and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp600.asp">S&P SmallCap 600</a>, which represents small-cap companies. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 combine to cover 90% of all U.S. capitalization in an index known as the S&P Composite 1500.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="6"></span><br/>
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<span class="heading-toc" id="toc-sp-500-index-construction"></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"> S&P 500 Index Construction </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 only uses <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freefloatmethodology.asp">free-floating</a> shares when calculating market cap, meaning the shares that the public can trade. The S&P adjusts each company's market cap to compensate for new share issues or company mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor. The divisor is proprietary information of the S&P and is not released to the public. The S&P Index (SPX) is not a total return index and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040915/does-sp-500-index-include-dividends.asp">does not include cash dividend gains</a> for the companies listed.<span class="ql-inline-citation" data-cite="16"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> However, you can calculate a company's weighting in the index, which can provide investors with valuable information. If a stock rises or falls, you can get a sense as to whether it might have an impact on the overall index. For example, a company with a 10% weighting will have a greater impact on the value of the index than a company with a 2% weighting.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The S&P 500 is one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. The S&P 500 focuses on the U.S. market's large-cap sector and is also a float-weighted index (a type of capitalization weighting), meaning company market caps are adjusted by the number of shares available for public trading.<span class="ql-inline-citation" data-cite="19"></span>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The S&P 500's most recent rebalancing was announced on Sep. 1, 2023, and took effect before markets opened on Sept. 18, 2023. Blackstone Inc. and Airbnb Inc. replaced Lincoln National Corp. and Newell Brands Inc., respectively.<span class="ql-inline-citation" data-cite="37"></span></p></div></div></div>
<span class="heading-toc" id="toc-sp-500-competitors"></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"> S&P 500 Competitors </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> S&P 500 vs. Dow Jones Industrial Average (DJIA) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Another common U.S. stock market benchmark is 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 often the institutional investor's preferred index given its depth and breadth, while the DJIA has historically been associated with significant equities from the retail investor's point of view. Institutional investors perceive the S&P 500 as more representative of U.S. equity markets because it comprises more stocks across all sectors (500 versus the Dow's 30).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Furthermore, the S&P 500 uses a market-cap weighting method, giving a higher percentage allocation to companies with the largest market caps, while the DJIA is a price-weighted index that gives companies with higher stock prices a higher index weighting. The market-cap-weighted structure tends to be more common than the price-weighted across U.S. indexes.<span class="ql-inline-citation" data-cite="31"></span>
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<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"> S&P 500 vs. Nasdaq </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq</a> is a global electronic marketplace for trading securities. There are several equity market indexes that include stocks traded on Nasdaq. Note that a given stock included in the S&P 500 Index may also be in one or more of the various Nasdaq indexes.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Among the most-watched Nasdaq stock indices are the:
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq100.asp">Nasdaq 100 Index</a>, which includes 100 of the largest, most actively traded common equities listed on Nasdaq.</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp">Nasdaq Composite Index</a>, which the media often simply refers to as the Nasdaq (and which includes more than 2,500 common stocks that trade on Nasdaq).</li>
<li>Nasdaq Global Equity Index (NQGI), which includes international stocks.</li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/soxx.asp">PHLX Semiconductor Sector Index (SOX)</a>, which is the leading barometer of stocks related to the semiconductor industry.</li>
<li>OMX Stockholm 30 Index (OMXS30), which includes 30 actively traded stocks on the Stockholm Stock Exchange.<span class="ql-inline-citation" data-cite="17"></span><br/></li>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> S&P 500 vs. Russell Indexes </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The S&P 500 is a member of a set of indexes created by Standard & Poor's. The Standard & Poor's set of indexes is like the Russell index family in that both are market-cap-weighted indexes unless stated otherwise (as in the case of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equalweight.asp">equal-weighted</a> indexes, for example).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> However, there are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/070715/sp-500-vs-russell-2000-etf-which-should-you-get.asp">two large differences</a> between the construction of the S&P and Russell families of indexes. First, Standard & Poor's chooses constituent companies via a committee, while <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/022416/investment-fundamentals-sp-500-index-vs-russell-1000-index.asp">Russell indexes</a> use a formula to choose stocks to include. Second, there is no name overlap within S&P style indices (growth versus value), while Russell indexes will include the same company in both the value and growth style indexes.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="12"></span>
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<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"> S&P 500 vs. Vanguard 500 Fund </span> </h3>
<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/articles/investing/111215/vanguard-total-stock-index-vs-vanguard-500-index-fund.asp">Vanguard 500 Index Fund</a> seeks to track the price and yield performance of the S&P 500 Index by investing its total net assets in the stocks comprising the index and holding each component with approximately the same weight as the S&P index. In this way, the fund barely deviates from the S&P, which it is designed to mimic.<span class="ql-inline-citation" data-cite="7"></span>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The S&P 500 is an index, so it can't be traded directly. Those who want to invest in the companies that comprise the S&P must invest in a mutual fund 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 fund (ETF)</a> that tracks the index, such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/121814/look-vanguards-sp-500-etf.asp">Vanguard 500 ETF</a> (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=voo">VOO</a>).</p></div></div></div>
<span class="heading-toc" id="toc-limitations-of-the-sp-500-index"></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"> Limitations of the S&P 500 Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> One of the limitations of the S&P and other market-cap-weighted indexes arises when <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/08/find-stocks-in-sp500.asp">stocks in the index</a> become overvalued, meaning they rise higher than their fundamentals warrant. If a stock has a heavy weighting in the index while being overvalued, the stock typically inflates the overall value or price of the index.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> A company's rising market cap isn't necessarily indicative of a company's fundamentals so much as it reflects the stock's increase in value relative to shares outstanding. As a result, equal-weighted indexes have become increasingly popular whereby each company's stock price movements have an equal impact on the index.<span class="ql-inline-citation" data-cite="32"></span><span class="ql-inline-citation" data-cite="33"></span>
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<span class="heading-toc" id="toc-example-of-the-sp-500-market-cap-weighting"></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"> Example of the S&P 500 Market Cap Weighting </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> In order to understand how the underlying stocks affect the S&P index, the individual market weights must be calculated by dividing the market cap of each company by the total market cap of the index. Below is an example of Apple's weighting in the index:
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<li>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>) reported 15.7 billion shares outstanding in its quarterly filing for the period ending July 1, 2023, and had a stock price of $173.93 at the end of the trading day on Sept. 21, 2023.<span class="ql-inline-citation" data-cite="35"></span><span class="ql-inline-citation" data-cite="22"></span></li>
<li>Apple's market cap is $2.7 trillion as of Sept. 21, 2023.<span class="ql-inline-citation" data-cite="34"></span></li>
<li>The S&P 500 total market cap is approximately $39.7 trillion as of Aug. 31, 2023, which is the sum of the market caps for all of the stocks in the index.<span class="ql-inline-citation" data-cite="27"></span></li>
<li>Apple's weighting in the index was approximately 6.8%, or $2.7 trillion divided by $39.7 trillion.</li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Overall, the larger the market weight of a company, the more impact each 1% change in a stock's price will have on the index. Note that S&P does not currently provide the total list of all 503 components on its website, outside of the top 10.
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-why-is-it-called-standard-and-poors"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is It Called Standard and Poor's?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The first S&P Index was launched in 1923 as a joint project by the Standard Statistical Bureau and Poor's Publishing. The original index covered 233 companies. The two companies merged in 1941 to become <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp.asp">Standard and Poor's</a>.<span class="ql-inline-citation" data-cite="38"></span><span class="ql-inline-citation" data-cite="31"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-which-companies-qualify-for-the-sp-500"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Companies Qualify for the S&P 500?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In order to be included in the S&P 500 Index, a company must be publicly traded and based in the United States. It also needs to meet certain requirements for liquidity and market capitalization, have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-is-companys-float/">public float</a> of at least 10% of its shares, and have positive earnings over the trailing four quarters.<span class="ql-inline-citation" data-cite="19"></span></p></div>
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<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-do-you-invest-in-the-sp-500"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Invest in the S&P 500?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The simplest way to invest in the S&P 500 Index (or any other stock market index) is to buy shares of an index fund that targets that index. These funds invest in a cross-section of the companies represented on the index, meaning that the fund's performance should mirror the performance of the index itself.</p></div>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> The S&P 500 Index is one of the most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market-proxy.asp">widely used indexes for the U.S. stock market</a>. These 500 companies represent the largest and most liquid companies in the U.S., from technology and software companies to banks and manufacturers. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp">Historically, the index has been used</a> to provide insight into the direction of the stock market. Although the index was created by a private company, the S&P 500 is now a popular yardstick for the performance of the market economy at large.<br/>
</p></div> | ## What Is the S&P 500 Index?
The S&P 500 Index, or Standard & Poor's 500 Index, is a [market-capitalization-weighted index](https://www.investopedia.com/terms/c/capitalizationweightedindex.asp) of 500 leading publicly traded companies in the U.S. The index actually has 503 components because three of them have two share classes listed.
It is not an exact list of the top 500 U.S. companies by [market cap](https://www.investopedia.com/terms/m/marketcapitalization.asp) because there are other criteria that the index includes. Still, the S&P 500 index is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.
### Key Takeaways
* The S&P 500 Index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization.
* The S&P 500 Index was launched in 1957 by the credit rating agency Standard and Poor's.
* The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading.
* Because of its depth and diversity, the S&P 500 is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market.
* You can't directly invest in the S&P 500 because it's an index, but you can invest in one of the many funds that use it as a benchmark, tracking its composition and performance.
![S&P 500 Index]()
:max_bytes(150000):strip_icc()/SP-500-Index-d04148d29bca4307b412f4fd91741e17.jpg)
Investopedia / Julie Bang
## Weighting Formula and Calculation of the S&P 500
The S&P 500 uses a [market-cap weighting method](https://www.investopedia.com/terms/c/capitalizationweightedindex.asp), giving a higher percentage allocation to companies with the largest market capitalizations.
> Company Weighting in S & P
>
>
> =
>
>
>
> Company market cap
>
>
> Total of all market caps
>
>
>
>
> \text{Company Weighting in S \& P}= \frac{\text{Company market cap}}{\text{Total of all market caps}}
>
>
> Company Weighting in S & P=Total of all market capsCompany market cap
Determining the weighting of each component of the S&P 500 begins with adding up the total market cap for the index by adding together the market cap of every company in the index.
To review, the market cap of a company is calculated by taking the current stock price and multiplying it by the company's [outstanding shares](https://www.investopedia.com/terms/o/outstandingshares.asp). Fortunately, the total market cap for the S&P 500 as well as the market caps of individual companies are published frequently on financial websites, saving investors the need to calculate them.
The weighting of each company in the index is calculated by taking the company's market cap and dividing it by the total market cap of the index.
### Other S&P Indices
The S&P 500 is a part of the S&P Global 1200 family of indices. Other indices included are the [S&P MidCap 400](https://www.investopedia.com/terms/s/sp-midcap-400-index.asp), which represents the mid-cap range of companies, and the [S&P SmallCap 600](https://www.investopedia.com/terms/s/sp600.asp), which represents small-cap companies. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 combine to cover 90% of all U.S. capitalization in an index known as the S&P Composite 1500.
## S&P 500 Index Construction
The S&P only uses [free-floating](https://www.investopedia.com/terms/f/freefloatmethodology.asp) shares when calculating market cap, meaning the shares that the public can trade. The S&P adjusts each company's market cap to compensate for new share issues or company mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor. The divisor is proprietary information of the S&P and is not released to the public. The S&P Index (SPX) is not a total return index and [does not include cash dividend gains](https://www.investopedia.com/ask/answers/040915/does-sp-500-index-include-dividends.asp) for the companies listed.
However, you can calculate a company's weighting in the index, which can provide investors with valuable information. If a stock rises or falls, you can get a sense as to whether it might have an impact on the overall index. For example, a company with a 10% weighting will have a greater impact on the value of the index than a company with a 2% weighting.
The S&P 500 is one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. The S&P 500 focuses on the U.S. market's large-cap sector and is also a float-weighted index (a type of capitalization weighting), meaning company market caps are adjusted by the number of shares available for public trading.
###
The S&P 500's most recent rebalancing was announced on Sep. 1, 2023, and took effect before markets opened on Sept. 18, 2023. Blackstone Inc. and Airbnb Inc. replaced Lincoln National Corp. and Newell Brands Inc., respectively.
## S&P 500 Competitors
### S&P 500 vs. Dow Jones Industrial Average (DJIA)
Another common U.S. stock market benchmark is the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp). The S&P 500 is often the institutional investor's preferred index given its depth and breadth, while the DJIA has historically been associated with significant equities from the retail investor's point of view. Institutional investors perceive the S&P 500 as more representative of U.S. equity markets because it comprises more stocks across all sectors (500 versus the Dow's 30).
Furthermore, the S&P 500 uses a market-cap weighting method, giving a higher percentage allocation to companies with the largest market caps, while the DJIA is a price-weighted index that gives companies with higher stock prices a higher index weighting. The market-cap-weighted structure tends to be more common than the price-weighted across U.S. indexes.
### S&P 500 vs. Nasdaq
[Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp) is a global electronic marketplace for trading securities. There are several equity market indexes that include stocks traded on Nasdaq. Note that a given stock included in the S&P 500 Index may also be in one or more of the various Nasdaq indexes.
Among the most-watched Nasdaq stock indices are the:
* [Nasdaq 100 Index](https://www.investopedia.com/terms/n/nasdaq100.asp), which includes 100 of the largest, most actively traded common equities listed on Nasdaq.
* [Nasdaq Composite Index](https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp), which the media often simply refers to as the Nasdaq (and which includes more than 2,500 common stocks that trade on Nasdaq).
* Nasdaq Global Equity Index (NQGI), which includes international stocks.
* [PHLX Semiconductor Sector Index (SOX)](https://www.investopedia.com/terms/s/soxx.asp), which is the leading barometer of stocks related to the semiconductor industry.
* OMX Stockholm 30 Index (OMXS30), which includes 30 actively traded stocks on the Stockholm Stock Exchange.
### S&P 500 vs. Russell Indexes
The S&P 500 is a member of a set of indexes created by Standard & Poor's. The Standard & Poor's set of indexes is like the Russell index family in that both are market-cap-weighted indexes unless stated otherwise (as in the case of [equal-weighted](https://www.investopedia.com/terms/e/equalweight.asp) indexes, for example).
However, there are [two large differences](https://www.investopedia.com/articles/investing/070715/sp-500-vs-russell-2000-etf-which-should-you-get.asp) between the construction of the S&P and Russell families of indexes. First, Standard & Poor's chooses constituent companies via a committee, while [Russell indexes](https://www.investopedia.com/articles/investing/022416/investment-fundamentals-sp-500-index-vs-russell-1000-index.asp) use a formula to choose stocks to include. Second, there is no name overlap within S&P style indices (growth versus value), while Russell indexes will include the same company in both the value and growth style indexes.
### S&P 500 vs. Vanguard 500 Fund
The [Vanguard 500 Index Fund](https://www.investopedia.com/articles/investing/111215/vanguard-total-stock-index-vs-vanguard-500-index-fund.asp) seeks to track the price and yield performance of the S&P 500 Index by investing its total net assets in the stocks comprising the index and holding each component with approximately the same weight as the S&P index. In this way, the fund barely deviates from the S&P, which it is designed to mimic.
###
The S&P 500 is an index, so it can't be traded directly. Those who want to invest in the companies that comprise the S&P must invest in a mutual fund or [exchange-traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp) that tracks the index, such as the [Vanguard 500 ETF](https://www.investopedia.com/articles/investing/121814/look-vanguards-sp-500-etf.asp) ([VOO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=voo)).
## Limitations of the S&P 500 Index
One of the limitations of the S&P and other market-cap-weighted indexes arises when [stocks in the index](https://www.investopedia.com/ask/answers/08/find-stocks-in-sp500.asp) become overvalued, meaning they rise higher than their fundamentals warrant. If a stock has a heavy weighting in the index while being overvalued, the stock typically inflates the overall value or price of the index.
A company's rising market cap isn't necessarily indicative of a company's fundamentals so much as it reflects the stock's increase in value relative to shares outstanding. As a result, equal-weighted indexes have become increasingly popular whereby each company's stock price movements have an equal impact on the index.
## Example of the S&P 500 Market Cap Weighting
In order to understand how the underlying stocks affect the S&P index, the individual market weights must be calculated by dividing the market cap of each company by the total market cap of the index. Below is an example of Apple's weighting in the index:
* Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) reported 15.7 billion shares outstanding in its quarterly filing for the period ending July 1, 2023, and had a stock price of $173.93 at the end of the trading day on Sept. 21, 2023.
* Apple's market cap is $2.7 trillion as of Sept. 21, 2023.
* The S&P 500 total market cap is approximately $39.7 trillion as of Aug. 31, 2023, which is the sum of the market caps for all of the stocks in the index.
* Apple's weighting in the index was approximately 6.8%, or $2.7 trillion divided by $39.7 trillion.
Overall, the larger the market weight of a company, the more impact each 1% change in a stock's price will have on the index. Note that S&P does not currently provide the total list of all 503 components on its website, outside of the top 10.
## Why Is It Called Standard and Poor's?
The first S&P Index was launched in 1923 as a joint project by the Standard Statistical Bureau and Poor's Publishing. The original index covered 233 companies. The two companies merged in 1941 to become [Standard and Poor's](https://www.investopedia.com/terms/s/sp.asp).
## Which Companies Qualify for the S&P 500?
In order to be included in the S&P 500 Index, a company must be publicly traded and based in the United States. It also needs to meet certain requirements for liquidity and market capitalization, have a [public float](https://www.investopedia.com/ask/answers/what-is-companys-float/) of at least 10% of its shares, and have positive earnings over the trailing four quarters.
## How Do You Invest in the S&P 500?
The simplest way to invest in the S&P 500 Index (or any other stock market index) is to buy shares of an index fund that targets that index. These funds invest in a cross-section of the companies represented on the index, meaning that the fund's performance should mirror the performance of the index itself.
## The Bottom Line
The S&P 500 Index is one of the most [widely used indexes for the U.S. stock market](https://www.investopedia.com/terms/m/market-proxy.asp). These 500 companies represent the largest and most liquid companies in the U.S., from technology and software companies to banks and manufacturers. [Historically, the index has been used](https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp) to provide insight into the direction of the stock market. Although the index was created by a private company, the S&P 500 is now a popular yardstick for the performance of the market economy at large.
| What Is the S&P 500 Index?
The S&P 500 Index, or Standard & Poor's 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The index actually has 503 components because three of them have two share classes listed.
It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes. Still, the S&P 500 index is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.
Key Takeaways
The S&P 500 Index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization.The S&P 500 Index was launched in 1957 by the credit rating agency Standard and Poor's.The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading.Because of its depth and diversity, the S&P 500 is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market.You can't directly invest in the S&P 500 because it's an index, but you can invest in one of the many funds that use it as a benchmark, tracking its composition and performance.
Investopedia / Julie Bang
Weighting Formula and Calculation of the S&P 500
The S&P 500 uses a market-cap weighting method, giving a higher percentage allocation to companies with the largest market capitalizations.
Company Weighting in S & P
=
Company market cap
Total of all market caps
\text{Company Weighting in S \& P}= \frac{\text{Company market cap}}{\text{Total of all market caps}}
Company Weighting in S & P=Total of all market capsCompany market cap
Determining the weighting of each component of the S&P 500 begins with adding up the total market cap for the index by adding together the market cap of every company in the index.
To review, the market cap of a company is calculated by taking the current stock price and multiplying it by the company's outstanding shares. Fortunately, the total market cap for the S&P 500 as well as the market caps of individual companies are published frequently on financial websites, saving investors the need to calculate them.
The weighting of each company in the index is calculated by taking the company's market cap and dividing it by the total market cap of the index.
Other S&P Indices
The S&P 500 is a part of the S&P Global 1200 family of indices. Other indices included are the S&P MidCap 400, which represents the mid-cap range of companies, and the S&P SmallCap 600, which represents small-cap companies. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 combine to cover 90% of all U.S. capitalization in an index known as the S&P Composite 1500.
S&P 500 Index Construction
The S&P only uses free-floating shares when calculating market cap, meaning the shares that the public can trade. The S&P adjusts each company's market cap to compensate for new share issues or company mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor. The divisor is proprietary information of the S&P and is not released to the public. The S&P Index (SPX) is not a total return index and does not include cash dividend gains for the companies listed.
However, you can calculate a company's weighting in the index, which can provide investors with valuable information. If a stock rises or falls, you can get a sense as to whether it might have an impact on the overall index. For example, a company with a 10% weighting will have a greater impact on the value of the index than a company with a 2% weighting.
The S&P 500 is one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. The S&P 500 focuses on the U.S. market's large-cap sector and is also a float-weighted index (a type of capitalization weighting), meaning company market caps are adjusted by the number of shares available for public trading.
The S&P 500's most recent rebalancing was announced on Sep. 1, 2023, and took effect before markets opened on Sept. 18, 2023. Blackstone Inc. and Airbnb Inc. replaced Lincoln National Corp. and Newell Brands Inc., respectively.
S&P 500 Competitors
S&P 500 vs. Dow Jones Industrial Average (DJIA)
Another common U.S. stock market benchmark is the Dow Jones Industrial Average (DJIA). The S&P 500 is often the institutional investor's preferred index given its depth and breadth, while the DJIA has historically been associated with significant equities from the retail investor's point of view. Institutional investors perceive the S&P 500 as more representative of U.S. equity markets because it comprises more stocks across all sectors (500 versus the Dow's 30).
Furthermore, the S&P 500 uses a market-cap weighting method, giving a higher percentage allocation to companies with the largest market caps, while the DJIA is a price-weighted index that gives companies with higher stock prices a higher index weighting. The market-cap-weighted structure tends to be more common than the price-weighted across U.S. indexes.
S&P 500 vs. Nasdaq
Nasdaq is a global electronic marketplace for trading securities. There are several equity market indexes that include stocks traded on Nasdaq. Note that a given stock included in the S&P 500 Index may also be in one or more of the various Nasdaq indexes.
Among the most-watched Nasdaq stock indices are the:
Nasdaq 100 Index, which includes 100 of the largest, most actively traded common equities listed on Nasdaq.
Nasdaq Composite Index, which the media often simply refers to as the Nasdaq (and which includes more than 2,500 common stocks that trade on Nasdaq).
Nasdaq Global Equity Index (NQGI), which includes international stocks.
PHLX Semiconductor Sector Index (SOX), which is the leading barometer of stocks related to the semiconductor industry.
OMX Stockholm 30 Index (OMXS30), which includes 30 actively traded stocks on the Stockholm Stock Exchange.
S&P 500 vs. Russell Indexes
The S&P 500 is a member of a set of indexes created by Standard & Poor's. The Standard & Poor's set of indexes is like the Russell index family in that both are market-cap-weighted indexes unless stated otherwise (as in the case of equal-weighted indexes, for example).
However, there are two large differences between the construction of the S&P and Russell families of indexes. First, Standard & Poor's chooses constituent companies via a committee, while Russell indexes use a formula to choose stocks to include. Second, there is no name overlap within S&P style indices (growth versus value), while Russell indexes will include the same company in both the value and growth style indexes.
S&P 500 vs. Vanguard 500 Fund
The Vanguard 500 Index Fund seeks to track the price and yield performance of the S&P 500 Index by investing its total net assets in the stocks comprising the index and holding each component with approximately the same weight as the S&P index. In this way, the fund barely deviates from the S&P, which it is designed to mimic.
The S&P 500 is an index, so it can't be traded directly. Those who want to invest in the companies that comprise the S&P must invest in a mutual fund or exchange-traded fund (ETF) that tracks the index, such as the Vanguard 500 ETF (VOO).
Limitations of the S&P 500 Index
One of the limitations of the S&P and other market-cap-weighted indexes arises when stocks in the index become overvalued, meaning they rise higher than their fundamentals warrant. If a stock has a heavy weighting in the index while being overvalued, the stock typically inflates the overall value or price of the index.
A company's rising market cap isn't necessarily indicative of a company's fundamentals so much as it reflects the stock's increase in value relative to shares outstanding. As a result, equal-weighted indexes have become increasingly popular whereby each company's stock price movements have an equal impact on the index.
Example of the S&P 500 Market Cap Weighting
In order to understand how the underlying stocks affect the S&P index, the individual market weights must be calculated by dividing the market cap of each company by the total market cap of the index. Below is an example of Apple's weighting in the index:
Apple (AAPL) reported 15.7 billion shares outstanding in its quarterly filing for the period ending July 1, 2023, and had a stock price of $173.93 at the end of the trading day on Sept. 21, 2023.
Apple's market cap is $2.7 trillion as of Sept. 21, 2023.
The S&P 500 total market cap is approximately $39.7 trillion as of Aug. 31, 2023, which is the sum of the market caps for all of the stocks in the index.
Apple's weighting in the index was approximately 6.8%, or $2.7 trillion divided by $39.7 trillion.
Overall, the larger the market weight of a company, the more impact each 1% change in a stock's price will have on the index. Note that S&P does not currently provide the total list of all 503 components on its website, outside of the top 10.
Why Is It Called Standard and Poor's?
The first S&P Index was launched in 1923 as a joint project by the Standard Statistical Bureau and Poor's Publishing. The original index covered 233 companies. The two companies merged in 1941 to become Standard and Poor's.
Which Companies Qualify for the S&P 500?
In order to be included in the S&P 500 Index, a company must be publicly traded and based in the United States. It also needs to meet certain requirements for liquidity and market capitalization, have a public float of at least 10% of its shares, and have positive earnings over the trailing four quarters.
How Do You Invest in the S&P 500?
The simplest way to invest in the S&P 500 Index (or any other stock market index) is to buy shares of an index fund that targets that index. These funds invest in a cross-section of the companies represented on the index, meaning that the fund's performance should mirror the performance of the index itself.
The Bottom Line
The S&P 500 Index is one of the most widely used indexes for the U.S. stock market. These 500 companies represent the largest and most liquid companies in the U.S., from technology and software companies to banks and manufacturers. Historically, the index has been used to provide insight into the direction of the stock market. Although the index was created by a private company, the S&P 500 is now a popular yardstick for the performance of the market economy at large.
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https://www.investopedia.com/bitcoin-rises-above-usd65k-heading-into-halving-monitor-this-important-chart-level-8635907 | Bitcoin Rises Above $65K Heading Into Halving—Monitor This Important Chart Level | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 moved above $65,000, recovering from earlier losses, ahead of its highly-anticipated halving event and amid investor concerns about geopolitical tensions.</li><li>Recently launched spot Bitcoin ETFs have helped propel Bitcoin's price to a record high before the halving event, an occurrence that has never happened in Bitcoin’s 15 year history. </li><li>Bitcoin's price successfully held above the key $60K and 38.2% Fibonacci level following Israel's retaliatory attack against Iran, indicating that recent geopolitical tensions may already be factored into the price.<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"> 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>), the largest cryptocurrency by <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>, surged above $65,000 Friday morning, paring earlier intraday losses ahead of the highly anticipated <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-you-need-to-know-ahead-of-the-bitcoin-halving-8634750#:~:text=What%20Does%20the%20Halving%20Mean,asset's%20supply%20and%20demand%20dynamics.">halving</a> event that's expected to take place either today or tomorrow. The price had fallen below $60,000 earlier following overnight news that Israel had retaliated against Iran for its weekend drone and missile attack.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> In the pioneer cryptocurrency’s Olympics moment, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-halving-how-this-time-is-different-8624717">Bitcoin will undergo</a> its one-in-every-four-year halving, in which the digital asset’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/block-reward.asp">block reward</a> reduces from 6.25 to 3.125 bitcoins, an event that historically increases its value in the months following amid fewer coins entering circulation.<span class="ql-inline-citation" data-cite="4"></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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> However, Bitcoin has fallen as much as 19% from its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/record_high.asp#:~:text=A%20record%20high%20is%20the,last%20record%20high%20is%20exceeded.">record high</a> of $73,835.57 on March 14, with some analysts saying the sell-off indicates the cryptocurrency’s halving has already been factored into the current price. They argue that recently launched <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> have improved the asset’s pricing efficiency and propelled the cryptocurrency to a new record high prior to the halving—an occurrence that has never happened in Bitcoin’s 15-year history.<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"> Market commentators also point out that current <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/macroeconomics.asp">macroeconomic</a> conditions are significantly different to the three occasions when Bitcoin has halved since 2012, which were characterized by low interest rates and low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> compared to today’s higher rates that make <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-on-risk-off.asp#:~:text=Risk%20is%20the%20uncertainty%20associated,and%20vehicles%20with%20lower%20risk.">risk-on</a> assets, such as cryptocurrencies, less attractive.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Bitcoin bulls concede that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">intuitional investors</a> have driven the recent rally, but anticipate sentiment to turn bullish after the halving, which they believe will attract new <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/030515/what-difference-between-institutional-traders-and-retail-traders.asp">retail traders</a>. “While the recent rally has been led by institutional investors, with past halvings we’ve seen a positive sentiment shift in the market that attracts new retail traders; I think the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp#:~:text=Bitcoins%20are%20created%20by%20mining,in%20mid%2DApril%2C%202024.">cycle</a> will repeat itself,” Cash App’s Miles Suter told <em>CoinDesk</em>.<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"> Taking a look at the charts, Bitcoin’s price consolidated within a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/symmetricaltriangle.asp">symmetrical triangle</a> throughout March and early April before breaking down from the pattern late last week, with sentiment remaining bearish ahead of the halving.
</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"> Looking ahead, investors should monitor if the legacy cryptocurrency can hold above the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/02/061802.asp">psychological</a> $60,000 level, an area on the chart where the price also finds <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/support.asp">support</a> from the key 38.2% <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fibonacciretracement.asp">Fibonacci retracement level</a>, when using a grid stretched from the Jan. 23 low to the March 14 high. Interestingly, BTC tested this level key early Friday morning after news surfaced of Israel’s retaliatory attack on Iran but found immediate buying interest, indicating recent geopolitical tensions may already be factored into the price.
</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>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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> <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 moved above $65,000, recovering from earlier losses, ahead of its highly-anticipated halving event and amid investor concerns about geopolitical tensions.
* Recently launched spot Bitcoin ETFs have helped propel Bitcoin's price to a record high before the halving event, an occurrence that has never happened in Bitcoin’s 15 year history.
* Bitcoin's price successfully held above the key $60K and 38.2% Fibonacci level following Israel's retaliatory attack against Iran, indicating that recent geopolitical tensions may already be factored into the price.
Bitcoin ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD)), the largest cryptocurrency by [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp), surged above $65,000 Friday morning, paring earlier intraday losses ahead of the highly anticipated [halving](https://www.investopedia.com/what-you-need-to-know-ahead-of-the-bitcoin-halving-8634750#:~:text=What%20Does%20the%20Halving%20Mean,asset's%20supply%20and%20demand%20dynamics.) event that's expected to take place either today or tomorrow. The price had fallen below $60,000 earlier following overnight news that Israel had retaliated against Iran for its weekend drone and missile attack.
In the pioneer cryptocurrency’s Olympics moment, [Bitcoin will undergo](https://www.investopedia.com/bitcoin-halving-how-this-time-is-different-8624717) its one-in-every-four-year halving, in which the digital asset’s [block reward](https://www.investopedia.com/terms/b/block-reward.asp) reduces from 6.25 to 3.125 bitcoins, an event that historically increases its value in the months following amid fewer coins entering circulation.
However, Bitcoin has fallen as much as 19% from its [record high](https://www.investopedia.com/terms/r/record_high.asp#:~:text=A%20record%20high%20is%20the,last%20record%20high%20is%20exceeded.) of $73,835.57 on March 14, with some analysts saying the sell-off indicates the cryptocurrency’s halving has already been factored into the current price. They argue that recently launched [spot Bitcoin exchange-traded funds (ETFs)](https://www.investopedia.com/spot-bitcoin-etfs-8358373) have improved the asset’s pricing efficiency and propelled the cryptocurrency to a new record high prior to the halving—an occurrence that has never happened in Bitcoin’s 15-year history.
Market commentators also point out that current [macroeconomic](https://www.investopedia.com/terms/m/macroeconomics.asp) conditions are significantly different to the three occasions when Bitcoin has halved since 2012, which were characterized by low interest rates and low [inflation](https://www.investopedia.com/terms/i/inflation.asp) compared to today’s higher rates that make [risk-on](https://www.investopedia.com/terms/r/risk-on-risk-off.asp#:~:text=Risk%20is%20the%20uncertainty%20associated,and%20vehicles%20with%20lower%20risk.) assets, such as cryptocurrencies, less attractive.
Bitcoin bulls concede that [intuitional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) have driven the recent rally, but anticipate sentiment to turn bullish after the halving, which they believe will attract new [retail traders](https://www.investopedia.com/articles/active-trading/030515/what-difference-between-institutional-traders-and-retail-traders.asp). “While the recent rally has been led by institutional investors, with past halvings we’ve seen a positive sentiment shift in the market that attracts new retail traders; I think the [cycle](https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp#:~:text=Bitcoins%20are%20created%20by%20mining,in%20mid%2DApril%2C%202024.) will repeat itself,” Cash App’s Miles Suter told *CoinDesk*.
Taking a look at the charts, Bitcoin’s price consolidated within a [symmetrical triangle](https://www.investopedia.com/terms/s/symmetricaltriangle.asp) throughout March and early April before breaking down from the pattern late last week, with sentiment remaining bearish ahead of the halving.
Looking ahead, investors should monitor if the legacy cryptocurrency can hold above the [psychological](https://www.investopedia.com/articles/technical/02/061802.asp) $60,000 level, an area on the chart where the price also finds [support](https://www.investopedia.com/terms/s/support.asp) from the key 38.2% [Fibonacci retracement level](https://www.investopedia.com/terms/f/fibonacciretracement.asp), when using a grid stretched from the Jan. 23 low to the March 14 high. Interestingly, BTC tested this level key early Friday morning after news surfaced of Israel’s retaliatory attack on Iran but found immediate buying interest, indicating recent geopolitical tensions may already be factored into the price.
*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 moved above $65,000, recovering from earlier losses, ahead of its highly-anticipated halving event and amid investor concerns about geopolitical tensions.Recently launched spot Bitcoin ETFs have helped propel Bitcoin's price to a record high before the halving event, an occurrence that has never happened in Bitcoin’s 15 year history. Bitcoin's price successfully held above the key $60K and 38.2% Fibonacci level following Israel's retaliatory attack against Iran, indicating that recent geopolitical tensions may already be factored into the price.
Bitcoin (BTC), the largest cryptocurrency by market capitalization, surged above $65,000 Friday morning, paring earlier intraday losses ahead of the highly anticipated halving event that's expected to take place either today or tomorrow. The price had fallen below $60,000 earlier following overnight news that Israel had retaliated against Iran for its weekend drone and missile attack.
In the pioneer cryptocurrency’s Olympics moment, Bitcoin will undergo its one-in-every-four-year halving, in which the digital asset’s block reward reduces from 6.25 to 3.125 bitcoins, an event that historically increases its value in the months following amid fewer coins entering circulation.
However, Bitcoin has fallen as much as 19% from its record high of $73,835.57 on March 14, with some analysts saying the sell-off indicates the cryptocurrency’s halving has already been factored into the current price. They argue that recently launched spot Bitcoin exchange-traded funds (ETFs) have improved the asset’s pricing efficiency and propelled the cryptocurrency to a new record high prior to the halving—an occurrence that has never happened in Bitcoin’s 15-year history.
Market commentators also point out that current macroeconomic conditions are significantly different to the three occasions when Bitcoin has halved since 2012, which were characterized by low interest rates and low inflation compared to today’s higher rates that make risk-on assets, such as cryptocurrencies, less attractive.
Bitcoin bulls concede that intuitional investors have driven the recent rally, but anticipate sentiment to turn bullish after the halving, which they believe will attract new retail traders. “While the recent rally has been led by institutional investors, with past halvings we’ve seen a positive sentiment shift in the market that attracts new retail traders; I think the cycle will repeat itself,” Cash App’s Miles Suter told CoinDesk.
Taking a look at the charts, Bitcoin’s price consolidated within a symmetrical triangle throughout March and early April before breaking down from the pattern late last week, with sentiment remaining bearish ahead of the halving.
Looking ahead, investors should monitor if the legacy cryptocurrency can hold above the psychological $60,000 level, an area on the chart where the price also finds support from the key 38.2% Fibonacci retracement level, when using a grid stretched from the Jan. 23 low to the March 14 high. Interestingly, BTC tested this level key early Friday morning after news surfaced of Israel’s retaliatory attack on Iran but found immediate buying interest, indicating recent geopolitical tensions may already be factored into the price.
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? Please email us at
[email protected] | [
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https://www.investopedia.com/insurers-warn-of-increase-in-catalytic-converter-theft-5215755 | Insurers Warn of Increase in Catalytic Converter Theft | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> During the pandemic, the theft of catalytic converters from vehicles has soared, prompting auto insurers to publish warnings as they process millions in claims and prompting drivers to take notice and call their insurer and mechanic.
</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>Catalytic converter theft is rising enormously throughout the U.S.<span class="ql-inline-citation" data-cite="1"></span></li><li>Claims paid totaled more than $21 million for State Farm in first 6 months of 2021</li><li>P &C trade association in December named auto and auto part theft is one of 5 trends challenging auto insurers</li><li>Theft is driven by using prices for precious metals embedded in the converters, supply chain issues, pandemic economic issues</li><li>There are actions drivers can take to help prevent theft</li></ul><p><br/></p></div></div></div>
<span class="heading-toc" id="toc-catalytic-converter-theft-is-booming"></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"> Catalytic converter theft is booming </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> According to claims data reviewed by the National Insurance Crime Bureau (NICB), thefts of catalytic converters increased a whopping 325% in 2020<span class="ql-inline-citation" data-cite="1"></span>. NICB saw claims for 3,389 thefts in 2019 and 14,433 in 2020. These numbers only reflect instances where policyholders filed claims, as thefts of these parts are considered significantly under-reported.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> While numbers are not in yet for the full year of 2021, the rise in stolen catalytic converters has been accelerating sharply even since the first year of the pandemic, according to 2021 claims data from State Farm Mutual Auto Insurance Co.<br/>
</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-claims-skyrocketing-for-stolen-parts"></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"> Claims skyrocketing for stolen parts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In the 12-month period from July 1, 2020 to June 30, 2021, catalytic converter theft skyrocketed close to 293% nationwide, according to State Farm’s claim analysis. State Farm paid out more than $33.7 million in the most recent 12 month period dating back from its press release in July 2021,<span class="ql-inline-citation" data-cite="2"></span> compared to the previous 12-month when it paid out less than $9 million.
</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"> During that 12-month period, there were more than 18,000 of these parts stolen and reported by State Farm customers, compared to slightly above 4,500 in the previous 12-month period, the company reported.
</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 largest U.S. auto insurer paid out slightly more than $12 million in claims for catalytic converter theft in the last half of 2020, it said this past summer. Yet, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://newsroom.statefarm.com/auto-claims-analysis-reveals-explosion-in-catalytic-converter-theft/" rel="nofollow">in the first 6 months of 2021</a>, State Farm paid more than $21 million to cover them.<br/>
</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-coverage-of-stolen-parts-may-not-be-triggered"></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"> Coverage of stolen parts may not be triggered </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Not all auto insurance policies cover the theft of the converter, which has been mandatory part of all gas-powered cars since the 1975 model year, to reduce harmful emissions, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.progressive.com/answers/catalytic-converter-theft/" rel="nofollow">Progressive</a>.
</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 comprehensive personal auto insurance policy does covers this loss along with other part thefts, flooding, damage due to civil unrest and other non-traffic accident losses, but owners usually pay the deductible, which could be equal to or greater than the cost of the catalytic converter depending on the car’s make and model. The NICB said it “advises drivers to contact their insurer to report the theft and determine the best course of action.”
</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"> As far as driving insurance costs, while this is in certain cases <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.carinsurance101.com/will-car-insurance-cover-a-stolen-catalytic-converter/" rel="nofollow">covered by insurance</a>, it is only one factor of many that drive insurance rates. For example, theft, type of car, driving record, years driving experience, miles driven, etc., are part of the insurance picture and all play a role. Catalytic converter theft, while it does play a role in the overall picture, it is only a small part of the whole. ” said Tully Lehman, NICB spokesperson.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> However, the drastic increase stolen auto parts as well as for vehicles themselves have contributed to rising comprehensive auto insurance policy costs, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.apci.org/media/news-releases/release/69289/">according to the American Property Casualty Insurance Association</a>. APCIA’s policy research vice president Dave Snyder spoke on cost trends as part of a presentation on the five key auto issues — including thefts — affecting auto premiums during the national fall/winter meeting of insurance commissioners in San Diego.
</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-precious-metals-make-catalytic-converters-attractive"></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"> Precious metals make catalytic converters attractive </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Insurers and industry advocates have said there is a strong correlation between the theft of catalytic converters and the rise in market value of the precious metals that coat the component, namely platinum, rhodium, and palladium, especially in 2020 and later. Rhodium, for example, goes for about $13,700 an ounce, according to NICB, citing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://KITCO.com" rel="nofollow">KITCO.com</a>.<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.kitco.com/charts/livepalladium.html" rel="nofollow"> Palladium</a> is now a little less than $2,000 per ounce.
</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"> These parts fetch a lot of money at scrap metal or recycling facilities, especially now during a time when supply chain issues continue. Catalytic converters could be worth several hundred to several thousand dollars, although sometimes they can also go for just $50, according to industry experts.
</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 pandemic’s socioeconomic impact has also spurred theft and opportunity, according to NICB.
</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"> “We have seen a significant increase during the pandemic. As the value of the precious metals contained within the catalytic converters continues to increase, so do the number of thefts of these devices. There is a clear connection between times of crisis, limited resources, and disruption of the supply chain that drives investors towards these precious metals,” said NICB President & CEO David Glawe.<br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<span class="heading-toc" id="toc-what-vehicles-and-states-are-most-at-risk"></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"> What vehicles and states are most at risk? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Thieves target bigger vehicles like large pickups and delivery vehicles because their undercarriage is higher from the ground and provides easier reach to the catalytic converter, NICB notes. Progressive says on its website that newer cars whose parts would likely in better condition are more sought after by thieves, as are SUVs, which have a higher ground clearance. These thefts of the part, which can look like an oversized cheese grater from underneath the car, happen when the vehicles are stored in fleets in open areas at night, allowing the thieves to steal many efficiently.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> “It only takes a few minutes for a thief to steal a catalytic converter, so multiple catalytic converters can be stolen in a relatively short amount of time,” Progressive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.progressive.com/answers/catalytic-converter-theft/" rel="nofollow">stated</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"> Toyota Priuses and other hybrids are especially attractive to parts thieves. Priuses boast two catalytic converters as a hybrid, according to NICB and as a hybrid, these two converters usually experience less corrosion per mile than other cars—upping the value of their precious metal parts. Other targeted or susceptible hybrid models include Honda Jazz, Toyota Auris, and Lexus RX no matter the make or model year, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.allstate.com/tr/car-insurance/catalytic-converter-theft.aspx" rel="nofollow">according to Allstate</a>.<br/>
</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 top 5 states in catalytic converter theft, as ranked by State Farm’s experience with claims, is led by California, which counted for more than 3 out of 10 claims being filed, followed by Texas, Minnesota, Washington and Illinois. State Farm called the situation in Texas “dire,” noting during 2020 there were 445 catalytic converter thefts reported by State Farm customers but in the first half of 2021, that number “ballooned” almost 210% to 1,380.”
</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 thefts tend to rise more sharply at the end of summer and through December, then drop back in January, according to data from the NICB and presented in a chart by the APCIA in its presentation.
</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-some-states-are-taking-action"></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"> Some states are taking action </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Ten states passed laws in 2021 to tamp down the market for catalytic converters by requiring multiple forms of personal identifying information for anyone trying to sell used converters, including proof of vehicle ownership, according to the NICB. Others, like Washington State where the theft is rampant, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.heraldnet.com/northwest/bill-to-reduce-catalytic-converter-thefts-introduced-in-state/">could follow</a>, as legislation has been introduced.
</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-tips-from-experts-for-avoiding-theft-and-receiving-compensation-for-stolen-parts"></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"> Tips from experts for avoiding theft and receiving compensation for stolen parts </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li>Install a sensitive alarm system.</li><li>Engrave your vehicle's VIN number on the catalytic converter. </li><li>Park in well-lit areas or garages.</li><li>NICB advises car owners to install catalytic converter anti-theft devices available from various manufacturers.</li><li>Contact local law enforcement if your catalytic converter is stolen—this helps with measuring the trend.</li><li>If the catalytic converter has been stolen, you might hear a loud muffler disconnection sound, smell unclean exhaust exiting and feel a lack of acceleration. State Farm calls it a loud, "weird" noise. It can be dangerous to drive without one, insurers warn.</li><li>To be able to file an insurance claim in the future, talk to your agent about switching to comprehensive coverage if not already on your policy.</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">
</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> | During the pandemic, the theft of catalytic converters from vehicles has soared, prompting auto insurers to publish warnings as they process millions in claims and prompting drivers to take notice and call their insurer and mechanic.
### Key Takeaways
* Catalytic converter theft is rising enormously throughout the U.S.
* Claims paid totaled more than $21 million for State Farm in first 6 months of 2021
* P &C trade association in December named auto and auto part theft is one of 5 trends challenging auto insurers
* Theft is driven by using prices for precious metals embedded in the converters, supply chain issues, pandemic economic issues
* There are actions drivers can take to help prevent theft
## Catalytic converter theft is booming
According to claims data reviewed by the National Insurance Crime Bureau (NICB), thefts of catalytic converters increased a whopping 325% in 2020. NICB saw claims for 3,389 thefts in 2019 and 14,433 in 2020. These numbers only reflect instances where policyholders filed claims, as thefts of these parts are considered significantly under-reported.
While numbers are not in yet for the full year of 2021, the rise in stolen catalytic converters has been accelerating sharply even since the first year of the pandemic, according to 2021 claims data from State Farm Mutual Auto Insurance Co.
## Claims skyrocketing for stolen parts
In the 12-month period from July 1, 2020 to June 30, 2021, catalytic converter theft skyrocketed close to 293% nationwide, according to State Farm’s claim analysis. State Farm paid out more than $33.7 million in the most recent 12 month period dating back from its press release in July 2021, compared to the previous 12-month when it paid out less than $9 million.
During that 12-month period, there were more than 18,000 of these parts stolen and reported by State Farm customers, compared to slightly above 4,500 in the previous 12-month period, the company reported.
The largest U.S. auto insurer paid out slightly more than $12 million in claims for catalytic converter theft in the last half of 2020, it said this past summer. Yet, [in the first 6 months of 2021](https://newsroom.statefarm.com/auto-claims-analysis-reveals-explosion-in-catalytic-converter-theft/), State Farm paid more than $21 million to cover them.
## Coverage of stolen parts may not be triggered
Not all auto insurance policies cover the theft of the converter, which has been mandatory part of all gas-powered cars since the 1975 model year, to reduce harmful emissions, according to [Progressive](https://www.progressive.com/answers/catalytic-converter-theft/).
A comprehensive personal auto insurance policy does covers this loss along with other part thefts, flooding, damage due to civil unrest and other non-traffic accident losses, but owners usually pay the deductible, which could be equal to or greater than the cost of the catalytic converter depending on the car’s make and model. The NICB said it “advises drivers to contact their insurer to report the theft and determine the best course of action.”
As far as driving insurance costs, while this is in certain cases [covered by insurance](https://www.carinsurance101.com/will-car-insurance-cover-a-stolen-catalytic-converter/), it is only one factor of many that drive insurance rates. For example, theft, type of car, driving record, years driving experience, miles driven, etc., are part of the insurance picture and all play a role. Catalytic converter theft, while it does play a role in the overall picture, it is only a small part of the whole. ” said Tully Lehman, NICB spokesperson.
However, the drastic increase stolen auto parts as well as for vehicles themselves have contributed to rising comprehensive auto insurance policy costs, [according to the American Property Casualty Insurance Association](https://www.apci.org/media/news-releases/release/69289/). APCIA’s policy research vice president Dave Snyder spoke on cost trends as part of a presentation on the five key auto issues — including thefts — affecting auto premiums during the national fall/winter meeting of insurance commissioners in San Diego.
## Precious metals make catalytic converters attractive
Insurers and industry advocates have said there is a strong correlation between the theft of catalytic converters and the rise in market value of the precious metals that coat the component, namely platinum, rhodium, and palladium, especially in 2020 and later. Rhodium, for example, goes for about $13,700 an ounce, according to NICB, citing [KITCO.com](http://KITCO.com). [Palladium](https://www.kitco.com/charts/livepalladium.html) is now a little less than $2,000 per ounce.
These parts fetch a lot of money at scrap metal or recycling facilities, especially now during a time when supply chain issues continue. Catalytic converters could be worth several hundred to several thousand dollars, although sometimes they can also go for just $50, according to industry experts.
The pandemic’s socioeconomic impact has also spurred theft and opportunity, according to NICB.
“We have seen a significant increase during the pandemic. As the value of the precious metals contained within the catalytic converters continues to increase, so do the number of thefts of these devices. There is a clear connection between times of crisis, limited resources, and disruption of the supply chain that drives investors towards these precious metals,” said NICB President & CEO David Glawe.
## What vehicles and states are most at risk?
Thieves target bigger vehicles like large pickups and delivery vehicles because their undercarriage is higher from the ground and provides easier reach to the catalytic converter, NICB notes. Progressive says on its website that newer cars whose parts would likely in better condition are more sought after by thieves, as are SUVs, which have a higher ground clearance. These thefts of the part, which can look like an oversized cheese grater from underneath the car, happen when the vehicles are stored in fleets in open areas at night, allowing the thieves to steal many efficiently.
“It only takes a few minutes for a thief to steal a catalytic converter, so multiple catalytic converters can be stolen in a relatively short amount of time,” Progressive [stated](https://www.progressive.com/answers/catalytic-converter-theft/).
Toyota Priuses and other hybrids are especially attractive to parts thieves. Priuses boast two catalytic converters as a hybrid, according to NICB and as a hybrid, these two converters usually experience less corrosion per mile than other cars—upping the value of their precious metal parts. Other targeted or susceptible hybrid models include Honda Jazz, Toyota Auris, and Lexus RX no matter the make or model year, [according to Allstate](https://www.allstate.com/tr/car-insurance/catalytic-converter-theft.aspx).
The top 5 states in catalytic converter theft, as ranked by State Farm’s experience with claims, is led by California, which counted for more than 3 out of 10 claims being filed, followed by Texas, Minnesota, Washington and Illinois. State Farm called the situation in Texas “dire,” noting during 2020 there were 445 catalytic converter thefts reported by State Farm customers but in the first half of 2021, that number “ballooned” almost 210% to 1,380.”
The thefts tend to rise more sharply at the end of summer and through December, then drop back in January, according to data from the NICB and presented in a chart by the APCIA in its presentation.
## Some states are taking action
Ten states passed laws in 2021 to tamp down the market for catalytic converters by requiring multiple forms of personal identifying information for anyone trying to sell used converters, including proof of vehicle ownership, according to the NICB. Others, like Washington State where the theft is rampant, [could follow](https://www.heraldnet.com/northwest/bill-to-reduce-catalytic-converter-thefts-introduced-in-state/), as legislation has been introduced.
## Tips from experts for avoiding theft and receiving compensation for stolen parts
* Install a sensitive alarm system.
* Engrave your vehicle's VIN number on the catalytic converter.
* Park in well-lit areas or garages.
* NICB advises car owners to install catalytic converter anti-theft devices available from various manufacturers.
* Contact local law enforcement if your catalytic converter is stolen—this helps with measuring the trend.
* If the catalytic converter has been stolen, you might hear a loud muffler disconnection sound, smell unclean exhaust exiting and feel a lack of acceleration. State Farm calls it a loud, "weird" noise. It can be dangerous to drive without one, insurers warn.
* To be able to file an insurance claim in the future, talk to your agent about switching to comprehensive coverage if not already on your policy.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | During the pandemic, the theft of catalytic converters from vehicles has soared, prompting auto insurers to publish warnings as they process millions in claims and prompting drivers to take notice and call their insurer and mechanic.
Key Takeaways
Catalytic converter theft is rising enormously throughout the U.S.Claims paid totaled more than $21 million for State Farm in first 6 months of 2021P &C trade association in December named auto and auto part theft is one of 5 trends challenging auto insurersTheft is driven by using prices for precious metals embedded in the converters, supply chain issues, pandemic economic issuesThere are actions drivers can take to help prevent theft
Catalytic converter theft is booming
According to claims data reviewed by the National Insurance Crime Bureau (NICB), thefts of catalytic converters increased a whopping 325% in 2020. NICB saw claims for 3,389 thefts in 2019 and 14,433 in 2020. These numbers only reflect instances where policyholders filed claims, as thefts of these parts are considered significantly under-reported.
While numbers are not in yet for the full year of 2021, the rise in stolen catalytic converters has been accelerating sharply even since the first year of the pandemic, according to 2021 claims data from State Farm Mutual Auto Insurance Co.
Claims skyrocketing for stolen parts
In the 12-month period from July 1, 2020 to June 30, 2021, catalytic converter theft skyrocketed close to 293% nationwide, according to State Farm’s claim analysis. State Farm paid out more than $33.7 million in the most recent 12 month period dating back from its press release in July 2021, compared to the previous 12-month when it paid out less than $9 million.
During that 12-month period, there were more than 18,000 of these parts stolen and reported by State Farm customers, compared to slightly above 4,500 in the previous 12-month period, the company reported.
The largest U.S. auto insurer paid out slightly more than $12 million in claims for catalytic converter theft in the last half of 2020, it said this past summer. Yet, in the first 6 months of 2021, State Farm paid more than $21 million to cover them.
Coverage of stolen parts may not be triggered
Not all auto insurance policies cover the theft of the converter, which has been mandatory part of all gas-powered cars since the 1975 model year, to reduce harmful emissions, according to Progressive.
A comprehensive personal auto insurance policy does covers this loss along with other part thefts, flooding, damage due to civil unrest and other non-traffic accident losses, but owners usually pay the deductible, which could be equal to or greater than the cost of the catalytic converter depending on the car’s make and model. The NICB said it “advises drivers to contact their insurer to report the theft and determine the best course of action.”
As far as driving insurance costs, while this is in certain cases covered by insurance, it is only one factor of many that drive insurance rates. For example, theft, type of car, driving record, years driving experience, miles driven, etc., are part of the insurance picture and all play a role. Catalytic converter theft, while it does play a role in the overall picture, it is only a small part of the whole. ” said Tully Lehman, NICB spokesperson.
However, the drastic increase stolen auto parts as well as for vehicles themselves have contributed to rising comprehensive auto insurance policy costs, according to the American Property Casualty Insurance Association. APCIA’s policy research vice president Dave Snyder spoke on cost trends as part of a presentation on the five key auto issues — including thefts — affecting auto premiums during the national fall/winter meeting of insurance commissioners in San Diego.
Precious metals make catalytic converters attractive
Insurers and industry advocates have said there is a strong correlation between the theft of catalytic converters and the rise in market value of the precious metals that coat the component, namely platinum, rhodium, and palladium, especially in 2020 and later. Rhodium, for example, goes for about $13,700 an ounce, according to NICB, citing KITCO.com. Palladium is now a little less than $2,000 per ounce.
These parts fetch a lot of money at scrap metal or recycling facilities, especially now during a time when supply chain issues continue. Catalytic converters could be worth several hundred to several thousand dollars, although sometimes they can also go for just $50, according to industry experts.
The pandemic’s socioeconomic impact has also spurred theft and opportunity, according to NICB.
“We have seen a significant increase during the pandemic. As the value of the precious metals contained within the catalytic converters continues to increase, so do the number of thefts of these devices. There is a clear connection between times of crisis, limited resources, and disruption of the supply chain that drives investors towards these precious metals,” said NICB President & CEO David Glawe.
What vehicles and states are most at risk?
Thieves target bigger vehicles like large pickups and delivery vehicles because their undercarriage is higher from the ground and provides easier reach to the catalytic converter, NICB notes. Progressive says on its website that newer cars whose parts would likely in better condition are more sought after by thieves, as are SUVs, which have a higher ground clearance. These thefts of the part, which can look like an oversized cheese grater from underneath the car, happen when the vehicles are stored in fleets in open areas at night, allowing the thieves to steal many efficiently.
“It only takes a few minutes for a thief to steal a catalytic converter, so multiple catalytic converters can be stolen in a relatively short amount of time,” Progressive stated.
Toyota Priuses and other hybrids are especially attractive to parts thieves. Priuses boast two catalytic converters as a hybrid, according to NICB and as a hybrid, these two converters usually experience less corrosion per mile than other cars—upping the value of their precious metal parts. Other targeted or susceptible hybrid models include Honda Jazz, Toyota Auris, and Lexus RX no matter the make or model year, according to Allstate.
The top 5 states in catalytic converter theft, as ranked by State Farm’s experience with claims, is led by California, which counted for more than 3 out of 10 claims being filed, followed by Texas, Minnesota, Washington and Illinois. State Farm called the situation in Texas “dire,” noting during 2020 there were 445 catalytic converter thefts reported by State Farm customers but in the first half of 2021, that number “ballooned” almost 210% to 1,380.”
The thefts tend to rise more sharply at the end of summer and through December, then drop back in January, according to data from the NICB and presented in a chart by the APCIA in its presentation.
Some states are taking action
Ten states passed laws in 2021 to tamp down the market for catalytic converters by requiring multiple forms of personal identifying information for anyone trying to sell used converters, including proof of vehicle ownership, according to the NICB. Others, like Washington State where the theft is rampant, could follow, as legislation has been introduced.
Tips from experts for avoiding theft and receiving compensation for stolen parts
Install a sensitive alarm system.Engrave your vehicle's VIN number on the catalytic converter. Park in well-lit areas or garages.NICB advises car owners to install catalytic converter anti-theft devices available from various manufacturers.Contact local law enforcement if your catalytic converter is stolen—this helps with measuring the trend.If the catalytic converter has been stolen, you might hear a loud muffler disconnection sound, smell unclean exhaust exiting and feel a lack of acceleration. State Farm calls it a loud, "weird" noise. It can be dangerous to drive without one, insurers warn.To be able to file an insurance claim in the future, talk to your agent about switching to comprehensive coverage if not already on your policy.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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"in the first 6 months of 2021",
"https://newsroom.statefarm.com/auto-claims-analysis-reveals-explosion-in-catalytic-converter-theft/"
],
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[
"according to Allstate",
"https://www.allstate.com/tr/car-insurance/catalytic-converter-theft.aspx"
],
[
"could follow",
"https://www.heraldnet.com/northwest/bill-to-reduce-catalytic-converter-thefts-introduced-in-state/"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/could-blockbuster-arm-and-instacart-ipos-signal-a-turnaround-in-the-sluggish-ipo-market-7971243 | Could Blockbuster Arm and Instacart IPOs Signal a Turnaround in the Sluggish IPO 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"> Blockbuster listings for Instacart-owner Maplebear (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.tradingview.com/chart/?symbol=NASDAQ%3ACART" rel="nofollow">CART</a>) today and Arm Holdings (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=arm">ARM</a>) last week may suggest that the sluggish <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering (IPO)</a> market may be turning. However, there may be reason to temper that optimism a little.
</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 global IPO market has struggled amid rising interest rates and market uncertainty, while proceeds and returns have substantially lagged their pre-pandemic averages, according to a Goldman Sachs report.
</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>Rising borrowing costs have quashed demand for U.S. IPOs, which haven't exceeded 25 for a single quarter over the past six.</li><li>Companies that have gone public since the pandemic have broadly underperformed the broader market, lagging the Russell 3000 by 48 percentage points over a 12-month period.</li><li>With interest rates expected to remain high for the foreseeable future, we could expect a sluggish IPO market in the months ahead.</li></ul></div></div></div>
<span class="heading-toc" id="toc-economic-conditions-weighed-on-lackluster-ipos"></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"> Economic Conditions Weighed On Lackluster IPOs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The global IPO market has struggled since <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> around the world started raising interest rates last year in an effort to tame the highest inflation in decades. Higher borrowing costs and tighter financial conditions led to a slowdown in corporate lending and more cautious investors. The S&P 500 fell into a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearmarket.asp">bear market</a> last year, while IPOs slowed to a trickle after the record-breaking activity of the first two years of 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 number of U.S. IPOs hasn't exceeded 25 for a single quarter over the past six, dating back to the start of last year. This contrasts with 84 IPOs in the fourth quarter of 2021, and a stunning 118 in the second quarter that year, according to KPMG.<span class="ql-inline-citation" data-cite="1"></span> In the first half of this year, 63 companies went public, compared to 416 through all of 2021.<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"> Companies that have gone public have raised just a fraction of the proceeds from two years ago. Proceeds for the latest quarter ended June totaled $6.6 billion, above a trough of $1.2 billion in the fourth quarter last year, but well below a peak of $40.7 billion in the second quarter of 2021.<span class="ql-inline-citation" data-cite="1"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<span class="heading-toc" id="toc-blockbuster-listings-for-instacart-and-arm-but-economic-challenges-remain"></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"> Blockbuster Listings For Instacart and Arm, But Economic Challenges Remain </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Shares of grocery-delivery firm Instacart jumped more than 40% at $42 per share in their Nasdaq debut, after the company set its IPO price at the top of its range at $30 per share. Last week, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ads.asp">American depositary shares (ADSs)</a> of Arm, a U.K.-based chip design company, had <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/british-chip-designer-arm-debuts-on-nasdaq-in-biggest-us-ipo-since-2021-7969648">skyrocketed almost 25%</a> and were worth nearly $63 by the end of trading after setting its IPO price at $51 per share.<span class="ql-inline-citation" data-cite="3"></span> Arm's was the biggest U.S. IPO since 2021.
</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"> With interest rates projected to rise or remain high for the foreseeable future, there is no guarantee that the IPO market won't revert to its sluggish ways in the months ahead.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<span class="heading-toc" id="toc-ipos-buoyed-by-large-investors-should-retail-investors-avoid-them"></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"> IPOs Buoyed By Large Investors, Should Retail Investors Avoid Them? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Not only have there been fewer IPOs, but companies that have gone public since the pandemic have largely underperformed the broader market. According to Goldman Sachs analysts, the median IPO in 2020-2021 lagged the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell_3000.asp">Russell 3000</a>—an index that comprises roughly 98% of the U.S. equity market—by 48 percentage points within 12 months after going public. Just 18% of IPOs have managed to outperform the broader market over this period.
</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"> It's important to note that it is extremely difficult for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailinvestor.asp">retail investors</a> to score shares in IPOs. A majority of the shares tend to get allocated to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional</a> or <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</a> investors. Retail investors are often only able to get their hands on shares after they begin trading on exchanges.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If there is a lot of hype surrounding the company, an IPO can quickly get <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oversubscribed.asp">oversubscribed</a> as even the largest investors clamor to get a piece of the company.
</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"> For example, Japanese conglomerate SoftBank, which has privately owned Arm since 2016, still has a 90.6% ownership stake in the company, meaning less than 10% of shares were available through the IPO.<span class="ql-inline-citation" data-cite="4"></span> Some of Arm's biggest clients include big tech companies like 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>), Amazon (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>), and Nvidia (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>), which rely heavily on Arm's chip designs to manufacture millions of semiconductors each year, and had expressed interest in purchasing up to $735 million of the company's stock collectively.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Similarly, institutional investors such as Norges Bank, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-careers/09/private-equity.asp">private equity</a> companies including TCV and Sequoia Capital, and <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> such as D1 Capital Partners and Valiant Capital Management all sought to purchase up to $400 million worth of shares in Instacart.<span class="ql-inline-citation" data-cite="6"></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> | Blockbuster listings for Instacart-owner Maplebear ([CART](https://www.tradingview.com/chart/?symbol=NASDAQ%3ACART)) today and Arm Holdings ([ARM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=arm)) last week may suggest that the sluggish [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) market may be turning. However, there may be reason to temper that optimism a little.
The global IPO market has struggled amid rising interest rates and market uncertainty, while proceeds and returns have substantially lagged their pre-pandemic averages, according to a Goldman Sachs report.
### Key Takeaways
* Rising borrowing costs have quashed demand for U.S. IPOs, which haven't exceeded 25 for a single quarter over the past six.
* Companies that have gone public since the pandemic have broadly underperformed the broader market, lagging the Russell 3000 by 48 percentage points over a 12-month period.
* With interest rates expected to remain high for the foreseeable future, we could expect a sluggish IPO market in the months ahead.
## Economic Conditions Weighed On Lackluster IPOs
The global IPO market has struggled since [central banks](https://www.investopedia.com/terms/c/centralbank.asp) around the world started raising interest rates last year in an effort to tame the highest inflation in decades. Higher borrowing costs and tighter financial conditions led to a slowdown in corporate lending and more cautious investors. The S&P 500 fell into a [bear market](https://www.investopedia.com/terms/b/bearmarket.asp) last year, while IPOs slowed to a trickle after the record-breaking activity of the first two years of the pandemic.
The number of U.S. IPOs hasn't exceeded 25 for a single quarter over the past six, dating back to the start of last year. This contrasts with 84 IPOs in the fourth quarter of 2021, and a stunning 118 in the second quarter that year, according to KPMG. In the first half of this year, 63 companies went public, compared to 416 through all of 2021.
Companies that have gone public have raised just a fraction of the proceeds from two years ago. Proceeds for the latest quarter ended June totaled $6.6 billion, above a trough of $1.2 billion in the fourth quarter last year, but well below a peak of $40.7 billion in the second quarter of 2021.
## Blockbuster Listings For Instacart and Arm, But Economic Challenges Remain
Shares of grocery-delivery firm Instacart jumped more than 40% at $42 per share in their Nasdaq debut, after the company set its IPO price at the top of its range at $30 per share. Last week, [American depositary shares (ADSs)](https://www.investopedia.com/terms/a/ads.asp) of Arm, a U.K.-based chip design company, had [skyrocketed almost 25%](https://www.investopedia.com/british-chip-designer-arm-debuts-on-nasdaq-in-biggest-us-ipo-since-2021-7969648) and were worth nearly $63 by the end of trading after setting its IPO price at $51 per share. Arm's was the biggest U.S. IPO since 2021.
With interest rates projected to rise or remain high for the foreseeable future, there is no guarantee that the IPO market won't revert to its sluggish ways in the months ahead.
## IPOs Buoyed By Large Investors, Should Retail Investors Avoid Them?
Not only have there been fewer IPOs, but companies that have gone public since the pandemic have largely underperformed the broader market. According to Goldman Sachs analysts, the median IPO in 2020-2021 lagged the [Russell 3000](https://www.investopedia.com/terms/r/russell_3000.asp)—an index that comprises roughly 98% of the U.S. equity market—by 48 percentage points within 12 months after going public. Just 18% of IPOs have managed to outperform the broader market over this period.
It's important to note that it is extremely difficult for [retail investors](https://www.investopedia.com/terms/r/retailinvestor.asp) to score shares in IPOs. A majority of the shares tend to get allocated to [institutional](https://www.investopedia.com/terms/i/institutionalinvestor.asp) or [high-net-worth](https://www.investopedia.com/terms/h/hnwi.asp) investors. Retail investors are often only able to get their hands on shares after they begin trading on exchanges.
If there is a lot of hype surrounding the company, an IPO can quickly get [oversubscribed](https://www.investopedia.com/terms/o/oversubscribed.asp) as even the largest investors clamor to get a piece of the company.
For example, Japanese conglomerate SoftBank, which has privately owned Arm since 2016, still has a 90.6% ownership stake in the company, meaning less than 10% of shares were available through the IPO. Some of Arm's biggest clients include big tech companies like Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)), Amazon ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)), and Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)), which rely heavily on Arm's chip designs to manufacture millions of semiconductors each year, and had expressed interest in purchasing up to $735 million of the company's stock collectively.
Similarly, institutional investors such as Norges Bank, [private equity](https://www.investopedia.com/articles/financial-careers/09/private-equity.asp) companies including TCV and Sequoia Capital, and [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) such as D1 Capital Partners and Valiant Capital Management all sought to purchase up to $400 million worth of shares in Instacart.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Blockbuster listings for Instacart-owner Maplebear (CART) today and Arm Holdings (ARM) last week may suggest that the sluggish initial public offering (IPO) market may be turning. However, there may be reason to temper that optimism a little.
The global IPO market has struggled amid rising interest rates and market uncertainty, while proceeds and returns have substantially lagged their pre-pandemic averages, according to a Goldman Sachs report.
Key Takeaways
Rising borrowing costs have quashed demand for U.S. IPOs, which haven't exceeded 25 for a single quarter over the past six.Companies that have gone public since the pandemic have broadly underperformed the broader market, lagging the Russell 3000 by 48 percentage points over a 12-month period.With interest rates expected to remain high for the foreseeable future, we could expect a sluggish IPO market in the months ahead.
Economic Conditions Weighed On Lackluster IPOs
The global IPO market has struggled since central banks around the world started raising interest rates last year in an effort to tame the highest inflation in decades. Higher borrowing costs and tighter financial conditions led to a slowdown in corporate lending and more cautious investors. The S&P 500 fell into a bear market last year, while IPOs slowed to a trickle after the record-breaking activity of the first two years of the pandemic.
The number of U.S. IPOs hasn't exceeded 25 for a single quarter over the past six, dating back to the start of last year. This contrasts with 84 IPOs in the fourth quarter of 2021, and a stunning 118 in the second quarter that year, according to KPMG. In the first half of this year, 63 companies went public, compared to 416 through all of 2021.
Companies that have gone public have raised just a fraction of the proceeds from two years ago. Proceeds for the latest quarter ended June totaled $6.6 billion, above a trough of $1.2 billion in the fourth quarter last year, but well below a peak of $40.7 billion in the second quarter of 2021.
Blockbuster Listings For Instacart and Arm, But Economic Challenges Remain
Shares of grocery-delivery firm Instacart jumped more than 40% at $42 per share in their Nasdaq debut, after the company set its IPO price at the top of its range at $30 per share. Last week, American depositary shares (ADSs) of Arm, a U.K.-based chip design company, had skyrocketed almost 25% and were worth nearly $63 by the end of trading after setting its IPO price at $51 per share. Arm's was the biggest U.S. IPO since 2021.
With interest rates projected to rise or remain high for the foreseeable future, there is no guarantee that the IPO market won't revert to its sluggish ways in the months ahead.
IPOs Buoyed By Large Investors, Should Retail Investors Avoid Them?
Not only have there been fewer IPOs, but companies that have gone public since the pandemic have largely underperformed the broader market. According to Goldman Sachs analysts, the median IPO in 2020-2021 lagged the Russell 3000—an index that comprises roughly 98% of the U.S. equity market—by 48 percentage points within 12 months after going public. Just 18% of IPOs have managed to outperform the broader market over this period.
It's important to note that it is extremely difficult for retail investors to score shares in IPOs. A majority of the shares tend to get allocated to institutional or high-net-worth investors. Retail investors are often only able to get their hands on shares after they begin trading on exchanges.
If there is a lot of hype surrounding the company, an IPO can quickly get oversubscribed as even the largest investors clamor to get a piece of the company.
For example, Japanese conglomerate SoftBank, which has privately owned Arm since 2016, still has a 90.6% ownership stake in the company, meaning less than 10% of shares were available through the IPO. Some of Arm's biggest clients include big tech companies like Apple (AAPL), Amazon (AMZN), and Nvidia (NVDA), which rely heavily on Arm's chip designs to manufacture millions of semiconductors each year, and had expressed interest in purchasing up to $735 million of the company's stock collectively.
Similarly, institutional investors such as Norges Bank, private equity companies including TCV and Sequoia Capital, and hedge funds such as D1 Capital Partners and Valiant Capital Management all sought to purchase up to $400 million worth of shares in Instacart.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/terms/a/average-propensity-to-consume.asp | Average Propensity to Consumer (APC) Meaning & 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-average-propensity-to-consume"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Average Propensity to Consume? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.
</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 either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/household_income.asp">household income</a>, or earnings.
</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>Income, whether individual or national, must be either spent or saved.</li><li>The average propensity to consume is the percentage of income spent, while the average propensity to save is the percentage of income saved.</li><li>Higher average propensity to consume signals greater economic activity as consumers are demanding goods and services.</li><li>Alternatively, lower average propensity signals a slowing economy as less goods are needed and job stability is at risk.</li><li>Average propensity of consumption is most informational when tracked over time or compared across nations or individuals. </li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-average-propensity-to-consume"></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 Average Propensity to Consume </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> From the broader economic view, a high average propensity to consume is generally good for the economy. When the average propensity to consume is high, consumers are saving less and spending more on goods or services. This increased demand drives economic growth, business expansion, and broad employment.
</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"> Low-income households are often seen as having a higher average propensity to consume than high-income households. Low-income households may be forced to spend their entire income on necessities with minimal disposable income remaining to save. Alternatively, high-income households with higher cash flow after their necessities are met typically have a relatively lower average propensity to consume.
</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"> Economists often gauge economy forecasts on actions by the middle-income households. The spending and savings patterns of this demographic often indicate a degree of confidence or pessimism about their own personal financial situations and the economy as a whole.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>When annotated as a decimal, average propensity to consume ranges from zero to one. At zero (or 0%), all income is being saved. At one (or 100%), all income is being consumed.</p></div></div></div>
<span class="heading-toc" id="toc-propensity-to-consume-vs-propensity-to-save"></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"> Propensity to Consume vs. Propensity to Save </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The sum of the average propensity to consume and the average propensity to save is always equivalent to one. A household or a nation must either spend or save all of its income.
</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 inverse of the average propensity to consume is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/average-propensity-to-save.asp">average propensity to save</a> (APS). That figure is simply the total of income minus spending. The result is known as the savings ratio.
</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"> Notably, the savings ratio is normally based on its percentage of disposable income, or after-tax income. An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.
</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-example-of-average-propensity-to-consume"></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"> Example of Average Propensity to Consume </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Assume a nation's economy has a <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</a> (GDP) equivalent to its disposable income of $500 billion for the previous year. The total savings of the economy was $300 billion, and the rest was spent on goods and services.
</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 nation's APS is calculated to be 0.60, or $300 billion/$500 billion. This indicates the economy allocated 60% of its disposable income to savings. The average propensity to consume is calculated to be 0.40, or (1 - 0.60). Therefore, the nation spent 40% of its GDP on goods and services.
</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"> APS can include saving for retirement, a home purchase, and other long-term investments. As such, it can be a proxy for national financial health.
</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-note" 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 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>According to the Bureau of Economic Analysis, the average household in the United States saved 6.2% of their disposable income in March 2022. This is over 2% lower than just three months prior.<span class="ql-inline-citation" data-cite="1"></span></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_33-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp">marginal propensity to consume</a> (MPC) is a related concept. It measures the change in the average propensity to consume.
</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"> Assume that the nation in the previous example increased its GDP to $700 billion and its consumption of goods and services rose to $375 billion. The economy's average propensity to consume increased to 53.57%.
</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 nation's consumption increased from $200 billion to $375 billion. Alternatively, the nation's GDP increased from $500 billion to $700 billion. The nation's marginal propensity to consume is 87.5% ($375 billion - $200 billion) / ($700 billion - $500 billion). The marginal propensity measures the directional trend of how an entity is utilizing its money. In this case, 87.5% of new growth was further consumed.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-what-is-average-propensity-to-consume"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Average Propensity to Consume?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Average propensity to consume is an economic indicator of how much income is spent. A specific entity is selected such as an individual, an income class, or an entire country. Average propensity to consume measures how much money is saved compared to spent.</p><p>Average propensity to consume is used by economists to forecast future economic growth. When average propensity to consume is higher, more people are spending more money. This drives economic growth through product demand and job creation.</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-is-average-propensity-to-consume-measured"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is Average Propensity to Consume Measured?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Average propensity to consume may be reported as a percent (60% of income is consumed) or as a decimal (average consumption is 0.6). Average propensity to consume is also generally most useful when compared against itself over time or across entities. For example, the average propensity to consume for a United States citizen could be tracked over time or compared against Canadian citizens.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-how-do-i-calculate-average-propensity-to-consume"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Calculate Average Propensity to Consume?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Average propensity to consume is calculated by dividing an entity's consumption by the entity's total income. It is a ratio between what is spent and what is earned.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-what-does-average-propensity-to-consume-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Average Propensity to Consume Mean?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Average propensity to consume is an economic measurement of how much income a specific entity spends. That entity may be an individual or a country. If an entity has a higher average propensity to consume, it means a higher proportion of their income is used to buy things as opposed to save for the future.</p></div>
</div></div> | ## What Is Average Propensity to Consume?
Average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.
In either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average [household income](https://www.investopedia.com/terms/h/household_income.asp), or earnings.
### Key Takeaways
* Income, whether individual or national, must be either spent or saved.
* The average propensity to consume is the percentage of income spent, while the average propensity to save is the percentage of income saved.
* Higher average propensity to consume signals greater economic activity as consumers are demanding goods and services.
* Alternatively, lower average propensity signals a slowing economy as less goods are needed and job stability is at risk.
* Average propensity of consumption is most informational when tracked over time or compared across nations or individuals.
## Understanding Average Propensity to Consume
From the broader economic view, a high average propensity to consume is generally good for the economy. When the average propensity to consume is high, consumers are saving less and spending more on goods or services. This increased demand drives economic growth, business expansion, and broad employment.
Low-income households are often seen as having a higher average propensity to consume than high-income households. Low-income households may be forced to spend their entire income on necessities with minimal disposable income remaining to save. Alternatively, high-income households with higher cash flow after their necessities are met typically have a relatively lower average propensity to consume.
Economists often gauge economy forecasts on actions by the middle-income households. The spending and savings patterns of this demographic often indicate a degree of confidence or pessimism about their own personal financial situations and the economy as a whole.
###
When annotated as a decimal, average propensity to consume ranges from zero to one. At zero (or 0%), all income is being saved. At one (or 100%), all income is being consumed.
## Propensity to Consume vs. Propensity to Save
The sum of the average propensity to consume and the average propensity to save is always equivalent to one. A household or a nation must either spend or save all of its income.
The inverse of the average propensity to consume is the [average propensity to save](https://www.investopedia.com/terms/a/average-propensity-to-save.asp) (APS). That figure is simply the total of income minus spending. The result is known as the savings ratio.
Notably, the savings ratio is normally based on its percentage of disposable income, or after-tax income. An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.
## Example of Average Propensity to Consume
Assume a nation's economy has a [gross domestic product](https://www.investopedia.com/terms/g/gdp.asp) (GDP) equivalent to its disposable income of $500 billion for the previous year. The total savings of the economy was $300 billion, and the rest was spent on goods and services.
The nation's APS is calculated to be 0.60, or $300 billion/$500 billion. This indicates the economy allocated 60% of its disposable income to savings. The average propensity to consume is calculated to be 0.40, or (1 - 0.60). Therefore, the nation spent 40% of its GDP on goods and services.
APS can include saving for retirement, a home purchase, and other long-term investments. As such, it can be a proxy for national financial health.
###
According to the Bureau of Economic Analysis, the average household in the United States saved 6.2% of their disposable income in March 2022. This is over 2% lower than just three months prior.
## Special Considerations
The [marginal propensity to consume](https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp) (MPC) is a related concept. It measures the change in the average propensity to consume.
Assume that the nation in the previous example increased its GDP to $700 billion and its consumption of goods and services rose to $375 billion. The economy's average propensity to consume increased to 53.57%.
The nation's consumption increased from $200 billion to $375 billion. Alternatively, the nation's GDP increased from $500 billion to $700 billion. The nation's marginal propensity to consume is 87.5% ($375 billion - $200 billion) / ($700 billion - $500 billion). The marginal propensity measures the directional trend of how an entity is utilizing its money. In this case, 87.5% of new growth was further consumed.
## What Is Average Propensity to Consume?
Average propensity to consume is an economic indicator of how much income is spent. A specific entity is selected such as an individual, an income class, or an entire country. Average propensity to consume measures how much money is saved compared to spent.
Average propensity to consume is used by economists to forecast future economic growth. When average propensity to consume is higher, more people are spending more money. This drives economic growth through product demand and job creation.
## How Is Average Propensity to Consume Measured?
Average propensity to consume may be reported as a percent (60% of income is consumed) or as a decimal (average consumption is 0.6). Average propensity to consume is also generally most useful when compared against itself over time or across entities. For example, the average propensity to consume for a United States citizen could be tracked over time or compared against Canadian citizens.
## How Do I Calculate Average Propensity to Consume?
Average propensity to consume is calculated by dividing an entity's consumption by the entity's total income. It is a ratio between what is spent and what is earned.
## What Does Average Propensity to Consume Mean?
Average propensity to consume is an economic measurement of how much income a specific entity spends. That entity may be an individual or a country. If an entity has a higher average propensity to consume, it means a higher proportion of their income is used to buy things as opposed to save for the future.
| What Is Average Propensity to Consume?
Average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.
In either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average household income, or earnings.
Key Takeaways
Income, whether individual or national, must be either spent or saved.The average propensity to consume is the percentage of income spent, while the average propensity to save is the percentage of income saved.Higher average propensity to consume signals greater economic activity as consumers are demanding goods and services.Alternatively, lower average propensity signals a slowing economy as less goods are needed and job stability is at risk.Average propensity of consumption is most informational when tracked over time or compared across nations or individuals.
Understanding Average Propensity to Consume
From the broader economic view, a high average propensity to consume is generally good for the economy. When the average propensity to consume is high, consumers are saving less and spending more on goods or services. This increased demand drives economic growth, business expansion, and broad employment.
Low-income households are often seen as having a higher average propensity to consume than high-income households. Low-income households may be forced to spend their entire income on necessities with minimal disposable income remaining to save. Alternatively, high-income households with higher cash flow after their necessities are met typically have a relatively lower average propensity to consume.
Economists often gauge economy forecasts on actions by the middle-income households. The spending and savings patterns of this demographic often indicate a degree of confidence or pessimism about their own personal financial situations and the economy as a whole.
When annotated as a decimal, average propensity to consume ranges from zero to one. At zero (or 0%), all income is being saved. At one (or 100%), all income is being consumed.
Propensity to Consume vs. Propensity to Save
The sum of the average propensity to consume and the average propensity to save is always equivalent to one. A household or a nation must either spend or save all of its income.
The inverse of the average propensity to consume is the average propensity to save (APS). That figure is simply the total of income minus spending. The result is known as the savings ratio.
Notably, the savings ratio is normally based on its percentage of disposable income, or after-tax income. An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.
Example of Average Propensity to Consume
Assume a nation's economy has a gross domestic product (GDP) equivalent to its disposable income of $500 billion for the previous year. The total savings of the economy was $300 billion, and the rest was spent on goods and services.
The nation's APS is calculated to be 0.60, or $300 billion/$500 billion. This indicates the economy allocated 60% of its disposable income to savings. The average propensity to consume is calculated to be 0.40, or (1 - 0.60). Therefore, the nation spent 40% of its GDP on goods and services.
APS can include saving for retirement, a home purchase, and other long-term investments. As such, it can be a proxy for national financial health.
According to the Bureau of Economic Analysis, the average household in the United States saved 6.2% of their disposable income in March 2022. This is over 2% lower than just three months prior.
Special Considerations
The marginal propensity to consume (MPC) is a related concept. It measures the change in the average propensity to consume.
Assume that the nation in the previous example increased its GDP to $700 billion and its consumption of goods and services rose to $375 billion. The economy's average propensity to consume increased to 53.57%.
The nation's consumption increased from $200 billion to $375 billion. Alternatively, the nation's GDP increased from $500 billion to $700 billion. The nation's marginal propensity to consume is 87.5% ($375 billion - $200 billion) / ($700 billion - $500 billion). The marginal propensity measures the directional trend of how an entity is utilizing its money. In this case, 87.5% of new growth was further consumed.
What Is Average Propensity to Consume?
Average propensity to consume is an economic indicator of how much income is spent. A specific entity is selected such as an individual, an income class, or an entire country. Average propensity to consume measures how much money is saved compared to spent.Average propensity to consume is used by economists to forecast future economic growth. When average propensity to consume is higher, more people are spending more money. This drives economic growth through product demand and job creation.
How Is Average Propensity to Consume Measured?
Average propensity to consume may be reported as a percent (60% of income is consumed) or as a decimal (average consumption is 0.6). Average propensity to consume is also generally most useful when compared against itself over time or across entities. For example, the average propensity to consume for a United States citizen could be tracked over time or compared against Canadian citizens.
How Do I Calculate Average Propensity to Consume?
Average propensity to consume is calculated by dividing an entity's consumption by the entity's total income. It is a ratio between what is spent and what is earned.
What Does Average Propensity to Consume Mean?
Average propensity to consume is an economic measurement of how much income a specific entity spends. That entity may be an individual or a country. If an entity has a higher average propensity to consume, it means a higher proportion of their income is used to buy things as opposed to save for the future.
| [
[
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],
[
"average propensity to save",
"https://www.investopedia.com/terms/a/average-propensity-to-save.asp"
],
[
"gross domestic product",
"https://www.investopedia.com/terms/g/gdp.asp"
],
[
"marginal propensity to consume",
"https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp"
]
] |
https://www.investopedia.com/2022-most-interesting-trades-6835843 | 2022 Most Interesting Trades | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 teamed up with our partner TradingView.com to create this list of the 10 most interesting trades from a tumultuous 2022. In what was a historic bear market in almost all global asset classes—stocks, cryptocurrency, bonds, and just about everything else was down—the majority of these trades are on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">short</a> side.
</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"> Energy was one of the few sectors that actually posted a good year. Another outperformer was the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/strongweakdollar.asp">U.S. dollar (USD)</a>. We recap it all below, including charts that illustrate the drama of each trade, stats about each, and key takeaways heading into 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_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>2022 was a tumultuous year marked by high volatility in the stock market.</li><li>Prices were down over 20% (and often a lot more) in most asset classes. A drop of 20% typically signifies a bear market.</li><li>Energy was the best-performing sector in the S&P 500.</li><li>There were notable blow-ups in 2022, including FTX Trading Ltd., the Bahamas-based cryptocurrency exchange.</li><li>2022 was a good year to go short in many sectors, securities, and asset classes.</li></ul></div></div></div>
<span class="heading-toc" id="toc-short-luna"></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"> Short Luna </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> When <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terrausd-crash-shows-risks-of-algorithmic-stablecoins-5272010">TerraUSD (UST)</a>—the flawed stablecoin at the center of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terra-5209502">Terra</a> ecosystem—depegged from the U.S. dollar in May this year, that led to a $60 billion wipeout and the complete collapse of one of the largest hedge funds in the crypto space: <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-hedge-fund-three-arrows-capital-enters-liquidation-5499238">Three Arrows Capital</a>. Luna, the Layer 1 token at the center of the ecosystem, ended up dropping to zero value from $86 in just under a week. This event had contagion effects that affected the whole industry and led to hundreds of high-profile bankruptcies, insolvencies, suspended withdrawals, and more.<span class="ql-inline-citation" data-cite="1"></span><br/>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-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">
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<img alt="2022 price chart for Luna, the stablecoin at the heart of Terra Ecosystem" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/a8R3miPMw3WybXZcXe8So2ccxVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart1-f4d7c46065564a4f95153b8bb6dc2832.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/a8R3miPMw3WybXZcXe8So2ccxVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart1-f4d7c46065564a4f95153b8bb6dc2832.png" data-srcset="https://www.investopedia.com/thmb/Pmia0YPWLTwpthKTiI6qHU2GoR4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart1-f4d7c46065564a4f95153b8bb6dc2832.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_1-0" width="2565"/>
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<img alt="2022 price chart for Luna, the stablecoin at the heart of Terra Ecosystem" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/a8R3miPMw3WybXZcXe8So2ccxVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart1-f4d7c46065564a4f95153b8bb6dc2832.png" srcset="https://www.investopedia.com/thmb/Pmia0YPWLTwpthKTiI6qHU2GoR4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart1-f4d7c46065564a4f95153b8bb6dc2832.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-long-xom"></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"> Long XOM </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-exxonmobil-makes-money-5116766">ExxonMobil</a> and other major oil companies benefited from higher oil prices in 2022, as chronic global underinvestment in processing & extraction facilities in the last few years led to a spike in prices as post-pandemic demand for energy recovered more quickly than many expected. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/new-us-sanctions-and-bans-on-investments-in-russia-5225120">sanctions on Russia</a> earlier this year also exacerbated global supply shortages and led to soaring profits for ExxonMobil and its peers.<span class="ql-inline-citation" data-cite="1"></span>
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<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-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_14-0"> <div class="figure-media">
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<img alt="Chart of 2022 stock prices for ExxonMobil" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/_83BowHN6lekJ3S7-kUvRqnf3OQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart2-c783dfafc61441cd929c94e70c1aefb5.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/_83BowHN6lekJ3S7-kUvRqnf3OQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart2-c783dfafc61441cd929c94e70c1aefb5.png" data-srcset="https://www.investopedia.com/thmb/MYdaM4XrnZUbB_IqVgq4Jj9p0xg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart2-c783dfafc61441cd929c94e70c1aefb5.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_2-0" width="2565"/>
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<img alt="Chart of 2022 stock prices for ExxonMobil" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/_83BowHN6lekJ3S7-kUvRqnf3OQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart2-c783dfafc61441cd929c94e70c1aefb5.png" srcset="https://www.investopedia.com/thmb/MYdaM4XrnZUbB_IqVgq4Jj9p0xg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart2-c783dfafc61441cd929c94e70c1aefb5.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-long-us-dollar"></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"> Long U.S. Dollar </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The dollar experienced one of its strongest years ever as the Fed was the first major central bank to begin tackling the problem of persistent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a>. As the federal funds rate was hiked over the course of 2022, USD interest rates became more and more attractive versus global counterparts, leading to a massive shift in global capital, and impressive outperformance for USD holders.<span class="ql-inline-citation" data-cite="1"></span>
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<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-landscape figure-high-res" id="mntl-sc-block_18-0"> <div class="figure-media">
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<img alt="Chart showing the underperformance of GBP and the corresponding strength of the U.S. dollar" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/x-JU1tvUVm9FKnR942nTDSzCW00=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart3-6c74c8a2eb4a4675824b7d9055fbbb90.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/x-JU1tvUVm9FKnR942nTDSzCW00=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart3-6c74c8a2eb4a4675824b7d9055fbbb90.png" data-srcset="https://www.investopedia.com/thmb/dtBxE426ltOxXmb2PLGszhoY1fk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart3-6c74c8a2eb4a4675824b7d9055fbbb90.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_3-0" width="2565"/>
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<img alt="Chart showing the underperformance of GBP and the corresponding strength of the U.S. dollar" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/x-JU1tvUVm9FKnR942nTDSzCW00=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart3-6c74c8a2eb4a4675824b7d9055fbbb90.png" srcset="https://www.investopedia.com/thmb/dtBxE426ltOxXmb2PLGszhoY1fk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart3-6c74c8a2eb4a4675824b7d9055fbbb90.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_3-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-short-ftt"></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"> Short FTT </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Investors in FTT, the native token of the now-failed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ftx-exchange-5200842">FTX</a> cryptocurrency exchange, have had a rough year. Throughout most of 2022, general <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-winter-5496605">crypto malaise</a> hurt the token as reduced trading volumes and profits from FTX led to lower buy-and-<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/cryptocurrency-burning-can-it-manage-inflation/">burn</a> numbers. Then, in early November, whispers began that FTX wouldn’t be able to back withdrawals for users. Over the course of the next week and a half, the value of FTT dropped more than 90% as it became clear that FTX had lent user deposits to other ventures related to FTX founder and now-former CEO <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/who-is-sam-bankman-fried-6830274">Sam Bankman-Fried</a> and used FTT to backstop users' deposits. As the price fell, the house of cards came tumbling down, rendering FTT ostensibly worthless.<span class="ql-inline-citation" data-cite="1"></span>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
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<img alt="Chart showing the collapse of FTT, the token of the FTX exchange" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/J9m0DvX2zdRh7EBSJMCl6FDHK9E=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart4-afbddcb85d694a849456fcb5cd1c2a0a.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/J9m0DvX2zdRh7EBSJMCl6FDHK9E=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart4-afbddcb85d694a849456fcb5cd1c2a0a.png" data-srcset="https://www.investopedia.com/thmb/i3sdXdLr_tyLUQzUBdiS_0oJ09w=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart4-afbddcb85d694a849456fcb5cd1c2a0a.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_4-0" width="2565"/>
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<img alt="Chart showing the collapse of FTT, the token of the FTX exchange" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/J9m0DvX2zdRh7EBSJMCl6FDHK9E=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart4-afbddcb85d694a849456fcb5cd1c2a0a.png" srcset="https://www.investopedia.com/thmb/i3sdXdLr_tyLUQzUBdiS_0oJ09w=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart4-afbddcb85d694a849456fcb5cd1c2a0a.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_4-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-short-arkk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> Short ARKK </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> As monetary tightening continued throughout 2022, many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthstock.asp">growth stocks</a> got hit as the present value of their future profits shrank inversely with rising risk-free interest rates. This was doubly true for high-growth companies that had no profits to speak of, like many of the holdings found within Cathie Wood's flagship exchange-traded fund (ETF), <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-express-podcast-episode-112-6828488">ARK Innovation ETF (ARKK)</a>. The share price of the ETF managed by Wood's investment firm, ARK Invest—famous for its early bet on Tesla and notable outperformance in 2020 and 2021—is currently down more than 60% on the year.<span class="ql-inline-citation" data-cite="1"></span>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_26-0"> <div class="figure-media">
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<img alt="2022 chart of Cathie Wood's flagship fund, ARKK Innovation ETF" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/OT1SCLuk-ntsQ9bl729mPvWKCw4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart5-f8dc97f3555e4f8987c53d541d892ae3.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/OT1SCLuk-ntsQ9bl729mPvWKCw4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart5-f8dc97f3555e4f8987c53d541d892ae3.png" data-srcset="https://www.investopedia.com/thmb/ysMhHb-zQda8OvEKAzoFHJI13X8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart5-f8dc97f3555e4f8987c53d541d892ae3.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_5-0" width="2565"/>
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<img alt="2022 chart of Cathie Wood's flagship fund, ARKK Innovation ETF" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/OT1SCLuk-ntsQ9bl729mPvWKCw4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart5-f8dc97f3555e4f8987c53d541d892ae3.png" srcset="https://www.investopedia.com/thmb/ysMhHb-zQda8OvEKAzoFHJI13X8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart5-f8dc97f3555e4f8987c53d541d892ae3.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_5-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-long-natural-gas"></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"> Long Natural Gas </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Natural gas has navigated a supply-and-demand situation similar to that of oil this year. Heightened demand, coupled with stable supply, led to gains for the commodity early in the year. However, with the advent of the conflict in Ukraine and sanctions on Russia, shortages, especially in Europe, led to skyrocketing prices as EU countries scrambled to figure out how they were going to provide energy to their residents in the winter ahead. The Nord Stream 2 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/russia-pipeline-halt-sends-natural-gas-prices-soaring-6543235">pipeline shutdown</a> early in the year and explosions in September also put further stress on supplies.<span class="ql-inline-citation" data-cite="1"></span>
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<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">
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<img alt="Chart showing the volatility in natural gas prices during 2022" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/BQhICmLYy5xOT-5l6E0mHAd3LaI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart6-c8919cee6c2e4861833300946f6572c9.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/BQhICmLYy5xOT-5l6E0mHAd3LaI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart6-c8919cee6c2e4861833300946f6572c9.png" data-srcset="https://www.investopedia.com/thmb/BgyDTte2Cyx-5NqxEpju6DA2Jmw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart6-c8919cee6c2e4861833300946f6572c9.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_6-0" width="2565"/>
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<img alt="Chart showing the volatility in natural gas prices during 2022" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/BQhICmLYy5xOT-5l6E0mHAd3LaI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart6-c8919cee6c2e4861833300946f6572c9.png" srcset="https://www.investopedia.com/thmb/BgyDTte2Cyx-5NqxEpju6DA2Jmw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart6-c8919cee6c2e4861833300946f6572c9.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_6-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-short-meta"></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"> Short META </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/120114/how-does-facebook-fb-make-money.asp">Meta</a>, formerly known as Facebook, has had a transformational year. Late in 2021 the company announced its rebranding to Meta, meant to underscore its business shift to augmented and virtual reality. This new focus meant it poured billions of dollars into research & development (R&D). It has had an uphill battle convincing the public that the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/metaverse-definition-5206578">metaverse</a> really is the next big thing. Investors haven’t taken the news well, dumping the stock and causing its price to plunge to as low as $88 from more than $300 per share. Also hurting performance are declining user numbers for Meta's legacy products and rising interest rates.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
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<img alt="Chart of Meta showing its poor stock performance in 2022" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/5MiuvB9JlotHYJ0PaleyFKJe93I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart7-b72f432a5a8b4bd5b3d0005849585701.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/5MiuvB9JlotHYJ0PaleyFKJe93I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart7-b72f432a5a8b4bd5b3d0005849585701.png" data-srcset="https://www.investopedia.com/thmb/9RH10iO7fqzNMt7-mMVHVZo4Uuw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart7-b72f432a5a8b4bd5b3d0005849585701.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_7-0" width="2565"/>
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<img alt="Chart of Meta showing its poor stock performance in 2022" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/5MiuvB9JlotHYJ0PaleyFKJe93I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart7-b72f432a5a8b4bd5b3d0005849585701.png" srcset="https://www.investopedia.com/thmb/9RH10iO7fqzNMt7-mMVHVZo4Uuw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart7-b72f432a5a8b4bd5b3d0005849585701.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_7-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-short-treasuryslong-yield"></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"> Short Treasurys/Long Yield </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As the Fed continued to raise rates in 2022, government bond yields rose in tandem. And, as bond yields rise, bond prices fall. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/031915/overview-tlt-etf.asp">TLT</a>, one of the biggest ETFs for long-dated government bonds, is down more than 28% on the year so far, underscoring one of the worst years for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0312/the-basics-of-bonds.aspx">bonds</a> on record.<span class="ql-inline-citation" data-cite="1"></span>
</p>
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<img alt="Chart showing the rise in Treasury yields during 2022" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/j5JDWbrpO0LtJvlleEXg8mOIer8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart8yield-32f3d0a3e1534f6c9e4577a5e25f9117.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/j5JDWbrpO0LtJvlleEXg8mOIer8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart8yield-32f3d0a3e1534f6c9e4577a5e25f9117.png" data-srcset="https://www.investopedia.com/thmb/HYFGS-dTaQ1aZ5SIknI4zYswSFc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart8yield-32f3d0a3e1534f6c9e4577a5e25f9117.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_8-0" width="2565"/>
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<img alt="Chart showing the rise in Treasury yields during 2022" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/j5JDWbrpO0LtJvlleEXg8mOIer8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart8yield-32f3d0a3e1534f6c9e4577a5e25f9117.png" srcset="https://www.investopedia.com/thmb/HYFGS-dTaQ1aZ5SIknI4zYswSFc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart8yield-32f3d0a3e1534f6c9e4577a5e25f9117.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_8-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-coinbase"></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"> Coinbase </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/coinbase-what-it-and-how-do-you-use-it/">Coinbase</a> launched its initial public offering (IPO) in April of 2021 at around $380 a share, making the premiere U.S.-based crypto exchange one of the most valuable financial companies in the world. Fast forward to 2022, though, and it’s a completely different story. Crypto’s total market capitalization peaked in November of 2021 as the Fed began hiking interest rates, and 2022 has been nothing short of disastrous for this asset class. The biggest crypto assets—<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/031416/bitcoin-vs-ethereum-driven-different-purposes.asp">Bitcoin and Ethereum</a>—are down more than 60% in value on the year, and the high trading volumes that defined the speculative frenzy in 2021 are now nowhere to be seen. Not to mention the Luna and FTX collapses (see Luna and FTT trades above), which are having far-reaching consequences across the crypto ecosystem. Coinbase is still kicking, but with a stock price that’s down more than 80% on the year.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
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<img alt="Chart showing the plunge in Coinbase's price during 2022" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/fX0_uedzYy_4IRF5ysL_HdGIE2o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart9-dc9fdee2d4d5491cab17fa874248f190.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/fX0_uedzYy_4IRF5ysL_HdGIE2o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart9-dc9fdee2d4d5491cab17fa874248f190.png" data-srcset="https://www.investopedia.com/thmb/IqS2zRIz2FaYiow4LfZLHzKU_d0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart9-dc9fdee2d4d5491cab17fa874248f190.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_9-0" width="2565"/>
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<img alt="Chart showing the plunge in Coinbase's price during 2022" class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/fX0_uedzYy_4IRF5ysL_HdGIE2o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart9-dc9fdee2d4d5491cab17fa874248f190.png" srcset="https://www.investopedia.com/thmb/IqS2zRIz2FaYiow4LfZLHzKU_d0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart9-dc9fdee2d4d5491cab17fa874248f190.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_9-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-beyond-meat"></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"> Beyond Meat </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Shares of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/navigating-beyond-meat-stock-s-broken-bubble-4774652">Beyond Meat (BYND)</a> also had a rough 2022, falling nearly 80% on the year. The plant-based meat behemoth’s losses have widened, and investors have questioned the basic unit economics of the company. As a result, the big brand’s market cap has suffered.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<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:76.4%;">
<img alt="Chart showing the steep fall in 2022 of the stock price of Beyond Meat Inc. (BYND) " class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/lBTNE6iK4OwsDc1KCTMJqGhVkBU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart10-55f656c87a8c453ab7fb93780b9995c8.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/lBTNE6iK4OwsDc1KCTMJqGhVkBU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart10-55f656c87a8c453ab7fb93780b9995c8.png" data-srcset="https://www.investopedia.com/thmb/cXL1eu0mYrU1vq0yNrX6Fr7AgYM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart10-55f656c87a8c453ab7fb93780b9995c8.png 750w" data-tracking-container="true" height="1960" id="mntl-sc-block-image_10-0" width="2565"/>
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<img alt="Chart showing the steep fall in 2022 of the stock price of Beyond Meat Inc. (BYND) " class="img--noscript universal-image__image" height="1960" sizes="750px" src="https://www.investopedia.com/thmb/lBTNE6iK4OwsDc1KCTMJqGhVkBU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart10-55f656c87a8c453ab7fb93780b9995c8.png" srcset="https://www.investopedia.com/thmb/cXL1eu0mYrU1vq0yNrX6Fr7AgYM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Chart10-55f656c87a8c453ab7fb93780b9995c8.png 750w" width="2565"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_10-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The bear market of 2022 proved to be a difficult place for most traders and investors trying to make money in the financial markets. Apart from the energy sector, which showed significant gains for the year, most of the other sectors of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp">Standard & Poor's (S&P) 500</a> were in the red for 2022. As this summary shows, even though there were few interesting trades to be found on the long side, there were more positive opportunities for those brave enough to take the short side.<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> | We teamed up with our partner TradingView.com to create this list of the 10 most interesting trades from a tumultuous 2022. In what was a historic bear market in almost all global asset classes—stocks, cryptocurrency, bonds, and just about everything else was down—the majority of these trades are on the [short](https://www.investopedia.com/terms/s/short.asp) side.
Energy was one of the few sectors that actually posted a good year. Another outperformer was the [U.S. dollar (USD)](https://www.investopedia.com/ask/answers/06/strongweakdollar.asp). We recap it all below, including charts that illustrate the drama of each trade, stats about each, and key takeaways heading into 2023.
### Key Takeaways
* 2022 was a tumultuous year marked by high volatility in the stock market.
* Prices were down over 20% (and often a lot more) in most asset classes. A drop of 20% typically signifies a bear market.
* Energy was the best-performing sector in the S&P 500.
* There were notable blow-ups in 2022, including FTX Trading Ltd., the Bahamas-based cryptocurrency exchange.
* 2022 was a good year to go short in many sectors, securities, and asset classes.
## Short Luna
When [TerraUSD (UST)](https://www.investopedia.com/terrausd-crash-shows-risks-of-algorithmic-stablecoins-5272010)—the flawed stablecoin at the center of the [Terra](https://www.investopedia.com/terra-5209502) ecosystem—depegged from the U.S. dollar in May this year, that led to a $60 billion wipeout and the complete collapse of one of the largest hedge funds in the crypto space: [Three Arrows Capital](https://www.investopedia.com/crypto-hedge-fund-three-arrows-capital-enters-liquidation-5499238). Luna, the Layer 1 token at the center of the ecosystem, ended up dropping to zero value from $86 in just under a week. This event had contagion effects that affected the whole industry and led to hundreds of high-profile bankruptcies, insolvencies, suspended withdrawals, and more.
![2022 price chart for Luna, the stablecoin at the heart of Terra Ecosystem]()
:max_bytes(150000):strip_icc()/Chart1-f4d7c46065564a4f95153b8bb6dc2832.png)
TradingView
## Long XOM
[ExxonMobil](https://www.investopedia.com/how-exxonmobil-makes-money-5116766) and other major oil companies benefited from higher oil prices in 2022, as chronic global underinvestment in processing & extraction facilities in the last few years led to a spike in prices as post-pandemic demand for energy recovered more quickly than many expected. The [sanctions on Russia](https://www.investopedia.com/new-us-sanctions-and-bans-on-investments-in-russia-5225120) earlier this year also exacerbated global supply shortages and led to soaring profits for ExxonMobil and its peers.
![Chart of 2022 stock prices for ExxonMobil]()
:max_bytes(150000):strip_icc()/Chart2-c783dfafc61441cd929c94e70c1aefb5.png)
TradingView
## Long U.S. Dollar
The dollar experienced one of its strongest years ever as the Fed was the first major central bank to begin tackling the problem of persistent [inflation](https://www.investopedia.com/terms/i/inflation.asp). As the federal funds rate was hiked over the course of 2022, USD interest rates became more and more attractive versus global counterparts, leading to a massive shift in global capital, and impressive outperformance for USD holders.
![Chart showing the underperformance of GBP and the corresponding strength of the U.S. dollar]()
:max_bytes(150000):strip_icc()/Chart3-6c74c8a2eb4a4675824b7d9055fbbb90.png)
TradingView
## Short FTT
Investors in FTT, the native token of the now-failed [FTX](https://www.investopedia.com/ftx-exchange-5200842) cryptocurrency exchange, have had a rough year. Throughout most of 2022, general [crypto malaise](https://www.investopedia.com/crypto-winter-5496605) hurt the token as reduced trading volumes and profits from FTX led to lower buy-and-[burn](https://www.investopedia.com/tech/cryptocurrency-burning-can-it-manage-inflation/) numbers. Then, in early November, whispers began that FTX wouldn’t be able to back withdrawals for users. Over the course of the next week and a half, the value of FTT dropped more than 90% as it became clear that FTX had lent user deposits to other ventures related to FTX founder and now-former CEO [Sam Bankman-Fried](https://www.investopedia.com/who-is-sam-bankman-fried-6830274) and used FTT to backstop users' deposits. As the price fell, the house of cards came tumbling down, rendering FTT ostensibly worthless.
![Chart showing the collapse of FTT, the token of the FTX exchange]()
:max_bytes(150000):strip_icc()/Chart4-afbddcb85d694a849456fcb5cd1c2a0a.png)
TradingView
## Short ARKK
As monetary tightening continued throughout 2022, many [growth stocks](https://www.investopedia.com/terms/g/growthstock.asp) got hit as the present value of their future profits shrank inversely with rising risk-free interest rates. This was doubly true for high-growth companies that had no profits to speak of, like many of the holdings found within Cathie Wood's flagship exchange-traded fund (ETF), [ARK Innovation ETF (ARKK)](https://www.investopedia.com/the-express-podcast-episode-112-6828488). The share price of the ETF managed by Wood's investment firm, ARK Invest—famous for its early bet on Tesla and notable outperformance in 2020 and 2021—is currently down more than 60% on the year.
![2022 chart of Cathie Wood's flagship fund, ARKK Innovation ETF]()
:max_bytes(150000):strip_icc()/Chart5-f8dc97f3555e4f8987c53d541d892ae3.png)
TradingView
## Long Natural Gas
Natural gas has navigated a supply-and-demand situation similar to that of oil this year. Heightened demand, coupled with stable supply, led to gains for the commodity early in the year. However, with the advent of the conflict in Ukraine and sanctions on Russia, shortages, especially in Europe, led to skyrocketing prices as EU countries scrambled to figure out how they were going to provide energy to their residents in the winter ahead. The Nord Stream 2 [pipeline shutdown](https://www.investopedia.com/russia-pipeline-halt-sends-natural-gas-prices-soaring-6543235) early in the year and explosions in September also put further stress on supplies.
![Chart showing the volatility in natural gas prices during 2022]()
:max_bytes(150000):strip_icc()/Chart6-c8919cee6c2e4861833300946f6572c9.png)
TradingView
## Short META
[Meta](https://www.investopedia.com/ask/answers/120114/how-does-facebook-fb-make-money.asp), formerly known as Facebook, has had a transformational year. Late in 2021 the company announced its rebranding to Meta, meant to underscore its business shift to augmented and virtual reality. This new focus meant it poured billions of dollars into research & development (R&D). It has had an uphill battle convincing the public that the [metaverse](https://www.investopedia.com/metaverse-definition-5206578) really is the next big thing. Investors haven’t taken the news well, dumping the stock and causing its price to plunge to as low as $88 from more than $300 per share. Also hurting performance are declining user numbers for Meta's legacy products and rising interest rates.
![Chart of Meta showing its poor stock performance in 2022]()
:max_bytes(150000):strip_icc()/Chart7-b72f432a5a8b4bd5b3d0005849585701.png)
TradingView
## Short Treasurys/Long Yield
As the Fed continued to raise rates in 2022, government bond yields rose in tandem. And, as bond yields rise, bond prices fall. [TLT](https://www.investopedia.com/articles/investing/031915/overview-tlt-etf.asp), one of the biggest ETFs for long-dated government bonds, is down more than 28% on the year so far, underscoring one of the worst years for [bonds](https://www.investopedia.com/financial-edge/0312/the-basics-of-bonds.aspx) on record.
![Chart showing the rise in Treasury yields during 2022]()
:max_bytes(150000):strip_icc()/Chart8yield-32f3d0a3e1534f6c9e4577a5e25f9117.png)
TradingView
## Coinbase
[Coinbase](https://www.investopedia.com/tech/coinbase-what-it-and-how-do-you-use-it/) launched its initial public offering (IPO) in April of 2021 at around $380 a share, making the premiere U.S.-based crypto exchange one of the most valuable financial companies in the world. Fast forward to 2022, though, and it’s a completely different story. Crypto’s total market capitalization peaked in November of 2021 as the Fed began hiking interest rates, and 2022 has been nothing short of disastrous for this asset class. The biggest crypto assets—[Bitcoin and Ethereum](https://www.investopedia.com/articles/investing/031416/bitcoin-vs-ethereum-driven-different-purposes.asp)—are down more than 60% in value on the year, and the high trading volumes that defined the speculative frenzy in 2021 are now nowhere to be seen. Not to mention the Luna and FTX collapses (see Luna and FTT trades above), which are having far-reaching consequences across the crypto ecosystem. Coinbase is still kicking, but with a stock price that’s down more than 80% on the year.
![Chart showing the plunge in Coinbase's price during 2022]()
:max_bytes(150000):strip_icc()/Chart9-dc9fdee2d4d5491cab17fa874248f190.png)
TradingView
## Beyond Meat
Shares of [Beyond Meat (BYND)](https://www.investopedia.com/navigating-beyond-meat-stock-s-broken-bubble-4774652) also had a rough 2022, falling nearly 80% on the year. The plant-based meat behemoth’s losses have widened, and investors have questioned the basic unit economics of the company. As a result, the big brand’s market cap has suffered.
![Chart showing the steep fall in 2022 of the stock price of Beyond Meat Inc. (BYND) ]()
:max_bytes(150000):strip_icc()/Chart10-55f656c87a8c453ab7fb93780b9995c8.png)
TradingView
## The Bottom Line
The bear market of 2022 proved to be a difficult place for most traders and investors trying to make money in the financial markets. Apart from the energy sector, which showed significant gains for the year, most of the other sectors of the [Standard & Poor's (S&P) 500](https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp) were in the red for 2022. As this summary shows, even though there were few interesting trades to be found on the long side, there were more positive opportunities for those brave enough to take the short side.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | We teamed up with our partner TradingView.com to create this list of the 10 most interesting trades from a tumultuous 2022. In what was a historic bear market in almost all global asset classes—stocks, cryptocurrency, bonds, and just about everything else was down—the majority of these trades are on the short side.
Energy was one of the few sectors that actually posted a good year. Another outperformer was the U.S. dollar (USD). We recap it all below, including charts that illustrate the drama of each trade, stats about each, and key takeaways heading into 2023.
Key Takeaways
2022 was a tumultuous year marked by high volatility in the stock market.Prices were down over 20% (and often a lot more) in most asset classes. A drop of 20% typically signifies a bear market.Energy was the best-performing sector in the S&P 500.There were notable blow-ups in 2022, including FTX Trading Ltd., the Bahamas-based cryptocurrency exchange.2022 was a good year to go short in many sectors, securities, and asset classes.
Short Luna
When TerraUSD (UST)—the flawed stablecoin at the center of the Terra ecosystem—depegged from the U.S. dollar in May this year, that led to a $60 billion wipeout and the complete collapse of one of the largest hedge funds in the crypto space: Three Arrows Capital. Luna, the Layer 1 token at the center of the ecosystem, ended up dropping to zero value from $86 in just under a week. This event had contagion effects that affected the whole industry and led to hundreds of high-profile bankruptcies, insolvencies, suspended withdrawals, and more.
TradingView
Long XOM
ExxonMobil and other major oil companies benefited from higher oil prices in 2022, as chronic global underinvestment in processing & extraction facilities in the last few years led to a spike in prices as post-pandemic demand for energy recovered more quickly than many expected. The sanctions on Russia earlier this year also exacerbated global supply shortages and led to soaring profits for ExxonMobil and its peers.
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Long U.S. Dollar
The dollar experienced one of its strongest years ever as the Fed was the first major central bank to begin tackling the problem of persistent inflation. As the federal funds rate was hiked over the course of 2022, USD interest rates became more and more attractive versus global counterparts, leading to a massive shift in global capital, and impressive outperformance for USD holders.
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Short FTT
Investors in FTT, the native token of the now-failed FTX cryptocurrency exchange, have had a rough year. Throughout most of 2022, general crypto malaise hurt the token as reduced trading volumes and profits from FTX led to lower buy-and-burn numbers. Then, in early November, whispers began that FTX wouldn’t be able to back withdrawals for users. Over the course of the next week and a half, the value of FTT dropped more than 90% as it became clear that FTX had lent user deposits to other ventures related to FTX founder and now-former CEO Sam Bankman-Fried and used FTT to backstop users' deposits. As the price fell, the house of cards came tumbling down, rendering FTT ostensibly worthless.
TradingView
Short ARKK
As monetary tightening continued throughout 2022, many growth stocks got hit as the present value of their future profits shrank inversely with rising risk-free interest rates. This was doubly true for high-growth companies that had no profits to speak of, like many of the holdings found within Cathie Wood's flagship exchange-traded fund (ETF), ARK Innovation ETF (ARKK). The share price of the ETF managed by Wood's investment firm, ARK Invest—famous for its early bet on Tesla and notable outperformance in 2020 and 2021—is currently down more than 60% on the year.
TradingView
Long Natural Gas
Natural gas has navigated a supply-and-demand situation similar to that of oil this year. Heightened demand, coupled with stable supply, led to gains for the commodity early in the year. However, with the advent of the conflict in Ukraine and sanctions on Russia, shortages, especially in Europe, led to skyrocketing prices as EU countries scrambled to figure out how they were going to provide energy to their residents in the winter ahead. The Nord Stream 2 pipeline shutdown early in the year and explosions in September also put further stress on supplies.
TradingView
Short META
Meta, formerly known as Facebook, has had a transformational year. Late in 2021 the company announced its rebranding to Meta, meant to underscore its business shift to augmented and virtual reality. This new focus meant it poured billions of dollars into research & development (R&D). It has had an uphill battle convincing the public that the metaverse really is the next big thing. Investors haven’t taken the news well, dumping the stock and causing its price to plunge to as low as $88 from more than $300 per share. Also hurting performance are declining user numbers for Meta's legacy products and rising interest rates.
TradingView
Short Treasurys/Long Yield
As the Fed continued to raise rates in 2022, government bond yields rose in tandem. And, as bond yields rise, bond prices fall. TLT, one of the biggest ETFs for long-dated government bonds, is down more than 28% on the year so far, underscoring one of the worst years for bonds on record.
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Coinbase
Coinbase launched its initial public offering (IPO) in April of 2021 at around $380 a share, making the premiere U.S.-based crypto exchange one of the most valuable financial companies in the world. Fast forward to 2022, though, and it’s a completely different story. Crypto’s total market capitalization peaked in November of 2021 as the Fed began hiking interest rates, and 2022 has been nothing short of disastrous for this asset class. The biggest crypto assets—Bitcoin and Ethereum—are down more than 60% in value on the year, and the high trading volumes that defined the speculative frenzy in 2021 are now nowhere to be seen. Not to mention the Luna and FTX collapses (see Luna and FTT trades above), which are having far-reaching consequences across the crypto ecosystem. Coinbase is still kicking, but with a stock price that’s down more than 80% on the year.
TradingView
Beyond Meat
Shares of Beyond Meat (BYND) also had a rough 2022, falling nearly 80% on the year. The plant-based meat behemoth’s losses have widened, and investors have questioned the basic unit economics of the company. As a result, the big brand’s market cap has suffered.
TradingView
The Bottom Line
The bear market of 2022 proved to be a difficult place for most traders and investors trying to make money in the financial markets. Apart from the energy sector, which showed significant gains for the year, most of the other sectors of the Standard & Poor's (S&P) 500 were in the red for 2022. As this summary shows, even though there were few interesting trades to be found on the long side, there were more positive opportunities for those brave enough to take the short side.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/cardless-and-simon-malls-partner-to-launch-credit-card-6752417 | Cardless and Simon Malls Partner to Launch Credit Card | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Fintech company Cardless and Simon Property Group have partnered to launch a new co-branded credit card, the Simon American Express Credit Card. The card, which does not yet have a launch date, will offer cardholders up to 5% cash back at participating retailers.
</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>Cardless and Simon Property Group will soon launch a new credit card for Simon shoppers.</li><li>The American Express card will offer accelerated rewards with select retailers and at Simon properties, as well as a sign-up bonus.</li><li>The new card will be the first credit card from Cardless to run on the American Express network.</li></ul></div></div></div>
<span class="heading-toc" id="toc-earn-extra-rewards-with-the-countrys-largest-mall-network"></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"> Earn Extra Rewards With the Country's Largest Mall Network </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Simon Property Group owns the largest network of shopping malls in the U.S.,<span class="ql-inline-citation" data-cite="1"></span> and soon consumers who shop at Simon properties regularly can take advantage of better rewards on their purchases. Once launched, the Simon American Express Credit Card will offer the following:
</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>Up to 5% cash back at participating Simon destination retailers and on select online purchases.</li><li>Up to 3% cash back on all other eligible purchases at Simon Malls, Mills, and Premium Outlets.</li><li>Up to 1.5% cash back on all other purchases.</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"> Additionally, new cardholders can earn $150 after spending $1,000 in the first 90 days with the card. Rewards can be redeemed for statement credits.<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"> It's unclear whether the "up to" language for the card's proposed rewards rates means cardholders may earn less than 1.5% back. Cardless also didn't mention whether the card would have an annual fee. If you're thinking about applying, be sure to review the credit card's terms and fine print when it officially launches to ensure that it's a good fit for you.<br/>
</p></div> | Fintech company Cardless and Simon Property Group have partnered to launch a new co-branded credit card, the Simon American Express Credit Card. The card, which does not yet have a launch date, will offer cardholders up to 5% cash back at participating retailers.
### Key Takeaways
* Cardless and Simon Property Group will soon launch a new credit card for Simon shoppers.
* The American Express card will offer accelerated rewards with select retailers and at Simon properties, as well as a sign-up bonus.
* The new card will be the first credit card from Cardless to run on the American Express network.
## Earn Extra Rewards With the Country's Largest Mall Network
Simon Property Group owns the largest network of shopping malls in the U.S., and soon consumers who shop at Simon properties regularly can take advantage of better rewards on their purchases. Once launched, the Simon American Express Credit Card will offer the following:
* Up to 5% cash back at participating Simon destination retailers and on select online purchases.
* Up to 3% cash back on all other eligible purchases at Simon Malls, Mills, and Premium Outlets.
* Up to 1.5% cash back on all other purchases.
Additionally, new cardholders can earn $150 after spending $1,000 in the first 90 days with the card. Rewards can be redeemed for statement credits.
It's unclear whether the "up to" language for the card's proposed rewards rates means cardholders may earn less than 1.5% back. Cardless also didn't mention whether the card would have an annual fee. If you're thinking about applying, be sure to review the credit card's terms and fine print when it officially launches to ensure that it's a good fit for you.
| Fintech company Cardless and Simon Property Group have partnered to launch a new co-branded credit card, the Simon American Express Credit Card. The card, which does not yet have a launch date, will offer cardholders up to 5% cash back at participating retailers.
Key Takeaways
Cardless and Simon Property Group will soon launch a new credit card for Simon shoppers.The American Express card will offer accelerated rewards with select retailers and at Simon properties, as well as a sign-up bonus.The new card will be the first credit card from Cardless to run on the American Express network.
Earn Extra Rewards With the Country's Largest Mall Network
Simon Property Group owns the largest network of shopping malls in the U.S., and soon consumers who shop at Simon properties regularly can take advantage of better rewards on their purchases. Once launched, the Simon American Express Credit Card will offer the following:
Up to 5% cash back at participating Simon destination retailers and on select online purchases.Up to 3% cash back on all other eligible purchases at Simon Malls, Mills, and Premium Outlets.Up to 1.5% cash back on all other purchases.
Additionally, new cardholders can earn $150 after spending $1,000 in the first 90 days with the card. Rewards can be redeemed for statement credits.
It's unclear whether the "up to" language for the card's proposed rewards rates means cardholders may earn less than 1.5% back. Cardless also didn't mention whether the card would have an annual fee. If you're thinking about applying, be sure to review the credit card's terms and fine print when it officially launches to ensure that it's a good fit for you.
| [] |
https://www.investopedia.com/articles/trading/05/011705.asp | Day Trading: The Basics and How to Get Started | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> There was a time years ago when the only people able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. The arrival of online trading, along with instantaneous dissemination of news, has leveled the playing—or should we say trading—field. The easy-to-use trading apps and 0% commissions of services like Robinhood, TD Ameritrade, and Charles Schwab have made it easier than ever for retail investors to attempt to trade like the pros.
</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"> Day trading can turn into a lucrative career (as long as you do it properly). But it can be challenging for novices—especially those who don't have a well-planned strategy. And be aware that even the most seasoned day traders can hit rough patches and experience losses.
</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"> So, what exactly is day trading, and how does it work?
</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>Day traders buy and sell stocks or other assets during the trading day in order to profit from the rapid fluctuations in prices.</li><li>Day trading employs a wide variety of techniques and strategies to capitalize on these perceived market inefficiencies.</li><li>Day trading is often informed by technical analysis of price movements and requires a high degree of self-discipline and objectivity.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-day-trading"></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 Day Trading? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Day trading is a fast-paced form of investing in which individuals buy and sell securities within the same day. The goal is to profit from short-term price movements in stocks, options, futures, currencies, and other assets. Day traders typically combine strategies and forms of analyses, including the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp"><strong>Technical analysis</strong></a>: Focuses on past prices and trading patterns to predict coming trends.</li>
<li><strong>Momentum trading</strong>: Capitalizes on short-term trends and reversals to capture quick gains.</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"> Unlike long-term investors, day traders are less concerned with the fundamental value of the securities and more focused on capturing immediate gains from market fluctuations.
</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"> The Attraction of Day Trading </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The appeal of day trading lies in its potential for quick profits. However, it comes with severe risks and requires a significant understanding of the markets. Successful day traders do the following well:
</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><strong>Stay informed</strong>: Monitor market headlines, economic reports, and other factors influencing stock and other asset prices throughout the day.</li>
<li><strong>Make quick decisions</strong>: Have the ability to make fast, informed decisions in a volatile market.</li>
<li><strong>Employ <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/082813/how-leverage-used-forex-trading.asp">leverage</a></strong>: Use borrowed funds to amplify potential profits, which proportionately magnifies potential losses.</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"> Because of these factors, day trading is not for inexperienced traders or those without the finances to absorb the potential losses.
</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"> Relevant Regulations To Know </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Understanding the regulatory environment around day trading is crucial. In the U.S., the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have specific rules for "pattern day traders." These include the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0">
<li><strong><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/patterndaytrader.asp">Pattern day trader</a> definition</strong>: Traders who execute four or more day trades within five business days.</li>
<li><strong>Margin requirements</strong>: Pattern day traders must always have a cash balance of at least $25,000 in their brokerage account.<span class="ql-inline-citation" data-cite="2"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> These regulations ensure that only those with enough resources and knowledge participate in this high-stakes activity.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<span class="heading-toc" id="toc-the-basics-of-day-trading"></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 Basics of Day Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Day trading is most commonly found in stock and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/11/why-trade-forex.asp">foreign exchange</a> (forex) markets, where currencies are traded.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements like releasing economic statistics, corporate earnings, or interest rate changes are subject to market expectations and market psychology. That is, markets react when those expectations are unmet or exceeded—usually with sudden, significant moves that can benefit day traders.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<span class="heading-toc" id="toc-how-to-start-day-trading"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> How to Start Day Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Professional day traders have in-depth knowledge of the marketplace, are well-established, and make a living from it. Here are the steps:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <li>Learn a good deal about the market and how to use fundamental and technical analysis.</li><li>Ensure you have enough capital to begin to meet regulations and, beyond that, so you're never putting more on the line than you can afford to lose.</li><li>Develop criteria for trading and stick with them.</li>
</ol>
<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"> Here are more details:
</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"> 1) Gain Lots of Market Knowledge and Experience </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Individuals who attempt to day trade without an understanding of market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentals.asp">fundamentals</a> often lose money. A working knowledge of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> and chart reading is a good start. But without a deep understanding of the market and its unique risks, charts can be deceiving.
</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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/090415/only-take-trade-if-it-passes-5step-test.asp">Do your due diligence</a> and understand the particular ins and outs of the products you trade.
</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"> 2) Make Sure to Have Sufficient Capital </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Wise day traders use only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskcapital.asp">risk capital</a> that they can afford to lose. This protects them from financial ruin and helps eliminate emotion from their trading decisions.
</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"> A large amount of capital is often necessary to capitalize effectively on intraday price movements, which can be in pennies or fractions of a cent.
</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"> Adequate cash is required for day traders who intend to use leverage in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaccount.asp">margin accounts</a>. Volatile market swings can trigger big margin calls on short notice.
</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"> 3) Learn Trading Discipline </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Many day traders end up losing money because they fail to make trades that meet their own criteria. As the saying goes, “Plan the trade and trade the plan.” Success is impossible without discipline.
</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"> To profit, day traders rely heavily on market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a>. A day trader may find a stock attractive if it moves a lot during the day. That could happen for a number of different reasons, including an earnings report, investor sentiment, or even general economic or company news.
</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"> Day traders also like stocks that are highly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquid</a> because that gives them the chance to change their position without altering the price of the stock. If a stock price moves higher, traders may take a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buy.asp">buy</a> position. If the price moves down, a trader may decide to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">sell short</a> so they can profit when it falls.
</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"> Regardless of what technique a day trader uses, they’re usually looking to trade a stock that moves (a lot).
</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-who-makes-a-living-by-day-trading"></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"> Who Makes a Living by Day Trading? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> There are two primary divisions of professional day traders: those who work alone, and/or those who work for a larger institution.
</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"> Most day traders who trade for a living work for large players like <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> and the proprietary trading desks of banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to counterparties, a trading desk, large amounts of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a> and leverage, and expensive analytical software.
</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"> These traders are typically looking for easy profits from arbitrage opportunities and news events. Their resources allow them to capitalize on these less risky day trades before individual traders can react.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-subheading__text"> The Solo Day Traders </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Individual traders often manage other people’s money or simply trade with their own. Few have access to a trading desk, but they often have strong ties to a brokerage due to the large amounts they spend on commissions and access to other resources.
</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"> However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades—combined with some leverage—to generate adequate profits on small price movements in highly liquid stocks.<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_74-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Day trading demands access to some of the most complex financial services and instruments in the marketplace. Day traders typically require all of the following:<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div>
<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"> Access to a Trading Desk </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> This is usually reserved for traders who work for larger institutions or those who manage large amounts of money.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> The trading or dealing desk provides these traders with instantaneous order execution, which is crucial. For example, when an acquisition is announced, day traders looking at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mergerarbitrage.asp">merger arbitrage</a> can place their orders before the rest of the market is able to take advantage of the price differential.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-subheading__text"> Financial Media Sources </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> News provides most of the opportunities. It is imperative to be the first to know when something significant happens.
</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"> The typical trading room has access to all of the leading newswires, constant coverage from news organizations, and software that constantly scans news sources for important stories.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_87-0"> <span class="mntl-sc-block-subheading__text"> Analytical Software </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> Trading software is an expensive necessity for most day traders. Those who rely on technical indicators or swing trades rely more on software than on news. This software may be characterized by the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0">
<li><strong>Automatic pattern recognition</strong>: This trading program identifies technical indicators like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flag.asp">flags</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/channel.asp">channels</a> or more complex indicators such as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/elliottwavetheory.asp">Elliott Wave</a> patterns.</li>
<li><strong>Genetic and neural applications</strong>:<strong> </strong>These programs use <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/06/neuralnetworks.asp">neural networks</a> and genetic algorithms to perfect trading systems and make more accurate predictions of future price movements.</li>
<li><strong>Broker integration</strong>: Some of these applications even interface directly with the brokerage, allowing for instantaneous and even automatic execution of trades. This eliminates emotion from trading and improves execution times.</li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/backtesting.asp"><strong>Backtesting</strong></a>: This allows traders to look at how a certain strategy would have performed in the past to predict more accurately how it will perform in the future. Keep in mind that past performance is not always indicative of future results.</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"> Combined, these tools provide traders with an edge over the rest of the marketplace.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div>
<span class="heading-toc" id="toc-day-trading-strategies"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_94-0"> <span class="mntl-sc-block-heading__text"> Day Trading Strategies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> A trader needs to have an edge over the rest of the market. Day traders use any of a number of strategies, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swingtrading.asp">swing trading</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrage.asp">arbitrage</a>, and trading news. They refine these strategies until they produce consistent profits and limit their losses.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> There also are some basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> Day traders use numerous intraday strategies. These strategies include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> <strong>Scalping</strong>:<strong> </strong>This strategy focuses on making many small profits on ephemeral price changes that occur throughout the day. Arbitrage is a type of scalping that seeks to profit from correcting perceived mispricings in the market.
</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"> <strong>Range/swing trading</strong>: This strategy uses predetermined support and resistance levels in prices to determine the trader's buy and sell decisions.
</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"> <strong>News-based trading</strong>: This strategy seizes trading prospects from the heightened volatility that occurs around news events or headlines as they come out. One type of news-based trading involves whether a merger or acquisition that has been announced will go through or not.
</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"> <strong>High-frequency trading</strong>: These strategies use sophisticated <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/algorithm.asp">algorithms</a> to exploit small or short-term market inefficiencies.<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_108-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_109-0"> <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">Day Trading Strategy Breakdown</th>
</tr>
<tr>
<th>Type</th>
<th>Risk</th>
<th>Reward</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Swing Trading</td>
<td>High</td>
<td>High</td>
</tr>
<tr>
<td>Arbitrage</td>
<td>Low</td>
<td>Medium</td>
</tr>
<tr>
<td>Trading News</td>
<td>Medium</td>
<td>Medium</td>
</tr>
<tr>
<td>Mergers/Acquisitions</td>
<td>Medium</td>
<td>High</td>
</tr>
<tr>
<td>HFT</td>
<td>Medium</td>
<td>High</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div>
<span class="heading-toc" id="toc-risks-of-day-trading"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_111-0"> <span class="mntl-sc-block-heading__text"> Risks of Day Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_112-0"> For the average investor, day trading can be a daunting proposition because of the number of risks involved. The U.S. <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) highlights some of the risks of day trading, which are summarized below:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> <li><strong>Be prepared to suffer severe financial losses</strong>: Day traders typically suffer severe financial losses in their first months of trading, and many never make a profit.</li><li><strong>Day trading is an extremely stressful full-time job</strong>: Watching dozens of ticker quotes and price fluctuations to spot fleeting market trends demands great concentration.</li><li><strong>Day traders depend heavily on borrowing money</strong>: Day-trading strategies use the leverage of borrowed money to make profits. Many day traders not only lose all of their own money; they wind up in debt.</li><li><strong>Don’t believe claims of easy profits</strong>: Watch out for hot tips and expert advice from newsletters and websites catering to day traders and remember that educational seminars and classes about day trading may not be objective.<span class="ql-inline-citation" data-cite="1"></span><br/></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div>
<span class="heading-toc" id="toc-should-you-start-day-trading"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_116-0"> <span class="mntl-sc-block-heading__text"> Should You Start Day Trading? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> If you're determined to start day trading, be prepared to commit to the following steps:
</p>
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<li>Make sure you come in with some knowledge of the trading world and a good idea of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a>, capital, and goals.</li>
<li>Be prepared to put in the time to practice and perfect your strategies.</li>
<li>Start small. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/day-trading/pick-stocks-intraday-trading/">Focus on a few stocks</a> rather than wearing yourself thin. Going all out will complicate your trading strategy and can mean big losses.</li>
<li>Stay cool and try to keep emotion out of your trades. Don't deviate from your plan.</li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_121-0"> If you follow these simple guidelines, you may be headed for a sustainable career in day trading.
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<span class="heading-toc" id="toc-day-trading-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_123-0"> <span class="mntl-sc-block-heading__text"> Day Trading Example </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> A day trade is exactly the same as any stock trade except that both the purchase of a stock and its sale occur within the same day, and sometimes within seconds of each other.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> For example, say a day trader has completed a technical analysis of a company called Intuitive Sciences Inc. (ISI). The analysis indicates that this stock, which is listed in the Nasdaq 100, shows a pattern of rising in price by at least 0.6% on most of the days when the NASDAQ is up more than 0.4%. The trader has reason to believe that this is going to be one of those days.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_128-0"> The trader buys 1,000 shares of ISI when the market opens, then waits until ISI reaches a particular price point, probably up 0.6%. The trader then immediately sells the entire holding in ISI.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_130-0"> This is a day trade. Obviously, the merits of ISI as an investment have nothing to do with the day trader's actions. A trend is being exploited.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_132-0"> What if ISI had bucked the trend and lost 0.8%? The trader will sell anyway and take the loss.
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<span class="heading-toc" id="toc-why-day-trading-is-controversial"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_134-0"> <span class="mntl-sc-block-heading__text"> Why Day Trading is Controversial </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_135-0"> <br/>The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_137-0"> Some people day-trade without sufficient knowledge. But there are day traders who make a successful living despite—or perhaps because of—the risks.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_139-0"> Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Moreover, many economists and financial practitioners argue that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/active-trading.asp">active trading</a> strategies of any kind tend to underperform a more basic passive <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index-investing.asp">index strategy</a> over time especially after fees and taxes are taken into account.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_141-0"> Profiting from day trading is possible, but the success rate is inherently lower because it is risky and requires considerable skill. And don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.
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<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-is-day-trading-profitable"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Day Trading Profitable?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Day trading can be profitable, but it's far from guaranteed. Many day traders end up losing money before calling it quits. Success in day trading requires a deep understanding of market dynamics, the ability to analyze and act on market data quickly, and strict discipline in risk management. The profitability of day trading depends on several factors, including the trader's skill, strategy, and the amount of capital they can invest. While some traders do achieve significant profits, it's important to note that the high-risk nature of day trading also means it's possible to incur substantial losses. Additionally, profitability can be affected by transaction costs, taxes, and the psychological pressure associated with this type of trading.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_145-0"><span class="heading-toc" id="toc-what-percentage-of-day-traders-are-profitable"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Percentage of Day Traders Are Profitable?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The percentage of day traders who achieve profitability is relatively low. Various studies and broker reports suggest that a small fraction of day traders consistently make profits over the long term. Estimates vary, but it's commonly accepted that only around 10% to 15% of day traders are successful over time.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="8"></span> This low success rate is attributed to the high risks, the need for substantial skill and experience, and the intense competition in the financial markets. Many aspiring day traders face significant losses in their early trading career, and only a few persist and learn the skills necessary to become profitable. This statistic underscores the importance of proper training, risk management, and realistic expectations when entering the world of day trading.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_147-0"><span class="heading-toc" id="toc-why-is-day-trading-so-hard"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is Day Trading So Hard?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Day trading is challenging due to its fast-paced nature and the complexity of the financial markets. It requires traders to make quick decisions based on real-time information, which can be overwhelming, especially in volatile market conditions. Traders must be adept at technical analysis, interpreting charts and patterns, and understanding how economic events influence market movements. Moreover, emotional control is crucial; day traders must avoid common pitfalls like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overtrading.asp">overtrading</a> or letting <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trading-psychology.asp">emotions</a> drive their decisions. The steep learning curve, combined with the need for discipline, consistent strategy, and the ability to handle losses, makes day trading a hard thing to succeed at.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_149-0"><span class="heading-toc" id="toc-what-is-the-first-rule-of-day-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the First Rule of Day Trading?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The so-called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/071414/day-trading-rules-rookies-dont-play-it-ear.asp">first rule of day trading</a> is never to hold onto a position when the market closes for the day. Win or lose, sell out. Most day traders make it a rule never to hold a losing position overnight in the hope that part or all of the losses can be recouped. For one thing, brokers have higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margin.asp">margin</a> requirements for overnight trades, and that means additional capital is required. There's a good reason for that. A stock can go down or up on overnight news, inflicting a bigger trading loss on the owners of shares.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_151-0"><span class="heading-toc" id="toc-how-does-pattern-day-trading-work"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Pattern Day Trading Work?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Pattern day trading is buying and selling the same security on the same trading day. FINRA defines a "pattern day trader" as any investor who executes four or more day trades within five business days once the number of day trades is more than 6% of the trades in the margin account for that period.<span class="ql-inline-citation" data-cite="12"></span> Pattern day traders must maintain a minimum account balance of $25,000 in cash and eligible securities. They also have access to a higher level of leverage, typically up to four times their maintenance margin excess. This means they can trade larger positions but also face more significant risks.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span></p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_153-0"> <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_154-0"> Day traders can earn big profits or pile up significant losses. Indeed, with the evidence showing that most day traders lose money over time, it's an extremely risky career choice. Day traders, both institutional and individual, would argue that they play an essential role in the marketplace by keeping the markets efficient and liquid. Though day trading will always be intriguing to individual investors, anyone considering it needs to acquire the knowledge, the resources, and the cash that it takes to have a chance at succeeding.
</p></div> | There was a time years ago when the only people able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. The arrival of online trading, along with instantaneous dissemination of news, has leveled the playing—or should we say trading—field. The easy-to-use trading apps and 0% commissions of services like Robinhood, TD Ameritrade, and Charles Schwab have made it easier than ever for retail investors to attempt to trade like the pros.
Day trading can turn into a lucrative career (as long as you do it properly). But it can be challenging for novices—especially those who don't have a well-planned strategy. And be aware that even the most seasoned day traders can hit rough patches and experience losses.
So, what exactly is day trading, and how does it work?
### Key Takeaways
* Day traders buy and sell stocks or other assets during the trading day in order to profit from the rapid fluctuations in prices.
* Day trading employs a wide variety of techniques and strategies to capitalize on these perceived market inefficiencies.
* Day trading is often informed by technical analysis of price movements and requires a high degree of self-discipline and objectivity.
## What Is Day Trading?
Day trading is a fast-paced form of investing in which individuals buy and sell securities within the same day. The goal is to profit from short-term price movements in stocks, options, futures, currencies, and other assets. Day traders typically combine strategies and forms of analyses, including the following:
* [**Technical analysis**](https://www.investopedia.com/terms/t/technicalanalysis.asp): Focuses on past prices and trading patterns to predict coming trends.
* **Momentum trading**: Capitalizes on short-term trends and reversals to capture quick gains.
Unlike long-term investors, day traders are less concerned with the fundamental value of the securities and more focused on capturing immediate gains from market fluctuations.
### The Attraction of Day Trading
The appeal of day trading lies in its potential for quick profits. However, it comes with severe risks and requires a significant understanding of the markets. Successful day traders do the following well:
* **Stay informed**: Monitor market headlines, economic reports, and other factors influencing stock and other asset prices throughout the day.
* **Make quick decisions**: Have the ability to make fast, informed decisions in a volatile market.
* **Employ [leverage](https://www.investopedia.com/articles/forex/082813/how-leverage-used-forex-trading.asp)**: Use borrowed funds to amplify potential profits, which proportionately magnifies potential losses.
Because of these factors, day trading is not for inexperienced traders or those without the finances to absorb the potential losses.
### Relevant Regulations To Know
Understanding the regulatory environment around day trading is crucial. In the U.S., the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have specific rules for "pattern day traders." These include the following:
* **[Pattern day trader](https://www.investopedia.com/terms/p/patterndaytrader.asp) definition**: Traders who execute four or more day trades within five business days.
* **Margin requirements**: Pattern day traders must always have a cash balance of at least $25,000 in their brokerage account.
These regulations ensure that only those with enough resources and knowledge participate in this high-stakes activity.
## The Basics of Day Trading
Day trading is most commonly found in stock and [foreign exchange](https://www.investopedia.com/articles/forex/11/why-trade-forex.asp) (forex) markets, where currencies are traded.
Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements like releasing economic statistics, corporate earnings, or interest rate changes are subject to market expectations and market psychology. That is, markets react when those expectations are unmet or exceeded—usually with sudden, significant moves that can benefit day traders.
## How to Start Day Trading
Professional day traders have in-depth knowledge of the marketplace, are well-established, and make a living from it. Here are the steps:
1. Learn a good deal about the market and how to use fundamental and technical analysis.
2. Ensure you have enough capital to begin to meet regulations and, beyond that, so you're never putting more on the line than you can afford to lose.
3. Develop criteria for trading and stick with them.
Here are more details:
### 1) Gain Lots of Market Knowledge and Experience
Individuals who attempt to day trade without an understanding of market [fundamentals](https://www.investopedia.com/terms/f/fundamentals.asp) often lose money. A working knowledge of [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) and chart reading is a good start. But without a deep understanding of the market and its unique risks, charts can be deceiving.
[Do your due diligence](https://www.investopedia.com/articles/active-trading/090415/only-take-trade-if-it-passes-5step-test.asp) and understand the particular ins and outs of the products you trade.
### 2) Make Sure to Have Sufficient Capital
Wise day traders use only [risk capital](https://www.investopedia.com/terms/r/riskcapital.asp) that they can afford to lose. This protects them from financial ruin and helps eliminate emotion from their trading decisions.
A large amount of capital is often necessary to capitalize effectively on intraday price movements, which can be in pennies or fractions of a cent.
Adequate cash is required for day traders who intend to use leverage in [margin accounts](https://www.investopedia.com/terms/m/marginaccount.asp). Volatile market swings can trigger big margin calls on short notice.
### 3) Learn Trading Discipline
Many day traders end up losing money because they fail to make trades that meet their own criteria. As the saying goes, “Plan the trade and trade the plan.” Success is impossible without discipline.
To profit, day traders rely heavily on market [volatility](https://www.investopedia.com/terms/v/volatility.asp). A day trader may find a stock attractive if it moves a lot during the day. That could happen for a number of different reasons, including an earnings report, investor sentiment, or even general economic or company news.
Day traders also like stocks that are highly [liquid](https://www.investopedia.com/terms/l/liquidity.asp) because that gives them the chance to change their position without altering the price of the stock. If a stock price moves higher, traders may take a [buy](https://www.investopedia.com/terms/b/buy.asp) position. If the price moves down, a trader may decide to [sell short](https://www.investopedia.com/terms/s/shortselling.asp) so they can profit when it falls.
Regardless of what technique a day trader uses, they’re usually looking to trade a stock that moves (a lot).
## Who Makes a Living by Day Trading?
There are two primary divisions of professional day traders: those who work alone, and/or those who work for a larger institution.
Most day traders who trade for a living work for large players like [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) and the proprietary trading desks of banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to counterparties, a trading desk, large amounts of [capital](https://www.investopedia.com/terms/c/capital.asp) and leverage, and expensive analytical software.
These traders are typically looking for easy profits from arbitrage opportunities and news events. Their resources allow them to capitalize on these less risky day trades before individual traders can react.
### The Solo Day Traders
Individual traders often manage other people’s money or simply trade with their own. Few have access to a trading desk, but they often have strong ties to a brokerage due to the large amounts they spend on commissions and access to other resources.
However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades—combined with some leverage—to generate adequate profits on small price movements in highly liquid stocks.
Day trading demands access to some of the most complex financial services and instruments in the marketplace. Day traders typically require all of the following:
### Access to a Trading Desk
This is usually reserved for traders who work for larger institutions or those who manage large amounts of money.
The trading or dealing desk provides these traders with instantaneous order execution, which is crucial. For example, when an acquisition is announced, day traders looking at [merger arbitrage](https://www.investopedia.com/terms/m/mergerarbitrage.asp) can place their orders before the rest of the market is able to take advantage of the price differential.
### Financial Media Sources
News provides most of the opportunities. It is imperative to be the first to know when something significant happens.
The typical trading room has access to all of the leading newswires, constant coverage from news organizations, and software that constantly scans news sources for important stories.
### Analytical Software
Trading software is an expensive necessity for most day traders. Those who rely on technical indicators or swing trades rely more on software than on news. This software may be characterized by the following:
* **Automatic pattern recognition**: This trading program identifies technical indicators like [flags](https://www.investopedia.com/terms/f/flag.asp) and [channels](https://www.investopedia.com/terms/c/channel.asp) or more complex indicators such as [Elliott Wave](https://www.investopedia.com/terms/e/elliottwavetheory.asp) patterns.
* **Genetic and neural applications**:These programs use [neural networks](https://www.investopedia.com/articles/trading/06/neuralnetworks.asp) and genetic algorithms to perfect trading systems and make more accurate predictions of future price movements.
* **Broker integration**: Some of these applications even interface directly with the brokerage, allowing for instantaneous and even automatic execution of trades. This eliminates emotion from trading and improves execution times.
* [**Backtesting**](https://www.investopedia.com/terms/b/backtesting.asp): This allows traders to look at how a certain strategy would have performed in the past to predict more accurately how it will perform in the future. Keep in mind that past performance is not always indicative of future results.
Combined, these tools provide traders with an edge over the rest of the marketplace.
## Day Trading Strategies
A trader needs to have an edge over the rest of the market. Day traders use any of a number of strategies, including [swing trading](https://www.investopedia.com/terms/s/swingtrading.asp), [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp), and trading news. They refine these strategies until they produce consistent profits and limit their losses.
There also are some basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.
Day traders use numerous intraday strategies. These strategies include:
**Scalping**:This strategy focuses on making many small profits on ephemeral price changes that occur throughout the day. Arbitrage is a type of scalping that seeks to profit from correcting perceived mispricings in the market.
**Range/swing trading**: This strategy uses predetermined support and resistance levels in prices to determine the trader's buy and sell decisions.
**News-based trading**: This strategy seizes trading prospects from the heightened volatility that occurs around news events or headlines as they come out. One type of news-based trading involves whether a merger or acquisition that has been announced will go through or not.
**High-frequency trading**: These strategies use sophisticated [algorithms](https://www.investopedia.com/terms/a/algorithm.asp) to exploit small or short-term market inefficiencies.
| Day Trading Strategy Breakdown | | |
| --- | --- | --- |
| Type | Risk | Reward |
| Swing Trading | High | High |
| Arbitrage | Low | Medium |
| Trading News | Medium | Medium |
| Mergers/Acquisitions | Medium | High |
| HFT | Medium | High |
## Risks of Day Trading
For the average investor, day trading can be a daunting proposition because of the number of risks involved. The U.S. [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) highlights some of the risks of day trading, which are summarized below:
* **Be prepared to suffer severe financial losses**: Day traders typically suffer severe financial losses in their first months of trading, and many never make a profit.
* **Day trading is an extremely stressful full-time job**: Watching dozens of ticker quotes and price fluctuations to spot fleeting market trends demands great concentration.
* **Day traders depend heavily on borrowing money**: Day-trading strategies use the leverage of borrowed money to make profits. Many day traders not only lose all of their own money; they wind up in debt.
* **Don’t believe claims of easy profits**: Watch out for hot tips and expert advice from newsletters and websites catering to day traders and remember that educational seminars and classes about day trading may not be objective.
## Should You Start Day Trading?
If you're determined to start day trading, be prepared to commit to the following steps:
* Make sure you come in with some knowledge of the trading world and a good idea of your [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), capital, and goals.
* Be prepared to put in the time to practice and perfect your strategies.
* Start small. [Focus on a few stocks](https://www.investopedia.com/day-trading/pick-stocks-intraday-trading/) rather than wearing yourself thin. Going all out will complicate your trading strategy and can mean big losses.
* Stay cool and try to keep emotion out of your trades. Don't deviate from your plan.
If you follow these simple guidelines, you may be headed for a sustainable career in day trading.
## Day Trading Example
A day trade is exactly the same as any stock trade except that both the purchase of a stock and its sale occur within the same day, and sometimes within seconds of each other.
For example, say a day trader has completed a technical analysis of a company called Intuitive Sciences Inc. (ISI). The analysis indicates that this stock, which is listed in the Nasdaq 100, shows a pattern of rising in price by at least 0.6% on most of the days when the NASDAQ is up more than 0.4%. The trader has reason to believe that this is going to be one of those days.
The trader buys 1,000 shares of ISI when the market opens, then waits until ISI reaches a particular price point, probably up 0.6%. The trader then immediately sells the entire holding in ISI.
This is a day trade. Obviously, the merits of ISI as an investment have nothing to do with the day trader's actions. A trend is being exploited.
What if ISI had bucked the trend and lost 0.8%? The trader will sell anyway and take the loss.
## Why Day Trading is Controversial
The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time.
Some people day-trade without sufficient knowledge. But there are day traders who make a successful living despite—or perhaps because of—the risks.
Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Moreover, many economists and financial practitioners argue that [active trading](https://www.investopedia.com/terms/a/active-trading.asp) strategies of any kind tend to underperform a more basic passive [index strategy](https://www.investopedia.com/terms/i/index-investing.asp) over time especially after fees and taxes are taken into account.
Profiting from day trading is possible, but the success rate is inherently lower because it is risky and requires considerable skill. And don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.
## Is Day Trading Profitable?
Day trading can be profitable, but it's far from guaranteed. Many day traders end up losing money before calling it quits. Success in day trading requires a deep understanding of market dynamics, the ability to analyze and act on market data quickly, and strict discipline in risk management. The profitability of day trading depends on several factors, including the trader's skill, strategy, and the amount of capital they can invest. While some traders do achieve significant profits, it's important to note that the high-risk nature of day trading also means it's possible to incur substantial losses. Additionally, profitability can be affected by transaction costs, taxes, and the psychological pressure associated with this type of trading.
## What Percentage of Day Traders Are Profitable?
The percentage of day traders who achieve profitability is relatively low. Various studies and broker reports suggest that a small fraction of day traders consistently make profits over the long term. Estimates vary, but it's commonly accepted that only around 10% to 15% of day traders are successful over time. This low success rate is attributed to the high risks, the need for substantial skill and experience, and the intense competition in the financial markets. Many aspiring day traders face significant losses in their early trading career, and only a few persist and learn the skills necessary to become profitable. This statistic underscores the importance of proper training, risk management, and realistic expectations when entering the world of day trading.
## Why Is Day Trading So Hard?
Day trading is challenging due to its fast-paced nature and the complexity of the financial markets. It requires traders to make quick decisions based on real-time information, which can be overwhelming, especially in volatile market conditions. Traders must be adept at technical analysis, interpreting charts and patterns, and understanding how economic events influence market movements. Moreover, emotional control is crucial; day traders must avoid common pitfalls like [overtrading](https://www.investopedia.com/terms/o/overtrading.asp) or letting [emotions](https://www.investopedia.com/terms/t/trading-psychology.asp) drive their decisions. The steep learning curve, combined with the need for discipline, consistent strategy, and the ability to handle losses, makes day trading a hard thing to succeed at.
## What Is the First Rule of Day Trading?
The so-called [first rule of day trading](https://www.investopedia.com/articles/active-trading/071414/day-trading-rules-rookies-dont-play-it-ear.asp) is never to hold onto a position when the market closes for the day. Win or lose, sell out. Most day traders make it a rule never to hold a losing position overnight in the hope that part or all of the losses can be recouped. For one thing, brokers have higher [margin](https://www.investopedia.com/terms/m/margin.asp) requirements for overnight trades, and that means additional capital is required. There's a good reason for that. A stock can go down or up on overnight news, inflicting a bigger trading loss on the owners of shares.
## How Does Pattern Day Trading Work?
Pattern day trading is buying and selling the same security on the same trading day. FINRA defines a "pattern day trader" as any investor who executes four or more day trades within five business days once the number of day trades is more than 6% of the trades in the margin account for that period. Pattern day traders must maintain a minimum account balance of $25,000 in cash and eligible securities. They also have access to a higher level of leverage, typically up to four times their maintenance margin excess. This means they can trade larger positions but also face more significant risks.
## The Bottom Line
Day traders can earn big profits or pile up significant losses. Indeed, with the evidence showing that most day traders lose money over time, it's an extremely risky career choice. Day traders, both institutional and individual, would argue that they play an essential role in the marketplace by keeping the markets efficient and liquid. Though day trading will always be intriguing to individual investors, anyone considering it needs to acquire the knowledge, the resources, and the cash that it takes to have a chance at succeeding.
| There was a time years ago when the only people able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. The arrival of online trading, along with instantaneous dissemination of news, has leveled the playing—or should we say trading—field. The easy-to-use trading apps and 0% commissions of services like Robinhood, TD Ameritrade, and Charles Schwab have made it easier than ever for retail investors to attempt to trade like the pros.
Day trading can turn into a lucrative career (as long as you do it properly). But it can be challenging for novices—especially those who don't have a well-planned strategy. And be aware that even the most seasoned day traders can hit rough patches and experience losses.
So, what exactly is day trading, and how does it work?
Key Takeaways
Day traders buy and sell stocks or other assets during the trading day in order to profit from the rapid fluctuations in prices.Day trading employs a wide variety of techniques and strategies to capitalize on these perceived market inefficiencies.Day trading is often informed by technical analysis of price movements and requires a high degree of self-discipline and objectivity.
What Is Day Trading?
Day trading is a fast-paced form of investing in which individuals buy and sell securities within the same day. The goal is to profit from short-term price movements in stocks, options, futures, currencies, and other assets. Day traders typically combine strategies and forms of analyses, including the following:
Technical analysis: Focuses on past prices and trading patterns to predict coming trends.
Momentum trading: Capitalizes on short-term trends and reversals to capture quick gains.
Unlike long-term investors, day traders are less concerned with the fundamental value of the securities and more focused on capturing immediate gains from market fluctuations.
The Attraction of Day Trading
The appeal of day trading lies in its potential for quick profits. However, it comes with severe risks and requires a significant understanding of the markets. Successful day traders do the following well:
Stay informed: Monitor market headlines, economic reports, and other factors influencing stock and other asset prices throughout the day.
Make quick decisions: Have the ability to make fast, informed decisions in a volatile market.
Employ leverage: Use borrowed funds to amplify potential profits, which proportionately magnifies potential losses.
Because of these factors, day trading is not for inexperienced traders or those without the finances to absorb the potential losses.
Relevant Regulations To Know
Understanding the regulatory environment around day trading is crucial. In the U.S., the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have specific rules for "pattern day traders." These include the following:
Pattern day trader definition: Traders who execute four or more day trades within five business days.
Margin requirements: Pattern day traders must always have a cash balance of at least $25,000 in their brokerage account.
These regulations ensure that only those with enough resources and knowledge participate in this high-stakes activity.
The Basics of Day Trading
Day trading is most commonly found in stock and foreign exchange (forex) markets, where currencies are traded.
Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements like releasing economic statistics, corporate earnings, or interest rate changes are subject to market expectations and market psychology. That is, markets react when those expectations are unmet or exceeded—usually with sudden, significant moves that can benefit day traders.
How to Start Day Trading
Professional day traders have in-depth knowledge of the marketplace, are well-established, and make a living from it. Here are the steps:
Learn a good deal about the market and how to use fundamental and technical analysis.Ensure you have enough capital to begin to meet regulations and, beyond that, so you're never putting more on the line than you can afford to lose.Develop criteria for trading and stick with them.
Here are more details:
1) Gain Lots of Market Knowledge and Experience
Individuals who attempt to day trade without an understanding of market fundamentals often lose money. A working knowledge of technical analysis and chart reading is a good start. But without a deep understanding of the market and its unique risks, charts can be deceiving.
Do your due diligence and understand the particular ins and outs of the products you trade.
2) Make Sure to Have Sufficient Capital
Wise day traders use only risk capital that they can afford to lose. This protects them from financial ruin and helps eliminate emotion from their trading decisions.
A large amount of capital is often necessary to capitalize effectively on intraday price movements, which can be in pennies or fractions of a cent.
Adequate cash is required for day traders who intend to use leverage in margin accounts. Volatile market swings can trigger big margin calls on short notice.
3) Learn Trading Discipline
Many day traders end up losing money because they fail to make trades that meet their own criteria. As the saying goes, “Plan the trade and trade the plan.” Success is impossible without discipline.
To profit, day traders rely heavily on market volatility. A day trader may find a stock attractive if it moves a lot during the day. That could happen for a number of different reasons, including an earnings report, investor sentiment, or even general economic or company news.
Day traders also like stocks that are highly liquid because that gives them the chance to change their position without altering the price of the stock. If a stock price moves higher, traders may take a buy position. If the price moves down, a trader may decide to sell short so they can profit when it falls.
Regardless of what technique a day trader uses, they’re usually looking to trade a stock that moves (a lot).
Who Makes a Living by Day Trading?
There are two primary divisions of professional day traders: those who work alone, and/or those who work for a larger institution.
Most day traders who trade for a living work for large players like hedge funds and the proprietary trading desks of banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to counterparties, a trading desk, large amounts of capital and leverage, and expensive analytical software.
These traders are typically looking for easy profits from arbitrage opportunities and news events. Their resources allow them to capitalize on these less risky day trades before individual traders can react.
The Solo Day Traders
Individual traders often manage other people’s money or simply trade with their own. Few have access to a trading desk, but they often have strong ties to a brokerage due to the large amounts they spend on commissions and access to other resources.
However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades—combined with some leverage—to generate adequate profits on small price movements in highly liquid stocks.
Day trading demands access to some of the most complex financial services and instruments in the marketplace. Day traders typically require all of the following:
Access to a Trading Desk
This is usually reserved for traders who work for larger institutions or those who manage large amounts of money.
The trading or dealing desk provides these traders with instantaneous order execution, which is crucial. For example, when an acquisition is announced, day traders looking at merger arbitrage can place their orders before the rest of the market is able to take advantage of the price differential.
Financial Media Sources
News provides most of the opportunities. It is imperative to be the first to know when something significant happens.
The typical trading room has access to all of the leading newswires, constant coverage from news organizations, and software that constantly scans news sources for important stories.
Analytical Software
Trading software is an expensive necessity for most day traders. Those who rely on technical indicators or swing trades rely more on software than on news. This software may be characterized by the following:
Automatic pattern recognition: This trading program identifies technical indicators like flags and channels or more complex indicators such as Elliott Wave patterns.
Genetic and neural applications: These programs use neural networks and genetic algorithms to perfect trading systems and make more accurate predictions of future price movements.
Broker integration: Some of these applications even interface directly with the brokerage, allowing for instantaneous and even automatic execution of trades. This eliminates emotion from trading and improves execution times.
Backtesting: This allows traders to look at how a certain strategy would have performed in the past to predict more accurately how it will perform in the future. Keep in mind that past performance is not always indicative of future results.
Combined, these tools provide traders with an edge over the rest of the marketplace.
Day Trading Strategies
A trader needs to have an edge over the rest of the market. Day traders use any of a number of strategies, including swing trading, arbitrage, and trading news. They refine these strategies until they produce consistent profits and limit their losses.
There also are some basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.
Day traders use numerous intraday strategies. These strategies include:
Scalping: This strategy focuses on making many small profits on ephemeral price changes that occur throughout the day. Arbitrage is a type of scalping that seeks to profit from correcting perceived mispricings in the market.
Range/swing trading: This strategy uses predetermined support and resistance levels in prices to determine the trader's buy and sell decisions.
News-based trading: This strategy seizes trading prospects from the heightened volatility that occurs around news events or headlines as they come out. One type of news-based trading involves whether a merger or acquisition that has been announced will go through or not.
High-frequency trading: These strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.
Day Trading Strategy Breakdown
Type
Risk
Reward
Swing Trading
High
High
Arbitrage
Low
Medium
Trading News
Medium
Medium
Mergers/Acquisitions
Medium
High
HFT
Medium
High
Risks of Day Trading
For the average investor, day trading can be a daunting proposition because of the number of risks involved. The U.S. Securities and Exchange Commission (SEC) highlights some of the risks of day trading, which are summarized below:
Be prepared to suffer severe financial losses: Day traders typically suffer severe financial losses in their first months of trading, and many never make a profit.Day trading is an extremely stressful full-time job: Watching dozens of ticker quotes and price fluctuations to spot fleeting market trends demands great concentration.Day traders depend heavily on borrowing money: Day-trading strategies use the leverage of borrowed money to make profits. Many day traders not only lose all of their own money; they wind up in debt.Don’t believe claims of easy profits: Watch out for hot tips and expert advice from newsletters and websites catering to day traders and remember that educational seminars and classes about day trading may not be objective.
Should You Start Day Trading?
If you're determined to start day trading, be prepared to commit to the following steps:
Make sure you come in with some knowledge of the trading world and a good idea of your risk tolerance, capital, and goals.
Be prepared to put in the time to practice and perfect your strategies.
Start small. Focus on a few stocks rather than wearing yourself thin. Going all out will complicate your trading strategy and can mean big losses.
Stay cool and try to keep emotion out of your trades. Don't deviate from your plan.
If you follow these simple guidelines, you may be headed for a sustainable career in day trading.
Day Trading Example
A day trade is exactly the same as any stock trade except that both the purchase of a stock and its sale occur within the same day, and sometimes within seconds of each other.
For example, say a day trader has completed a technical analysis of a company called Intuitive Sciences Inc. (ISI). The analysis indicates that this stock, which is listed in the Nasdaq 100, shows a pattern of rising in price by at least 0.6% on most of the days when the NASDAQ is up more than 0.4%. The trader has reason to believe that this is going to be one of those days.
The trader buys 1,000 shares of ISI when the market opens, then waits until ISI reaches a particular price point, probably up 0.6%. The trader then immediately sells the entire holding in ISI.
This is a day trade. Obviously, the merits of ISI as an investment have nothing to do with the day trader's actions. A trend is being exploited.
What if ISI had bucked the trend and lost 0.8%? The trader will sell anyway and take the loss.
Why Day Trading is Controversial
The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time.
Some people day-trade without sufficient knowledge. But there are day traders who make a successful living despite—or perhaps because of—the risks.
Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Moreover, many economists and financial practitioners argue that active trading strategies of any kind tend to underperform a more basic passive index strategy over time especially after fees and taxes are taken into account.
Profiting from day trading is possible, but the success rate is inherently lower because it is risky and requires considerable skill. And don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.
Is Day Trading Profitable?
Day trading can be profitable, but it's far from guaranteed. Many day traders end up losing money before calling it quits. Success in day trading requires a deep understanding of market dynamics, the ability to analyze and act on market data quickly, and strict discipline in risk management. The profitability of day trading depends on several factors, including the trader's skill, strategy, and the amount of capital they can invest. While some traders do achieve significant profits, it's important to note that the high-risk nature of day trading also means it's possible to incur substantial losses. Additionally, profitability can be affected by transaction costs, taxes, and the psychological pressure associated with this type of trading.
What Percentage of Day Traders Are Profitable?
The percentage of day traders who achieve profitability is relatively low. Various studies and broker reports suggest that a small fraction of day traders consistently make profits over the long term. Estimates vary, but it's commonly accepted that only around 10% to 15% of day traders are successful over time. This low success rate is attributed to the high risks, the need for substantial skill and experience, and the intense competition in the financial markets. Many aspiring day traders face significant losses in their early trading career, and only a few persist and learn the skills necessary to become profitable. This statistic underscores the importance of proper training, risk management, and realistic expectations when entering the world of day trading.
Why Is Day Trading So Hard?
Day trading is challenging due to its fast-paced nature and the complexity of the financial markets. It requires traders to make quick decisions based on real-time information, which can be overwhelming, especially in volatile market conditions. Traders must be adept at technical analysis, interpreting charts and patterns, and understanding how economic events influence market movements. Moreover, emotional control is crucial; day traders must avoid common pitfalls like overtrading or letting emotions drive their decisions. The steep learning curve, combined with the need for discipline, consistent strategy, and the ability to handle losses, makes day trading a hard thing to succeed at.
What Is the First Rule of Day Trading?
The so-called first rule of day trading is never to hold onto a position when the market closes for the day. Win or lose, sell out. Most day traders make it a rule never to hold a losing position overnight in the hope that part or all of the losses can be recouped. For one thing, brokers have higher margin requirements for overnight trades, and that means additional capital is required. There's a good reason for that. A stock can go down or up on overnight news, inflicting a bigger trading loss on the owners of shares.
How Does Pattern Day Trading Work?
Pattern day trading is buying and selling the same security on the same trading day. FINRA defines a "pattern day trader" as any investor who executes four or more day trades within five business days once the number of day trades is more than 6% of the trades in the margin account for that period. Pattern day traders must maintain a minimum account balance of $25,000 in cash and eligible securities. They also have access to a higher level of leverage, typically up to four times their maintenance margin excess. This means they can trade larger positions but also face more significant risks.
The Bottom Line
Day traders can earn big profits or pile up significant losses. Indeed, with the evidence showing that most day traders lose money over time, it's an extremely risky career choice. Day traders, both institutional and individual, would argue that they play an essential role in the marketplace by keeping the markets efficient and liquid. Though day trading will always be intriguing to individual investors, anyone considering it needs to acquire the knowledge, the resources, and the cash that it takes to have a chance at succeeding.
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https://www.investopedia.com/family-and-retirement-8599280 | How to Start a Family and Save for 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"> Starting a family while saving for retirement comes with challenges and benefits. In most cases, time is on your side.
</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 start early, you still have plenty of time to grow your retirement savings and benefit from <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>. And there are a number of <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> plans out there to help you do so without incurring a huge tax bill.
</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"> On the other hand, starting relatively young means you may still be building your career and income. According to Vanguard’s “How America Saves 2023” report, the average retirement savings account balance for ages 35–44 is $76,354. For ages 25–34, that number is just $30,017. On top of that, there’s buying a home, a car, and paying for your children’s college and weddings to account 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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The good news is that with the right tools and strategies, planning for both your family’s needs and your retirement is entirely possible.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_9-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_10-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Plan ahead and start saving early to balance starting a family with building a successful retirement plan.</li><li>Understand common costs for individuals and couples who want to raise children while saving for retirement.</li><li>Assess your financial situation, set goals as a family, and create a budget to meet those goals.</li><li>Take advantage of cost reduction strategies and tax benefits available to families.</li><li>Use tax-advantaged accounts like individual retirement accounts (IRAs), 401(k)s, and Health Savings Accounts (HSAs) to save for retirement.</li></ul></div></div></div>
<span class="heading-toc" id="toc-costs-to-consider"></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"> Costs to Consider </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In general, the stereotypical American Dream is becoming more expensive. Take the average cost of raising two children until age 18, estimated at $576,896. The average amount needed to retire is even higher, clocking in at $715,968, according to Investopedia’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-american-dream-now-costs-over-usd3-million-8409951">recent analysis</a>.
</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"> Understanding the various costs you may face is the first step to preparing for them. Couples or individuals who are starting a family should consider the following.
</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"> Having a Baby or Adopting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> If you’re enrolled in a large group plan, out-of-pocket costs for a hospital birth average $2,854 per child.<span class="ql-inline-citation" data-cite="16"></span> When it comes to adoption, costs vary widely depending on whether you adopt via the public child welfare system, a private agency, independent adoption, or intercountry adoption.
</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 the Child Welfare Information Gateway from the U.S. Department of Health and Human Services, adoption from a private agency may cost $30,000 to $60,000.<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_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Independent or intercountry adoption ranges from $20,000 to $50,000, whereas adopting a child from the welfare system is virtually free. The associated expenses may include home study, court and legal fees, and social work or counseling services.<span class="ql-inline-citation" data-cite="2"></span>
</p>
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<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"> Paying for Child Care </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Child care has long been a substantial expense for families. The U.S. Department of Health and Human Services deems child care as “affordable” when it costs no more than 7% of a family’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/household_income.asp">household income</a>.<span class="ql-inline-citation" data-cite="18"></span> Yet many families spend 10% to 24% of household income on child care.<span class="ql-inline-citation" data-cite="15"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Child care costs vary by state. For example, the average cost of infant care in Alabama is around $500 per month and $432 each month for a 4-year-old. In California, the average monthly cost of infant care is $1,412, and $956 for a 4-year-old. And in Michigan, you’d pay an average of $905 per month for infant care or $741 per month for a 4-year-old.<span class="ql-inline-citation" data-cite="4"></span>
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Saving for Higher Education </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Putting your kids through college is a major cost, no matter how you slice it. For academic year 2021–22, the average total cost for full-time undergraduate attendance was $32,900 at a private for-profit institution and $55,800 at a private nonprofit institution. Meanwhile, public institutions had an average total cost of $26,000.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> These amounts represent the sum of tuition and required fees, books, supplies, and the average cost of room and board for students living on campus at four-year institutions.
</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-warning" 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>Keep in mind that this amount doesn’t reflect the various types of financial aid that students may receive.</p></div></div></div>
<span class="heading-toc" id="toc-assess-your-financial-situation"></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"> Assess Your Financial Situation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Evaluating your current financial situation is a crucial step toward reaching your personal financial goals. A thorough assessment of your income, expenses, and savings potential will provide valuable insights into your overall financial health and areas for improvement.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Here are key aspects to consider when assessing your finances:
</p>
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<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"> Income </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Calculate your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossincome.asp">gross annual income</a> by adding up all sources of earnings, such as wages, salaries, self-employment profits, interest, dividends, and rental income. Be sure to account for any changes in employment status, promotions, or new job opportunities throughout the year.
</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"> Expenses </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Create a detailed list of all ongoing and ad hoc expenses, categorizing them accordingly. Common categories include housing, utilities, food, transportation, insurance, healthcare, debt payments, entertainment, subscriptions, and miscellaneous expenses.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_46-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_47-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>To get a clear picture of your spending habits, track your expenses over several months by using budgeting tools like spreadsheets, mobile apps, or online resources provided by banks and credit unions.</p></div></div></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"> Savings Potential </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Determine your disposable income by calculating the amount left from your income after paying taxes and necessary expenses. Then, evaluate whether you have enough funds available for emergency savings, retirement planning, investments, and discretionary spending.
</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-establish-family-priorities"></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"> Establish Family Priorities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> With an understanding of the costs involved and a clear picture of your financial situation, you can begin to prioritize and outline future goals—both for your family and your retirement. Specific goals will depend on you, your partner, and your financial situation. But the following are a good place to start:
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-subheading__text"> Start or Grow Your Emergency Fund </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> If an unexpected car repair, pet expense, or medical emergency suddenly popped up, would you have enough cash to cover it? What if you got laid off next 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"> If you aren’t prepared, an unexpected expense could derail your savings plans. That's why financial experts always recommend having 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> to cover three to six months’ worth of living expenses.<span class="ql-inline-citation" data-cite="6"></span> If you’re self-employed or your income is unpredictable, you’ll want to save even more.
</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"> Having a safety net set aside keeps you from having to use credit cards or dipping into your retirement savings. The best place for an emergency fund is a liquid and thus easily accessible account, such as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings</a> or other interest-earning account.<br/>
</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"> Put Retirement First </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> When setting financial goals, it’s natural for parents to want to put their children first. But financial planners recommend prioritizing your own retirement over saving for a child’s education.
</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"> While students have access to loans, grants, and scholarships, there are no such resources for parents. Saving for retirement falls largely on the individual—with some help from your employer if you’re lucky.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> So, contribute as much as you can to your retirement savings accounts, and take advantage of any 401(k) or Health Savings Account (HSA) <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/matchingcontribution.asp">matching programs</a> that your company offers.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-subheading__text"> Plan Ahead for Education Savings </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Once you hit your retirement savings goals, the next step is saving for your kids’ college tuition. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/529plan.asp">529 plan</a> is a great way to do this, since it’s specifically designed to help pay for higher education.
</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"> This tax-advantaged account allows contributions to grow federal income tax-deferred, with tax-free withdrawals for qualified higher education expenses (such as tuition and room and board).<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_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"> Establish Short-, Medium-, and Long-Term Goals for Your Family </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> For families who may feel overwhelmed by competing financial goals—like buying a home, saving for a child's education, or retirement—Mike Kojonen, founder of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://principalpreservationservices.com/" rel="nofollow">Principal Preservation Services</a>, recommends setting goal milestones.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> “For example, rather than seeing retirement as a distant, abstract aim, break it down into actionable steps like increasing retirement contributions annually or setting up a dedicated college savings fund for their children,” he says.
</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"> These targets can be broken down into specific short-, medium-, and long-term financial objectives for your family. For instance, building an emergency fund, contributing to employer-matched retirement plans, and establishing a consistent saving habit might serve as short-term goals.
</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"> Long-term goals often include caring for aging parents or, if your children are young, saving for their college education. Medium-term goals (say, five years) could include a family vacation, buying a new car, or remodeling your home.
</p>
<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-callout mntl-block" id="mntl-sc-block_82-0"><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_83-0"><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>Consider having a conversation with family members or 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> to help outline these priorities and get on the same page.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Mark Damsgaard, head of client advisory at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://globalresidenceindex.com/" rel="nofollow">Global Residence Index</a>, also recommends that couples discuss whether they’ll keep some assets separate or share all assets.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> “It’s not wrong to not share the entirety of your assets, especially if you worked hard for them on your own. And then you may talk about having joint accounts for the earnings and assets you acquire when you enter your marriage or partnership,” Damsgaard says.<br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div>
<span class="heading-toc" id="toc-revisit-your-budget"></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"> Revisit Your Budget </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Achieving financial goals is often easier when you have a budget to give structure and clarity to your spending habits. 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> works best when it’s based on the specifics of your situation.
</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"> Use what you’ve learned about known costs for major goals like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/101016/family-retirement-plan.asp">family and retirement</a>, your financial situation, and your long- and short-term goals to set a realistic budget. Compare the following common budgeting models to see what works best for you.
</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"> 50/30/20 Rule </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp">50/30/20 rule</a> suggests allocating 50% of income to needs (such as housing, food, and utilities), 30% to wants (entertainment, dining out, and hobbies), and 20% to savings and debt repayment (including retirement savings). While it may not work for everyone, this rule is popular because of its simplicity.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_96-0"> <span class="mntl-sc-block-subheading__text"> Progressive Budgeting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> With progressive budgeting, you gradually increase savings and retirement contributions as your income grows or your family’s financial situation improves. Progressive budgeting is particularly useful in working against <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifestyle-creep.asp">lifestyle creep</a>, a common phenomenon that can eat into your retirement and family savings if you aren’t careful.
</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"> Pay Yourself First </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Pay yourself first is exactly what it sounds like. You set aside money from your income for debt payments and savings, including retirement contributions, before taking care of other bills.
</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"> Of course, you still need to account for rent and other ongoing expenses. But this method, sometimes called reverse budgeting, makes it easy to prioritize savings goals. For example, you could set up automatic transfers or contributions to retirement accounts before allocating money for other uses.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div>
<span class="heading-toc" id="toc-tips-for-balancing-saving-for-a-family-and-retirement"></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"> Tips for Balancing Saving for a Family and Retirement </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> Reducing costs and maximizing tax benefits mean more money that you can put toward retirement or family goals.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_107-0"> <span class="mntl-sc-block-subheading__text"> See Where You Can Reduce Costs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> Lowering your child care bill can amount to major savings. Consider enlisting help from neighbors and family members or arranging child care swaps with other parents. Some states also offer government-funded assistance programs to help families pay for child care.
</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"> Government resources include Head Start and Early Head Start programs, state-funded prekindergarten programs, military child care financial assistance programs, and government vouchers or subsidies. You should also see if your employer offers a Dependent Care Flexible Spending Account (FSA).
</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"> To save money beyond child care costs, look into other possibilities like:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> <li>Mortgage refinancing to reduce your monthly payment</li><li>Adjusting your thermostat or using energy-efficient bulbs to save on utility bills</li><li>Carpooling, using public transportation, or walking/cycling to trim transportation costs</li><li>Cutting food costs by cooking at home, buying store brands, and planning meals ahead of time<br/></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_116-0"> <span class="mntl-sc-block-subheading__text"> Maximize Tax Benefits </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> There are tax benefits designed to help families save money, including:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> <li><strong>Child Tax Credit (CTC)</strong>: The CTC provides a tax credit of up to $2,000 per qualifying child under the age of 17. For 2024, up to $1,700 of the tax credit may be refundable, depending on your tax situation.<span class="ql-inline-citation" data-cite="7"></span></li><li><strong>Child and Dependent Care Credit</strong>: This credit covers expenses for child care services, such as babysitting, daycare, or preschool, for children under age 13 or disabled spouses or parents. The credit ranges from 20% to 35% of expenses up to $3,000 for one dependent and $6,000 for two or more dependents.<span class="ql-inline-citation" data-cite="20"></span></li><li><strong>Earned Income Tax Credit (EITC)</strong>: Low- and moderate-income working families can benefit from the EITC, which reduces the amount of tax owed and may result in a tax refund. The credit is based on a percentage of earned income, with higher income phaseouts for taxpayers with children.<span class="ql-inline-citation" data-cite="9"></span></li><li><strong>Credit for Other Dependents</strong>: This is available to taxpayers with a dependent who doesn’t qualify for the Child Tax Credit, such as children age 17 or older, qualifying relatives, or dependent parents.<span class="ql-inline-citation" data-cite="10"></span></li><li><strong>Self-Employed Health Insurance Deduction</strong>: This permits self-employed parents to deduct 100% of the cost of health insurance premiums paid for family members, including children under age 27.<span class="ql-inline-citation" data-cite="11"></span><br/></li>
</ul>
<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"> Take Advantage of Retirement Savings Options </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_122-0"> Use tax-advantaged retirement accounts to maximize savings and growth.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_123-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0">
<li><strong>401(k) Plans</strong>: Employer-sponsored <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k) plans</a> allow employees to contribute a portion of their salary toward retirement savings, often with employer matching contributions.</li>
<li><strong>Individual Retirement Accounts (IRAs)</strong>: Traditional <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">IRAs</a> are personal retirement accounts that provide tax-deferred growth, while <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRAs</a> offer tax-free withdrawals in retirement.</li>
<li><strong>Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA</strong>: <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sep.asp">SEP</a> and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/simple-ira.asp">SIMPLE IRAs</a> let small business owners and self-employed individuals save for retirement while receiving tax benefits.<span class="ql-inline-citation" data-cite="22"></span></li>
<li><strong>Health Savings Accounts (HSAs)</strong>: For families or individuals with a high-deductible health plan, <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hsa.asp">HSAs</a> offer flexible options for saving money on healthcare or boosting retirement savings.<span class="ql-inline-citation" data-cite="21"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_125-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_126-0"><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_127-0"><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’re a millennial with your eyes on retirement, there are more resources <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisors/122815/how-much-millennials-should-save-retire-comfortably.asp">here</a> to help support your financial future.</p></div></div></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_128-0"><span class="heading-toc" id="toc-how-much-should-i-save-monthly-for-retirement"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Should I Save Monthly for Retirement?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The amount you should save monthly for retirement will vary based on your income, age, and retirement goals. Financial experts recommend saving at least 10% to 15% of your income for retirement—including your employer match, if you have one. If possible, bumping that up to 20% of your income can help you save significantly more over time. This is especially helpful if you’ve started later on saving for retirement.<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_129-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_130-0"><span class="heading-toc" id="toc-what-are-the-best-retirement-savings-options-for-families"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Best Retirement Savings Options for Families?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can use a number of strategies to help you save for retirement, including tax-advantaged retirement accounts like traditional or Roth 401(k)s and IRAs, SEP and SIMPLE IRAs (if you’re self-employed), HSAs, or other investment accounts. For parents who want to start putting money away for their children, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp">custodial IRAs</a> offer tax-advantaged savings.</p><p>The best retirement plan to build your nest egg will depend on your financial situation, your goals for retirement, and other factors. Understand the contribution limits, withdrawal penalties, and tax rules surrounding accounts to help you make the best decision. You may want to consult a financial advisor.<br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_131-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_132-0"><span class="heading-toc" id="toc-what-is-the-5-rule-for-retirement-savings"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the 5% Rule for Retirement Savings?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The 5% rule is a frequently used rule of thumb for calculating how much you can withdraw from retirement savings each year without running out of money. A modified version of the traditional 4% rule, the 5% rule allows for a higher annual withdrawal rate, which may work for long-term investors with diversified portfolios.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="14"></span> Work with a financial advisor to assess whether the 5% withdrawal rate aligns with your retirement objectives, investment strategy, and overall financial plan.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_133-0"></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_134-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_135-0"> Armed with knowledge about your goals, potential costs, financial situation, and available tools for investing, you can achieve a comfortable retirement while also growing a family. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/07/noexcuses.asp">Start early</a> and contribute consistently to retirement savings in order to maximize your savings and growth potential. If needed, seek professional financial advice to help you navigate the complexities of retirement planning and evaluate the best decisions based on your specific situation.
</p></div> | Starting a family while saving for retirement comes with challenges and benefits. In most cases, time is on your side.
If you start early, you still have plenty of time to grow your retirement savings and benefit from [compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp). And there are a number of [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) plans out there to help you do so without incurring a huge tax bill.
On the other hand, starting relatively young means you may still be building your career and income. According to Vanguard’s “How America Saves 2023” report, the average retirement savings account balance for ages 35–44 is $76,354. For ages 25–34, that number is just $30,017. On top of that, there’s buying a home, a car, and paying for your children’s college and weddings to account for.
The good news is that with the right tools and strategies, planning for both your family’s needs and your retirement is entirely possible.
### Key Takeaways
* Plan ahead and start saving early to balance starting a family with building a successful retirement plan.
* Understand common costs for individuals and couples who want to raise children while saving for retirement.
* Assess your financial situation, set goals as a family, and create a budget to meet those goals.
* Take advantage of cost reduction strategies and tax benefits available to families.
* Use tax-advantaged accounts like individual retirement accounts (IRAs), 401(k)s, and Health Savings Accounts (HSAs) to save for retirement.
## Costs to Consider
In general, the stereotypical American Dream is becoming more expensive. Take the average cost of raising two children until age 18, estimated at $576,896. The average amount needed to retire is even higher, clocking in at $715,968, according to Investopedia’s [recent analysis](https://www.investopedia.com/the-american-dream-now-costs-over-usd3-million-8409951).
Understanding the various costs you may face is the first step to preparing for them. Couples or individuals who are starting a family should consider the following.
### Having a Baby or Adopting
If you’re enrolled in a large group plan, out-of-pocket costs for a hospital birth average $2,854 per child. When it comes to adoption, costs vary widely depending on whether you adopt via the public child welfare system, a private agency, independent adoption, or intercountry adoption.
According to the Child Welfare Information Gateway from the U.S. Department of Health and Human Services, adoption from a private agency may cost $30,000 to $60,000.
Independent or intercountry adoption ranges from $20,000 to $50,000, whereas adopting a child from the welfare system is virtually free. The associated expenses may include home study, court and legal fees, and social work or counseling services.
### Paying for Child Care
Child care has long been a substantial expense for families. The U.S. Department of Health and Human Services deems child care as “affordable” when it costs no more than 7% of a family’s [household income](https://www.investopedia.com/terms/h/household_income.asp). Yet many families spend 10% to 24% of household income on child care.
Child care costs vary by state. For example, the average cost of infant care in Alabama is around $500 per month and $432 each month for a 4-year-old. In California, the average monthly cost of infant care is $1,412, and $956 for a 4-year-old. And in Michigan, you’d pay an average of $905 per month for infant care or $741 per month for a 4-year-old.
### Saving for Higher Education
Putting your kids through college is a major cost, no matter how you slice it. For academic year 2021–22, the average total cost for full-time undergraduate attendance was $32,900 at a private for-profit institution and $55,800 at a private nonprofit institution. Meanwhile, public institutions had an average total cost of $26,000.
These amounts represent the sum of tuition and required fees, books, supplies, and the average cost of room and board for students living on campus at four-year institutions.
###
Keep in mind that this amount doesn’t reflect the various types of financial aid that students may receive.
## Assess Your Financial Situation
Evaluating your current financial situation is a crucial step toward reaching your personal financial goals. A thorough assessment of your income, expenses, and savings potential will provide valuable insights into your overall financial health and areas for improvement.
Here are key aspects to consider when assessing your finances:
### Income
Calculate your [gross annual income](https://www.investopedia.com/terms/g/grossincome.asp) by adding up all sources of earnings, such as wages, salaries, self-employment profits, interest, dividends, and rental income. Be sure to account for any changes in employment status, promotions, or new job opportunities throughout the year.
### Expenses
Create a detailed list of all ongoing and ad hoc expenses, categorizing them accordingly. Common categories include housing, utilities, food, transportation, insurance, healthcare, debt payments, entertainment, subscriptions, and miscellaneous expenses.
### Tip
To get a clear picture of your spending habits, track your expenses over several months by using budgeting tools like spreadsheets, mobile apps, or online resources provided by banks and credit unions.
### Savings Potential
Determine your disposable income by calculating the amount left from your income after paying taxes and necessary expenses. Then, evaluate whether you have enough funds available for emergency savings, retirement planning, investments, and discretionary spending.
## Establish Family Priorities
With an understanding of the costs involved and a clear picture of your financial situation, you can begin to prioritize and outline future goals—both for your family and your retirement. Specific goals will depend on you, your partner, and your financial situation. But the following are a good place to start:
### Start or Grow Your Emergency Fund
If an unexpected car repair, pet expense, or medical emergency suddenly popped up, would you have enough cash to cover it? What if you got laid off next month?
If you aren’t prepared, an unexpected expense could derail your savings plans. That's why financial experts always recommend having an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) to cover three to six months’ worth of living expenses. If you’re self-employed or your income is unpredictable, you’ll want to save even more.
Having a safety net set aside keeps you from having to use credit cards or dipping into your retirement savings. The best place for an emergency fund is a liquid and thus easily accessible account, such as a [high-yield savings](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) or other interest-earning account.
### Put Retirement First
When setting financial goals, it’s natural for parents to want to put their children first. But financial planners recommend prioritizing your own retirement over saving for a child’s education.
While students have access to loans, grants, and scholarships, there are no such resources for parents. Saving for retirement falls largely on the individual—with some help from your employer if you’re lucky.
So, contribute as much as you can to your retirement savings accounts, and take advantage of any 401(k) or Health Savings Account (HSA) [matching programs](https://www.investopedia.com/terms/m/matchingcontribution.asp) that your company offers.
### Plan Ahead for Education Savings
Once you hit your retirement savings goals, the next step is saving for your kids’ college tuition. A [529 plan](https://www.investopedia.com/terms/1/529plan.asp) is a great way to do this, since it’s specifically designed to help pay for higher education.
This tax-advantaged account allows contributions to grow federal income tax-deferred, with tax-free withdrawals for qualified higher education expenses (such as tuition and room and board).
### Establish Short-, Medium-, and Long-Term Goals for Your Family
For families who may feel overwhelmed by competing financial goals—like buying a home, saving for a child's education, or retirement—Mike Kojonen, founder of [Principal Preservation Services](https://principalpreservationservices.com/), recommends setting goal milestones.
“For example, rather than seeing retirement as a distant, abstract aim, break it down into actionable steps like increasing retirement contributions annually or setting up a dedicated college savings fund for their children,” he says.
These targets can be broken down into specific short-, medium-, and long-term financial objectives for your family. For instance, building an emergency fund, contributing to employer-matched retirement plans, and establishing a consistent saving habit might serve as short-term goals.
Long-term goals often include caring for aging parents or, if your children are young, saving for their college education. Medium-term goals (say, five years) could include a family vacation, buying a new car, or remodeling your home.
###
Consider having a conversation with family members or a [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) to help outline these priorities and get on the same page.
Mark Damsgaard, head of client advisory at [Global Residence Index](https://globalresidenceindex.com/), also recommends that couples discuss whether they’ll keep some assets separate or share all assets.
“It’s not wrong to not share the entirety of your assets, especially if you worked hard for them on your own. And then you may talk about having joint accounts for the earnings and assets you acquire when you enter your marriage or partnership,” Damsgaard says.
## Revisit Your Budget
Achieving financial goals is often easier when you have a budget to give structure and clarity to your spending habits. A [budget](https://www.investopedia.com/terms/b/budget.asp) works best when it’s based on the specifics of your situation.
Use what you’ve learned about known costs for major goals like [family and retirement](https://www.investopedia.com/articles/personal-finance/101016/family-retirement-plan.asp), your financial situation, and your long- and short-term goals to set a realistic budget. Compare the following common budgeting models to see what works best for you.
### 50/30/20 Rule
The [50/30/20 rule](https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp) suggests allocating 50% of income to needs (such as housing, food, and utilities), 30% to wants (entertainment, dining out, and hobbies), and 20% to savings and debt repayment (including retirement savings). While it may not work for everyone, this rule is popular because of its simplicity.
### Progressive Budgeting
With progressive budgeting, you gradually increase savings and retirement contributions as your income grows or your family’s financial situation improves. Progressive budgeting is particularly useful in working against [lifestyle creep](https://www.investopedia.com/terms/l/lifestyle-creep.asp), a common phenomenon that can eat into your retirement and family savings if you aren’t careful.
### Pay Yourself First
Pay yourself first is exactly what it sounds like. You set aside money from your income for debt payments and savings, including retirement contributions, before taking care of other bills.
Of course, you still need to account for rent and other ongoing expenses. But this method, sometimes called reverse budgeting, makes it easy to prioritize savings goals. For example, you could set up automatic transfers or contributions to retirement accounts before allocating money for other uses.
## Tips for Balancing Saving for a Family and Retirement
Reducing costs and maximizing tax benefits mean more money that you can put toward retirement or family goals.
### See Where You Can Reduce Costs
Lowering your child care bill can amount to major savings. Consider enlisting help from neighbors and family members or arranging child care swaps with other parents. Some states also offer government-funded assistance programs to help families pay for child care.
Government resources include Head Start and Early Head Start programs, state-funded prekindergarten programs, military child care financial assistance programs, and government vouchers or subsidies. You should also see if your employer offers a Dependent Care Flexible Spending Account (FSA).
To save money beyond child care costs, look into other possibilities like:
* Mortgage refinancing to reduce your monthly payment
* Adjusting your thermostat or using energy-efficient bulbs to save on utility bills
* Carpooling, using public transportation, or walking/cycling to trim transportation costs
* Cutting food costs by cooking at home, buying store brands, and planning meals ahead of time
### Maximize Tax Benefits
There are tax benefits designed to help families save money, including:
* **Child Tax Credit (CTC)**: The CTC provides a tax credit of up to $2,000 per qualifying child under the age of 17. For 2024, up to $1,700 of the tax credit may be refundable, depending on your tax situation.
* **Child and Dependent Care Credit**: This credit covers expenses for child care services, such as babysitting, daycare, or preschool, for children under age 13 or disabled spouses or parents. The credit ranges from 20% to 35% of expenses up to $3,000 for one dependent and $6,000 for two or more dependents.
* **Earned Income Tax Credit (EITC)**: Low- and moderate-income working families can benefit from the EITC, which reduces the amount of tax owed and may result in a tax refund. The credit is based on a percentage of earned income, with higher income phaseouts for taxpayers with children.
* **Credit for Other Dependents**: This is available to taxpayers with a dependent who doesn’t qualify for the Child Tax Credit, such as children age 17 or older, qualifying relatives, or dependent parents.
* **Self-Employed Health Insurance Deduction**: This permits self-employed parents to deduct 100% of the cost of health insurance premiums paid for family members, including children under age 27.
### Take Advantage of Retirement Savings Options
Use tax-advantaged retirement accounts to maximize savings and growth.
* **401(k) Plans**: Employer-sponsored [401(k) plans](https://www.investopedia.com/terms/1/401kplan.asp) allow employees to contribute a portion of their salary toward retirement savings, often with employer matching contributions.
* **Individual Retirement Accounts (IRAs)**: Traditional [IRAs](https://www.investopedia.com/terms/i/ira.asp) are personal retirement accounts that provide tax-deferred growth, while [Roth IRAs](https://www.investopedia.com/terms/r/rothira.asp) offer tax-free withdrawals in retirement.
* **Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA**: [SEP](https://www.investopedia.com/terms/s/sep.asp) and [SIMPLE IRAs](https://www.investopedia.com/terms/s/simple-ira.asp) let small business owners and self-employed individuals save for retirement while receiving tax benefits.
* **Health Savings Accounts (HSAs)**: For families or individuals with a high-deductible health plan, [HSAs](https://www.investopedia.com/terms/h/hsa.asp) offer flexible options for saving money on healthcare or boosting retirement savings.
###
If you’re a millennial with your eyes on retirement, there are more resources [here](https://www.investopedia.com/articles/financial-advisors/122815/how-much-millennials-should-save-retire-comfortably.asp) to help support your financial future.
## How Much Should I Save Monthly for Retirement?
The amount you should save monthly for retirement will vary based on your income, age, and retirement goals. Financial experts recommend saving at least 10% to 15% of your income for retirement—including your employer match, if you have one. If possible, bumping that up to 20% of your income can help you save significantly more over time. This is especially helpful if you’ve started later on saving for retirement.
## What Are the Best Retirement Savings Options for Families?
You can use a number of strategies to help you save for retirement, including tax-advantaged retirement accounts like traditional or Roth 401(k)s and IRAs, SEP and SIMPLE IRAs (if you’re self-employed), HSAs, or other investment accounts. For parents who want to start putting money away for their children, [custodial IRAs](https://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp) offer tax-advantaged savings.
The best retirement plan to build your nest egg will depend on your financial situation, your goals for retirement, and other factors. Understand the contribution limits, withdrawal penalties, and tax rules surrounding accounts to help you make the best decision. You may want to consult a financial advisor.
## What Is the 5% Rule for Retirement Savings?
The 5% rule is a frequently used rule of thumb for calculating how much you can withdraw from retirement savings each year without running out of money. A modified version of the traditional 4% rule, the 5% rule allows for a higher annual withdrawal rate, which may work for long-term investors with diversified portfolios. Work with a financial advisor to assess whether the 5% withdrawal rate aligns with your retirement objectives, investment strategy, and overall financial plan.
## The Bottom Line
Armed with knowledge about your goals, potential costs, financial situation, and available tools for investing, you can achieve a comfortable retirement while also growing a family. [Start early](https://www.investopedia.com/articles/retirement/07/noexcuses.asp) and contribute consistently to retirement savings in order to maximize your savings and growth potential. If needed, seek professional financial advice to help you navigate the complexities of retirement planning and evaluate the best decisions based on your specific situation.
| Starting a family while saving for retirement comes with challenges and benefits. In most cases, time is on your side.
If you start early, you still have plenty of time to grow your retirement savings and benefit from compound interest. And there are a number of tax-advantaged plans out there to help you do so without incurring a huge tax bill.
On the other hand, starting relatively young means you may still be building your career and income. According to Vanguard’s “How America Saves 2023” report, the average retirement savings account balance for ages 35–44 is $76,354. For ages 25–34, that number is just $30,017. On top of that, there’s buying a home, a car, and paying for your children’s college and weddings to account for.
The good news is that with the right tools and strategies, planning for both your family’s needs and your retirement is entirely possible.
Key Takeaways
Plan ahead and start saving early to balance starting a family with building a successful retirement plan.Understand common costs for individuals and couples who want to raise children while saving for retirement.Assess your financial situation, set goals as a family, and create a budget to meet those goals.Take advantage of cost reduction strategies and tax benefits available to families.Use tax-advantaged accounts like individual retirement accounts (IRAs), 401(k)s, and Health Savings Accounts (HSAs) to save for retirement.
Costs to Consider
In general, the stereotypical American Dream is becoming more expensive. Take the average cost of raising two children until age 18, estimated at $576,896. The average amount needed to retire is even higher, clocking in at $715,968, according to Investopedia’s recent analysis.
Understanding the various costs you may face is the first step to preparing for them. Couples or individuals who are starting a family should consider the following.
Having a Baby or Adopting
If you’re enrolled in a large group plan, out-of-pocket costs for a hospital birth average $2,854 per child. When it comes to adoption, costs vary widely depending on whether you adopt via the public child welfare system, a private agency, independent adoption, or intercountry adoption.
According to the Child Welfare Information Gateway from the U.S. Department of Health and Human Services, adoption from a private agency may cost $30,000 to $60,000.
Independent or intercountry adoption ranges from $20,000 to $50,000, whereas adopting a child from the welfare system is virtually free. The associated expenses may include home study, court and legal fees, and social work or counseling services.
Paying for Child Care
Child care has long been a substantial expense for families. The U.S. Department of Health and Human Services deems child care as “affordable” when it costs no more than 7% of a family’s household income. Yet many families spend 10% to 24% of household income on child care.
Child care costs vary by state. For example, the average cost of infant care in Alabama is around $500 per month and $432 each month for a 4-year-old. In California, the average monthly cost of infant care is $1,412, and $956 for a 4-year-old. And in Michigan, you’d pay an average of $905 per month for infant care or $741 per month for a 4-year-old.
Saving for Higher Education
Putting your kids through college is a major cost, no matter how you slice it. For academic year 2021–22, the average total cost for full-time undergraduate attendance was $32,900 at a private for-profit institution and $55,800 at a private nonprofit institution. Meanwhile, public institutions had an average total cost of $26,000.
These amounts represent the sum of tuition and required fees, books, supplies, and the average cost of room and board for students living on campus at four-year institutions.
Keep in mind that this amount doesn’t reflect the various types of financial aid that students may receive.
Assess Your Financial Situation
Evaluating your current financial situation is a crucial step toward reaching your personal financial goals. A thorough assessment of your income, expenses, and savings potential will provide valuable insights into your overall financial health and areas for improvement.
Here are key aspects to consider when assessing your finances:
Income
Calculate your gross annual income by adding up all sources of earnings, such as wages, salaries, self-employment profits, interest, dividends, and rental income. Be sure to account for any changes in employment status, promotions, or new job opportunities throughout the year.
Expenses
Create a detailed list of all ongoing and ad hoc expenses, categorizing them accordingly. Common categories include housing, utilities, food, transportation, insurance, healthcare, debt payments, entertainment, subscriptions, and miscellaneous expenses.
Tip
To get a clear picture of your spending habits, track your expenses over several months by using budgeting tools like spreadsheets, mobile apps, or online resources provided by banks and credit unions.
Savings Potential
Determine your disposable income by calculating the amount left from your income after paying taxes and necessary expenses. Then, evaluate whether you have enough funds available for emergency savings, retirement planning, investments, and discretionary spending.
Establish Family Priorities
With an understanding of the costs involved and a clear picture of your financial situation, you can begin to prioritize and outline future goals—both for your family and your retirement. Specific goals will depend on you, your partner, and your financial situation. But the following are a good place to start:
Start or Grow Your Emergency Fund
If an unexpected car repair, pet expense, or medical emergency suddenly popped up, would you have enough cash to cover it? What if you got laid off next month?
If you aren’t prepared, an unexpected expense could derail your savings plans. That's why financial experts always recommend having an emergency fund to cover three to six months’ worth of living expenses. If you’re self-employed or your income is unpredictable, you’ll want to save even more.
Having a safety net set aside keeps you from having to use credit cards or dipping into your retirement savings. The best place for an emergency fund is a liquid and thus easily accessible account, such as a high-yield savings or other interest-earning account.
Put Retirement First
When setting financial goals, it’s natural for parents to want to put their children first. But financial planners recommend prioritizing your own retirement over saving for a child’s education.
While students have access to loans, grants, and scholarships, there are no such resources for parents. Saving for retirement falls largely on the individual—with some help from your employer if you’re lucky.
So, contribute as much as you can to your retirement savings accounts, and take advantage of any 401(k) or Health Savings Account (HSA) matching programs that your company offers.
Plan Ahead for Education Savings
Once you hit your retirement savings goals, the next step is saving for your kids’ college tuition. A 529 plan is a great way to do this, since it’s specifically designed to help pay for higher education.
This tax-advantaged account allows contributions to grow federal income tax-deferred, with tax-free withdrawals for qualified higher education expenses (such as tuition and room and board).
Establish Short-, Medium-, and Long-Term Goals for Your Family
For families who may feel overwhelmed by competing financial goals—like buying a home, saving for a child's education, or retirement—Mike Kojonen, founder of Principal Preservation Services, recommends setting goal milestones.
“For example, rather than seeing retirement as a distant, abstract aim, break it down into actionable steps like increasing retirement contributions annually or setting up a dedicated college savings fund for their children,” he says.
These targets can be broken down into specific short-, medium-, and long-term financial objectives for your family. For instance, building an emergency fund, contributing to employer-matched retirement plans, and establishing a consistent saving habit might serve as short-term goals.
Long-term goals often include caring for aging parents or, if your children are young, saving for their college education. Medium-term goals (say, five years) could include a family vacation, buying a new car, or remodeling your home.
Consider having a conversation with family members or a financial advisor to help outline these priorities and get on the same page.
Mark Damsgaard, head of client advisory at Global Residence Index, also recommends that couples discuss whether they’ll keep some assets separate or share all assets.
“It’s not wrong to not share the entirety of your assets, especially if you worked hard for them on your own. And then you may talk about having joint accounts for the earnings and assets you acquire when you enter your marriage or partnership,” Damsgaard says.
Revisit Your Budget
Achieving financial goals is often easier when you have a budget to give structure and clarity to your spending habits. A budget works best when it’s based on the specifics of your situation.
Use what you’ve learned about known costs for major goals like family and retirement, your financial situation, and your long- and short-term goals to set a realistic budget. Compare the following common budgeting models to see what works best for you.
50/30/20 Rule
The 50/30/20 rule suggests allocating 50% of income to needs (such as housing, food, and utilities), 30% to wants (entertainment, dining out, and hobbies), and 20% to savings and debt repayment (including retirement savings). While it may not work for everyone, this rule is popular because of its simplicity.
Progressive Budgeting
With progressive budgeting, you gradually increase savings and retirement contributions as your income grows or your family’s financial situation improves. Progressive budgeting is particularly useful in working against lifestyle creep, a common phenomenon that can eat into your retirement and family savings if you aren’t careful.
Pay Yourself First
Pay yourself first is exactly what it sounds like. You set aside money from your income for debt payments and savings, including retirement contributions, before taking care of other bills.
Of course, you still need to account for rent and other ongoing expenses. But this method, sometimes called reverse budgeting, makes it easy to prioritize savings goals. For example, you could set up automatic transfers or contributions to retirement accounts before allocating money for other uses.
Tips for Balancing Saving for a Family and Retirement
Reducing costs and maximizing tax benefits mean more money that you can put toward retirement or family goals.
See Where You Can Reduce Costs
Lowering your child care bill can amount to major savings. Consider enlisting help from neighbors and family members or arranging child care swaps with other parents. Some states also offer government-funded assistance programs to help families pay for child care.
Government resources include Head Start and Early Head Start programs, state-funded prekindergarten programs, military child care financial assistance programs, and government vouchers or subsidies. You should also see if your employer offers a Dependent Care Flexible Spending Account (FSA).
To save money beyond child care costs, look into other possibilities like:
Mortgage refinancing to reduce your monthly paymentAdjusting your thermostat or using energy-efficient bulbs to save on utility billsCarpooling, using public transportation, or walking/cycling to trim transportation costsCutting food costs by cooking at home, buying store brands, and planning meals ahead of time
Maximize Tax Benefits
There are tax benefits designed to help families save money, including:
Child Tax Credit (CTC): The CTC provides a tax credit of up to $2,000 per qualifying child under the age of 17. For 2024, up to $1,700 of the tax credit may be refundable, depending on your tax situation.Child and Dependent Care Credit: This credit covers expenses for child care services, such as babysitting, daycare, or preschool, for children under age 13 or disabled spouses or parents. The credit ranges from 20% to 35% of expenses up to $3,000 for one dependent and $6,000 for two or more dependents.Earned Income Tax Credit (EITC): Low- and moderate-income working families can benefit from the EITC, which reduces the amount of tax owed and may result in a tax refund. The credit is based on a percentage of earned income, with higher income phaseouts for taxpayers with children.Credit for Other Dependents: This is available to taxpayers with a dependent who doesn’t qualify for the Child Tax Credit, such as children age 17 or older, qualifying relatives, or dependent parents.Self-Employed Health Insurance Deduction: This permits self-employed parents to deduct 100% of the cost of health insurance premiums paid for family members, including children under age 27.
Take Advantage of Retirement Savings Options
Use tax-advantaged retirement accounts to maximize savings and growth.
401(k) Plans: Employer-sponsored 401(k) plans allow employees to contribute a portion of their salary toward retirement savings, often with employer matching contributions.
Individual Retirement Accounts (IRAs): Traditional IRAs are personal retirement accounts that provide tax-deferred growth, while Roth IRAs offer tax-free withdrawals in retirement.
Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA: SEP and SIMPLE IRAs let small business owners and self-employed individuals save for retirement while receiving tax benefits.
Health Savings Accounts (HSAs): For families or individuals with a high-deductible health plan, HSAs offer flexible options for saving money on healthcare or boosting retirement savings.
If you’re a millennial with your eyes on retirement, there are more resources here to help support your financial future.
How Much Should I Save Monthly for Retirement?
The amount you should save monthly for retirement will vary based on your income, age, and retirement goals. Financial experts recommend saving at least 10% to 15% of your income for retirement—including your employer match, if you have one. If possible, bumping that up to 20% of your income can help you save significantly more over time. This is especially helpful if you’ve started later on saving for retirement.
What Are the Best Retirement Savings Options for Families?
You can use a number of strategies to help you save for retirement, including tax-advantaged retirement accounts like traditional or Roth 401(k)s and IRAs, SEP and SIMPLE IRAs (if you’re self-employed), HSAs, or other investment accounts. For parents who want to start putting money away for their children, custodial IRAs offer tax-advantaged savings.The best retirement plan to build your nest egg will depend on your financial situation, your goals for retirement, and other factors. Understand the contribution limits, withdrawal penalties, and tax rules surrounding accounts to help you make the best decision. You may want to consult a financial advisor.
What Is the 5% Rule for Retirement Savings?
The 5% rule is a frequently used rule of thumb for calculating how much you can withdraw from retirement savings each year without running out of money. A modified version of the traditional 4% rule, the 5% rule allows for a higher annual withdrawal rate, which may work for long-term investors with diversified portfolios. Work with a financial advisor to assess whether the 5% withdrawal rate aligns with your retirement objectives, investment strategy, and overall financial plan.
The Bottom Line
Armed with knowledge about your goals, potential costs, financial situation, and available tools for investing, you can achieve a comfortable retirement while also growing a family. Start early and contribute consistently to retirement savings in order to maximize your savings and growth potential. If needed, seek professional financial advice to help you navigate the complexities of retirement planning and evaluate the best decisions based on your specific situation.
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https://www.investopedia.com/cadence-design-systems-stock-slides-after-company-issues-soft-outlook-8637323 | Cadence Design Systems Stock Slides After Company Issues Soft 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"><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>Cadence Design Systems shares fell nearly 6% in extended trading on Monday after the chip design software provider issued a weaker-than-expected current-quarter outlook.</li><li>The company attributed the softer guidance to the timing of shipments connected to the company’s new generation of design and verification tools.</li><li>Monitor how Cadence shares respond to a zone of support between a key horizontal line and the 200-day moving average from $247 to $266.</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"> Chip design software giant Cadence Design Systems (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=cdns">CDNS</a>) topped first-quarter estimates but its guidance missed Wall Street’s current-quarter earnings and sales forecasts, sending its shares tumbling in extended trading Monday evening.<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"> For the current quarter, the provider of semiconductor-design software and tools said it expects <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20is%20a%20metric,to%20the%20current%20time%20period.">adjusted earnings</a> to range between $1.20 and $1.24 per share, with the high end of that band falling considerably short of the $1.43-a-share figure expected by analysts. The company’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a> guidance for the period of $1.03 billion to $1.05 billion also missed the mark, which Wall Street had modeled at $1.11 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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Cadence's general manager for strategy and new ventures, Nimish Modi, attributed the softer-than-expected outlook to the timing of shipments connected to the company’s new generation of design and verification tools, which the company launched earlier this month. However, Modi added that customers have provided positive feedback about the company's suit of new tools and emphasized that no deals have been delayed.<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"> For the full year, the company upwardly revised its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/topline.asp">top-line</a> forecast to between $4.56 billion and $4.62 billion from $4.55 billion to $4.61 billion, indicating that the company’s results are going to be slightly more second-half loaded than it previously anticipated.<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_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> For the quarter ending March 31, the company reported an adjusted profit of $1.17 per share on revenue of $1.009 billion, topping estimates of $1.13 in earnings and sales of $1 billion. Notably, Cadence said it closed out the quarter with a record <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/backlog.asp">backlog</a> of about $6 billion in orders.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Cadence shares remained in a steady <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uptrend.asp">uptrend</a> between January 2023 and March of this year, apart from several minor retracements to the 50-day moving average. However, more recently, the price continues to track lower, with the stock last week breaking down below an established 16-month trendline. Amid earnings-related weakness, investors should monitor how the shares respond to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/zone-of-support.asp#:~:text=Key%20Takeaways,of%20the%20trend%20may%20occur.">zone of support</a> between a key <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Horizontal%20lines%20are%20commonly%20used,to%20fall%20on%20prior%20occasions.">horizontal line</a> and the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/013015/why-200-simple-moving-average-sma-so-common-traders-and-analysts.asp">200-day moving average</a> from $247 to $266.
</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"> Cadence shares fell 5.8% to $268.50 in after-hours trading on Monday. The stock has gained about 33% over the past 12 months.
</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>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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> <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
* Cadence Design Systems shares fell nearly 6% in extended trading on Monday after the chip design software provider issued a weaker-than-expected current-quarter outlook.
* The company attributed the softer guidance to the timing of shipments connected to the company’s new generation of design and verification tools.
* Monitor how Cadence shares respond to a zone of support between a key horizontal line and the 200-day moving average from $247 to $266.
Chip design software giant Cadence Design Systems ([CDNS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=cdns)) topped first-quarter estimates but its guidance missed Wall Street’s current-quarter earnings and sales forecasts, sending its shares tumbling in extended trading Monday evening.
For the current quarter, the provider of semiconductor-design software and tools said it expects [adjusted earnings](https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20is%20a%20metric,to%20the%20current%20time%20period.) to range between $1.20 and $1.24 per share, with the high end of that band falling considerably short of the $1.43-a-share figure expected by analysts. The company’s [revenue](https://www.investopedia.com/terms/r/revenue.asp) guidance for the period of $1.03 billion to $1.05 billion also missed the mark, which Wall Street had modeled at $1.11 billion.
Cadence's general manager for strategy and new ventures, Nimish Modi, attributed the softer-than-expected outlook to the timing of shipments connected to the company’s new generation of design and verification tools, which the company launched earlier this month. However, Modi added that customers have provided positive feedback about the company's suit of new tools and emphasized that no deals have been delayed.
For the full year, the company upwardly revised its [top-line](https://www.investopedia.com/terms/t/topline.asp) forecast to between $4.56 billion and $4.62 billion from $4.55 billion to $4.61 billion, indicating that the company’s results are going to be slightly more second-half loaded than it previously anticipated.
For the quarter ending March 31, the company reported an adjusted profit of $1.17 per share on revenue of $1.009 billion, topping estimates of $1.13 in earnings and sales of $1 billion. Notably, Cadence said it closed out the quarter with a record [backlog](https://www.investopedia.com/terms/b/backlog.asp) of about $6 billion in orders.
Cadence shares remained in a steady [uptrend](https://www.investopedia.com/terms/u/uptrend.asp) between January 2023 and March of this year, apart from several minor retracements to the 50-day moving average. However, more recently, the price continues to track lower, with the stock last week breaking down below an established 16-month trendline. Amid earnings-related weakness, investors should monitor how the shares respond to a [zone of support](https://www.investopedia.com/terms/z/zone-of-support.asp#:~:text=Key%20Takeaways,of%20the%20trend%20may%20occur.) between a key [horizontal line](https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Horizontal%20lines%20are%20commonly%20used,to%20fall%20on%20prior%20occasions.) and the [200-day moving average](https://www.investopedia.com/ask/answers/013015/why-200-simple-moving-average-sma-so-common-traders-and-analysts.asp) from $247 to $266.
Cadence shares fell 5.8% to $268.50 in after-hours trading on Monday. The stock has gained about 33% over the past 12 months.
*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
Cadence Design Systems shares fell nearly 6% in extended trading on Monday after the chip design software provider issued a weaker-than-expected current-quarter outlook.The company attributed the softer guidance to the timing of shipments connected to the company’s new generation of design and verification tools.Monitor how Cadence shares respond to a zone of support between a key horizontal line and the 200-day moving average from $247 to $266.
Chip design software giant Cadence Design Systems (CDNS) topped first-quarter estimates but its guidance missed Wall Street’s current-quarter earnings and sales forecasts, sending its shares tumbling in extended trading Monday evening.
For the current quarter, the provider of semiconductor-design software and tools said it expects adjusted earnings to range between $1.20 and $1.24 per share, with the high end of that band falling considerably short of the $1.43-a-share figure expected by analysts. The company’s revenue guidance for the period of $1.03 billion to $1.05 billion also missed the mark, which Wall Street had modeled at $1.11 billion.
Cadence's general manager for strategy and new ventures, Nimish Modi, attributed the softer-than-expected outlook to the timing of shipments connected to the company’s new generation of design and verification tools, which the company launched earlier this month. However, Modi added that customers have provided positive feedback about the company's suit of new tools and emphasized that no deals have been delayed.
For the full year, the company upwardly revised its top-line forecast to between $4.56 billion and $4.62 billion from $4.55 billion to $4.61 billion, indicating that the company’s results are going to be slightly more second-half loaded than it previously anticipated.
For the quarter ending March 31, the company reported an adjusted profit of $1.17 per share on revenue of $1.009 billion, topping estimates of $1.13 in earnings and sales of $1 billion. Notably, Cadence said it closed out the quarter with a record backlog of about $6 billion in orders.
Cadence shares remained in a steady uptrend between January 2023 and March of this year, apart from several minor retracements to the 50-day moving average. However, more recently, the price continues to track lower, with the stock last week breaking down below an established 16-month trendline. Amid earnings-related weakness, investors should monitor how the shares respond to a zone of support between a key horizontal line and the 200-day moving average from $247 to $266.
Cadence shares fell 5.8% to $268.50 in after-hours trading on Monday. The stock has gained about 33% over the past 12 months.
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.
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https://www.investopedia.com/articles/pf/09/credit-card-arbitrage.asp | What Are the Risks of Credit Card Arbitrage? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 it really possible to make "money for nothing" like Dire Straits sang in their hit song from 1985? People who profit from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-card-arbitrage.asp">credit card arbitrage</a> say yes. But is it a smart way to beat the credit card companies at their own game, or just a risky way to accumulate high-interest debt and pummel 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> in the process?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<span class="heading-toc" id="toc-what-is-credit-card-arbitrage"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> What Is Credit Card Arbitrage? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Arbitrage is the process of simultaneously buying an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentvehicle.asp">investment vehicle</a> at a lower cost and selling it at a higher price while profiting from the difference in prices. Credit card arbitrage involves borrowing money from credit card companies, then investing that money in an instrument offering a higher interest rate than what you're paying.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Here's how it works: you get an offer from a credit card company through the mail promising a zero percent or low-interest rate to transfer your balance from an existing card. You fill out the paperwork and make out one of the pre-printed checks the company sends with the offer payable to you. Or you fill out the application online and designate where the payment will go.
</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"> Next, you do a little homework to find a high-yield <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings account</a>, CD or another instrument offering a higher interest rate. From there, you invest the money, making at least the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-monthly-payment.asp">minimum payments</a> each month on time and, when the initial lower "teaser" rate expires, withdraw the money, pay the balance owed on the card, and keep the difference as profit.
</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-risks-of-credit-card-arbitrage"></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 Risks of Credit Card Arbitrage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> It's an easy way to make money for free, right? In reality, it's not that simple, and it can actually cost you more than you can afford.
</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"> Proponents of credit card arbitrage point to the fact that the zero percent, or low-interest rate, enables consumers to obtain <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a> at no or low cost. And if the borrower repays the entire amount on time, it can demonstrate that they're able to manage and repay the debt which, in turn, can potentially boost their credit score. But as Avi Karnani, co-founder of the financial planning website Thrive said in a phone interview, "It's a gamble like no other."
</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 following are some of the key risks of using your credit card to fund your investments.
</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-risk-1-poor-investments"></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"> Risk 1: Poor Investments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> One of the underlying assumptions about credit card arbitrage is that it's possible to find a "safe" investment that will earn you a significantly higher rate of return on the money you borrowed to invest. But in a difficult financial environment, those vehicles are harder to find.
</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"> "People who traditionally do arbitrage well are investment professionals," notes Karnani. "Why should anyone recommend it for the average individual as a way to make a relatively small amount of savings?"
</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"> When credit card companies begin pulling back from zero percent offers or suddenly change the terms to charge you more on your loan, the 3% interest rate from a high-yield savings account isn't going to net you any profit. And don't just look at the interest you could earn. You've got to know the terms of the investment you're making. If you needed to withdraw your money early, would you be charged a penalty? How much?
</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-risk-2-creating-a-debt-habit"></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"> Risk 2: Creating a Debt Habit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> An often unforeseen consequence of engaging in behaviors like credit card arbitrage is actually psychological in nature. "It encourages terrible financial behavior," says Karnani. "It's not financially healthy for people to get used to seeing large numbers on their credit card statements and carrying high levels of debt."
</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-risk-3-defaulting-on-the-loan"></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"> Risk 3: Defaulting on the Loan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The money that you get from the credit card company is a loan. If you fail to repay the company according to the terms of the loan, you're in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a>. When that happens you'll be charged a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/late-fee.asp">late fee</a> but, more importantly, the credit card company can immediately change the terms of your loan and charge a much higher interest rate, think 19% to 29%. Costs can mount quickly, and not only nullify any financial gain, but actually saddle you with debt that could take months or years to repay.
</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"> Unexpected life changes can quickly deplete <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> you may have been planning to use to make the monthly payments. "Credit card arbitrage works great on paper but the trouble comes when someone abruptly loses a job, gets extremely ill or has a major accident," says Kendall Peterson of CreditWhisperer.com. "It puts you in a situation where, overnight, you owe more money than you can pay off. No one plans for those types of things to happen to them."
</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-risk-4-credit-score-setbacks"></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"> Risk 4: Credit Score Setbacks </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Engaging in credit card arbitrage could hurt your credit score in several ways:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0">
<li>Opening a new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit</a> typically hurts your score.<span class="ql-inline-citation" data-cite="1"></span></li>
<li>Borrowing money on the new card increases your utilization ratio (how much credit you have available vs. how much you're currently using). A higher utilization ratio results in a lower credit score.<span class="ql-inline-citation" data-cite="2"></span></li>
<li>Though <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dti.asp">debt-to-income ratio (DTI)</a> is not on your report, a high DTI can impact your ability to obtain loans such as a mortgage.<span class="ql-inline-citation" data-cite="3"></span></li>
<li>Making just one late payment can spell disaster, as timely payments account for about 35 percent of your overall credit score.<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_36-0"></div>
<span class="heading-toc" id="toc-risk-5-rule-changes"></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 5: Rule Changes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> According to Curtis Arnold, founder of Cardratings.com: "The rules of the game have changed. It's a tough environment. What was considered hard and fast in the credit world is being changed overnight." Credit card companies aren't required to give advance notice, and you may not even realize the terms have changed. "You toss out a letter that looks like junk mail, but it's actually notifying you of important changes on your account," says Arnold.
</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"> Companies can change your payment due date, shorten your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/billing-cycle.asp">billing cycle</a>, raise your interest rate and add fees all without you being aware of the change. The implications can be serious. "Say you borrow $10,000, and overnight the company eliminates the cap on the offer," says Arnold. "Suddenly you're charged three percent interest on your loan balance which means you now have to pay least $300 for the loan; the rate of return on your investment must match up for you to net a profit."
</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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> While some people may have the financial discipline and capacity to engage in credit card arbitrage, there are significant risks that should not be overlooked. "The days of making a lot of money this way—it's a risky venture. However, there are still some offers out there that might make sense for people with the right approach and discipline," says Arnold.
</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"> To have the highest probability of success, Arnold gave the following tips.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0">
<li>Carefully read the terms of the credit card company's offer.</li>
<li>Do the math to make sure that after expenses are paid, it's going to pay a reasonable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rate of return</a>.</li>
<li>Set up an auto-pay system for the monthly payment.</li>
<li>Join an online social media group to keep up with the latest industry trends, traps, and tips.</li>
<li>Look for balance transfer offers with no <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expiration-date.asp">expiration dates</a>. These offers may have a higher interest rate but you can lock in that rate until you pay the balance off in full, which significantly extends your investing <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timehorizon.asp">time horizon</a>.</li>
<li>Have a plan B to quickly access liquid savings and repay the loan in full, if necessary.</li>
</ul>
<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 all of these steps are followed, you have a better chance at making credit card arbitrage work, but it's still a risky maneuver.
</p></div> | Is it really possible to make "money for nothing" like Dire Straits sang in their hit song from 1985? People who profit from [credit card arbitrage](https://www.investopedia.com/terms/c/credit-card-arbitrage.asp) say yes. But is it a smart way to beat the credit card companies at their own game, or just a risky way to accumulate high-interest debt and pummel your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) in the process?
## What Is Credit Card Arbitrage?
Arbitrage is the process of simultaneously buying an [investment vehicle](https://www.investopedia.com/terms/i/investmentvehicle.asp) at a lower cost and selling it at a higher price while profiting from the difference in prices. Credit card arbitrage involves borrowing money from credit card companies, then investing that money in an instrument offering a higher interest rate than what you're paying.
Here's how it works: you get an offer from a credit card company through the mail promising a zero percent or low-interest rate to transfer your balance from an existing card. You fill out the paperwork and make out one of the pre-printed checks the company sends with the offer payable to you. Or you fill out the application online and designate where the payment will go.
Next, you do a little homework to find a high-yield [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp), CD or another instrument offering a higher interest rate. From there, you invest the money, making at least the [minimum payments](https://www.investopedia.com/terms/m/minimum-monthly-payment.asp) each month on time and, when the initial lower "teaser" rate expires, withdraw the money, pay the balance owed on the card, and keep the difference as profit.
## The Risks of Credit Card Arbitrage
It's an easy way to make money for free, right? In reality, it's not that simple, and it can actually cost you more than you can afford.
Proponents of credit card arbitrage point to the fact that the zero percent, or low-interest rate, enables consumers to obtain [capital](https://www.investopedia.com/terms/c/capital.asp) at no or low cost. And if the borrower repays the entire amount on time, it can demonstrate that they're able to manage and repay the debt which, in turn, can potentially boost their credit score. But as Avi Karnani, co-founder of the financial planning website Thrive said in a phone interview, "It's a gamble like no other."
The following are some of the key risks of using your credit card to fund your investments.
## Risk 1: Poor Investments
One of the underlying assumptions about credit card arbitrage is that it's possible to find a "safe" investment that will earn you a significantly higher rate of return on the money you borrowed to invest. But in a difficult financial environment, those vehicles are harder to find.
"People who traditionally do arbitrage well are investment professionals," notes Karnani. "Why should anyone recommend it for the average individual as a way to make a relatively small amount of savings?"
When credit card companies begin pulling back from zero percent offers or suddenly change the terms to charge you more on your loan, the 3% interest rate from a high-yield savings account isn't going to net you any profit. And don't just look at the interest you could earn. You've got to know the terms of the investment you're making. If you needed to withdraw your money early, would you be charged a penalty? How much?
## Risk 2: Creating a Debt Habit
An often unforeseen consequence of engaging in behaviors like credit card arbitrage is actually psychological in nature. "It encourages terrible financial behavior," says Karnani. "It's not financially healthy for people to get used to seeing large numbers on their credit card statements and carrying high levels of debt."
## Risk 3: Defaulting on the Loan
The money that you get from the credit card company is a loan. If you fail to repay the company according to the terms of the loan, you're in [default](https://www.investopedia.com/terms/d/default2.asp). When that happens you'll be charged a [late fee](https://www.investopedia.com/terms/l/late-fee.asp) but, more importantly, the credit card company can immediately change the terms of your loan and charge a much higher interest rate, think 19% to 29%. Costs can mount quickly, and not only nullify any financial gain, but actually saddle you with debt that could take months or years to repay.
Unexpected life changes can quickly deplete [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) you may have been planning to use to make the monthly payments. "Credit card arbitrage works great on paper but the trouble comes when someone abruptly loses a job, gets extremely ill or has a major accident," says Kendall Peterson of CreditWhisperer.com. "It puts you in a situation where, overnight, you owe more money than you can pay off. No one plans for those types of things to happen to them."
## Risk 4: Credit Score Setbacks
Engaging in credit card arbitrage could hurt your credit score in several ways:
* Opening a new [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp) typically hurts your score.
* Borrowing money on the new card increases your utilization ratio (how much credit you have available vs. how much you're currently using). A higher utilization ratio results in a lower credit score.
* Though [debt-to-income ratio (DTI)](https://www.investopedia.com/terms/d/dti.asp) is not on your report, a high DTI can impact your ability to obtain loans such as a mortgage.
* Making just one late payment can spell disaster, as timely payments account for about 35 percent of your overall credit score.
## Risk 5: Rule Changes
According to Curtis Arnold, founder of Cardratings.com: "The rules of the game have changed. It's a tough environment. What was considered hard and fast in the credit world is being changed overnight." Credit card companies aren't required to give advance notice, and you may not even realize the terms have changed. "You toss out a letter that looks like junk mail, but it's actually notifying you of important changes on your account," says Arnold.
Companies can change your payment due date, shorten your [billing cycle](https://www.investopedia.com/terms/b/billing-cycle.asp), raise your interest rate and add fees all without you being aware of the change. The implications can be serious. "Say you borrow $10,000, and overnight the company eliminates the cap on the offer," says Arnold. "Suddenly you're charged three percent interest on your loan balance which means you now have to pay least $300 for the loan; the rate of return on your investment must match up for you to net a profit."
## The Bottom Line
While some people may have the financial discipline and capacity to engage in credit card arbitrage, there are significant risks that should not be overlooked. "The days of making a lot of money this way—it's a risky venture. However, there are still some offers out there that might make sense for people with the right approach and discipline," says Arnold.
To have the highest probability of success, Arnold gave the following tips.
* Carefully read the terms of the credit card company's offer.
* Do the math to make sure that after expenses are paid, it's going to pay a reasonable [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp).
* Set up an auto-pay system for the monthly payment.
* Join an online social media group to keep up with the latest industry trends, traps, and tips.
* Look for balance transfer offers with no [expiration dates](https://www.investopedia.com/terms/e/expiration-date.asp). These offers may have a higher interest rate but you can lock in that rate until you pay the balance off in full, which significantly extends your investing [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp).
* Have a plan B to quickly access liquid savings and repay the loan in full, if necessary.
If all of these steps are followed, you have a better chance at making credit card arbitrage work, but it's still a risky maneuver.
| Is it really possible to make "money for nothing" like Dire Straits sang in their hit song from 1985? People who profit from credit card arbitrage say yes. But is it a smart way to beat the credit card companies at their own game, or just a risky way to accumulate high-interest debt and pummel your credit score in the process?
What Is Credit Card Arbitrage?
Arbitrage is the process of simultaneously buying an investment vehicle at a lower cost and selling it at a higher price while profiting from the difference in prices. Credit card arbitrage involves borrowing money from credit card companies, then investing that money in an instrument offering a higher interest rate than what you're paying.
Here's how it works: you get an offer from a credit card company through the mail promising a zero percent or low-interest rate to transfer your balance from an existing card. You fill out the paperwork and make out one of the pre-printed checks the company sends with the offer payable to you. Or you fill out the application online and designate where the payment will go.
Next, you do a little homework to find a high-yield savings account, CD or another instrument offering a higher interest rate. From there, you invest the money, making at least the minimum payments each month on time and, when the initial lower "teaser" rate expires, withdraw the money, pay the balance owed on the card, and keep the difference as profit.
The Risks of Credit Card Arbitrage
It's an easy way to make money for free, right? In reality, it's not that simple, and it can actually cost you more than you can afford.
Proponents of credit card arbitrage point to the fact that the zero percent, or low-interest rate, enables consumers to obtain capital at no or low cost. And if the borrower repays the entire amount on time, it can demonstrate that they're able to manage and repay the debt which, in turn, can potentially boost their credit score. But as Avi Karnani, co-founder of the financial planning website Thrive said in a phone interview, "It's a gamble like no other."
The following are some of the key risks of using your credit card to fund your investments.
Risk 1: Poor Investments
One of the underlying assumptions about credit card arbitrage is that it's possible to find a "safe" investment that will earn you a significantly higher rate of return on the money you borrowed to invest. But in a difficult financial environment, those vehicles are harder to find.
"People who traditionally do arbitrage well are investment professionals," notes Karnani. "Why should anyone recommend it for the average individual as a way to make a relatively small amount of savings?"
When credit card companies begin pulling back from zero percent offers or suddenly change the terms to charge you more on your loan, the 3% interest rate from a high-yield savings account isn't going to net you any profit. And don't just look at the interest you could earn. You've got to know the terms of the investment you're making. If you needed to withdraw your money early, would you be charged a penalty? How much?
Risk 2: Creating a Debt Habit
An often unforeseen consequence of engaging in behaviors like credit card arbitrage is actually psychological in nature. "It encourages terrible financial behavior," says Karnani. "It's not financially healthy for people to get used to seeing large numbers on their credit card statements and carrying high levels of debt."
Risk 3: Defaulting on the Loan
The money that you get from the credit card company is a loan. If you fail to repay the company according to the terms of the loan, you're in default. When that happens you'll be charged a late fee but, more importantly, the credit card company can immediately change the terms of your loan and charge a much higher interest rate, think 19% to 29%. Costs can mount quickly, and not only nullify any financial gain, but actually saddle you with debt that could take months or years to repay.
Unexpected life changes can quickly deplete liquidity you may have been planning to use to make the monthly payments. "Credit card arbitrage works great on paper but the trouble comes when someone abruptly loses a job, gets extremely ill or has a major accident," says Kendall Peterson of CreditWhisperer.com. "It puts you in a situation where, overnight, you owe more money than you can pay off. No one plans for those types of things to happen to them."
Risk 4: Credit Score Setbacks
Engaging in credit card arbitrage could hurt your credit score in several ways:
Opening a new line of credit typically hurts your score.
Borrowing money on the new card increases your utilization ratio (how much credit you have available vs. how much you're currently using). A higher utilization ratio results in a lower credit score.
Though debt-to-income ratio (DTI) is not on your report, a high DTI can impact your ability to obtain loans such as a mortgage.
Making just one late payment can spell disaster, as timely payments account for about 35 percent of your overall credit score.
Risk 5: Rule Changes
According to Curtis Arnold, founder of Cardratings.com: "The rules of the game have changed. It's a tough environment. What was considered hard and fast in the credit world is being changed overnight." Credit card companies aren't required to give advance notice, and you may not even realize the terms have changed. "You toss out a letter that looks like junk mail, but it's actually notifying you of important changes on your account," says Arnold.
Companies can change your payment due date, shorten your billing cycle, raise your interest rate and add fees all without you being aware of the change. The implications can be serious. "Say you borrow $10,000, and overnight the company eliminates the cap on the offer," says Arnold. "Suddenly you're charged three percent interest on your loan balance which means you now have to pay least $300 for the loan; the rate of return on your investment must match up for you to net a profit."
The Bottom Line
While some people may have the financial discipline and capacity to engage in credit card arbitrage, there are significant risks that should not be overlooked. "The days of making a lot of money this way—it's a risky venture. However, there are still some offers out there that might make sense for people with the right approach and discipline," says Arnold.
To have the highest probability of success, Arnold gave the following tips.
Carefully read the terms of the credit card company's offer.
Do the math to make sure that after expenses are paid, it's going to pay a reasonable rate of return.
Set up an auto-pay system for the monthly payment.
Join an online social media group to keep up with the latest industry trends, traps, and tips.
Look for balance transfer offers with no expiration dates. These offers may have a higher interest rate but you can lock in that rate until you pay the balance off in full, which significantly extends your investing time horizon.
Have a plan B to quickly access liquid savings and repay the loan in full, if necessary.
If all of these steps are followed, you have a better chance at making credit card arbitrage work, but it's still a risky maneuver.
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https://www.investopedia.com/terms/c/cash_trading.asp | Cash Trading Definition, Rules, Vs. Margin Trading | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-cash-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 Cash Trading? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Cash trading requires that all transactions be paid for by funds available in the account at the time of settlement. It is the buying or selling of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a> by providing the capital needed to fund the transaction without relying on the use of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margin.asp">margin</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"> Cash trading can only be carried out if the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerageaccount.asp">brokerage account</a> has sufficient cash needed to complete a transaction.
</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>Cash trading involves buying or selling securities using cash funds held in a brokerage or clearing account.</li><li>Cash trading does not involve the use of margin, which means cash trades tend to be safer for brokers than margin trading accounts.</li><li>The downside of cash trading is that there is less upside potential due to the lack of leverage.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-cash-trading"></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 Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Cash trading is simply the buying and selling of securities using cash on hand rather than borrowed capital or margin. Most brokers offer cash trading accounts as a default account option. Since there’s no margin provided, these accounts are much simpler to open and maintain than margin 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"> The lack of margin makes these accounts inappropriate for most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/active-trading.asp">active traders</a>. However, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/longterminvestments.asp">long-term investors</a> may use these accounts as a standard option since they don’t typically buy securities on margin or require rapid trading settlements.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlementdate.asp">settlement date</a> is the day when the transaction is deemed to be consummated and the buyer has to complete full payment. Stock trades placed in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashaccount.asp">cash accounts</a> used to require up to three business days for settlement but that was amended in 2017 to two days. Market terminology for settlement is T+2—trade date plus two business days.<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"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlement_period.asp">settlement</a> process involves transferring the securities to the buyer’s account and the cash into the seller’s account. The rules governing cash accounts are contained in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulationt.asp">Regulation T</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_16-0"></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_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"> The most common types of potential violations that an investor should be aware of if they are cash trading are:
</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>Cash liquidation violation</strong>:<strong> </strong>One cannot buy if there is insufficient cash to cover that trade. For example, a cash trading account has $5,000 available cash and $20,000 tied up in ABC stock. An investor buys $10,000 of EFG stock on Monday and sells $10,000 of ABC stock on Tuesday. The settlement date for EFG stock is Wednesday (T+2), at which time the payment of $10,000 must be made in full. The available cash is still at $5,000 as the sale of $10,000 of ABC stock will not be finalized until Thursday. Therefore, the investor will not be allowed to buy $10,000 of EFG.</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freeriding.asp"><strong>Freeriding</strong></a>: This is another violation that can afflict a cash account. It prohibits investors from buying and selling securities before paying for them from their cash account.</li>
<li><strong>Good faith violation</strong>: This occurs when a cash account buys a stock with unsettled funds and liquidates it prior to settlement. For example, an investor has $20,000 of ABC stock though the cash account balance is $0. They sell $10,000 of ABC stock on Monday, which would net $10,000 in cash when it settles on Wednesday. On Tuesday, the investor buys and sells $10,000 of XYZ stock. This is considered to be a good faith violation as the account did not have the cash to buy XYZ in the first place.</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-advantages-and-disadvantages-of-cash-trading"></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"> Advantages and Disadvantages of Cash Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Cash trading doesn't involve the use of margin, which means they tend to be safer than margin trading accounts. For instance, a trader who purchases $1,000 worth of stock in a cash account can only lose the $1,000 that they invested, whereas a trader who purchases $1,000 worth of stock on margin could potentially lose more than their original investment. Cash trading also saves traders money in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest_cost.asp">interest costs</a> that would be incurred with margin accounts.
</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 downside of cash trading is that there is less <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/upside.asp">upside</a> potential due to the lack of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a>. For instance, the same dollar gain on a cash account and margin account could represent a difference in percentage return since margin accounts require less money down.
</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"> Another potential downside is that cash accounts require funds to settle before they can be used again, which is a process that can take several days at some brokerages.
</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-cash-trading-vs-margin-trading"></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"> Cash Trading vs. Margin Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> In a cash account, all transactions must be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/long.asp">long positions</a> made with available cash. When buying securities in a cash account, the investor must deposit cash to settle the trade—or sell an existing position two business days in advance to free up the necessary funds. In this respect, cash trading is fairly straightforward.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaccount.asp">margin account</a>, on the other hand, allows an investor to borrow against the value of the assets in the account in order to purchase new positions or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">sell short.</a> Investors can use margin to leverage their positions and profit from both bullish and bearish moves in the market.
</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"> Margin can also be used to make cash withdrawals against the value of the account in the form of a short-term loan. For investors seeking to leverage their positions, a margin account can be very useful and cost-effective.
</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"> When a margin balance (debit) is created, the outstanding balance is subject to a daily interest rate charged by the firm. These rates are based on the current <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>, plus an additional amount that is charged by the lending firm. This rate can be quite high. Moreover, leveraged positions will increase the riskiness as well as potential upside.
</p></div> | ## What Is Cash Trading?
Cash trading requires that all transactions be paid for by funds available in the account at the time of settlement. It is the buying or selling of [securities](https://www.investopedia.com/terms/s/security.asp) by providing the capital needed to fund the transaction without relying on the use of [margin](https://www.investopedia.com/terms/m/margin.asp).
Cash trading can only be carried out if the [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp) has sufficient cash needed to complete a transaction.
### Key Takeaways
* Cash trading involves buying or selling securities using cash funds held in a brokerage or clearing account.
* Cash trading does not involve the use of margin, which means cash trades tend to be safer for brokers than margin trading accounts.
* The downside of cash trading is that there is less upside potential due to the lack of leverage.
## Understanding Cash Trading
Cash trading is simply the buying and selling of securities using cash on hand rather than borrowed capital or margin. Most brokers offer cash trading accounts as a default account option. Since there’s no margin provided, these accounts are much simpler to open and maintain than margin accounts.
The lack of margin makes these accounts inappropriate for most [active traders](https://www.investopedia.com/terms/a/active-trading.asp). However, [long-term investors](https://www.investopedia.com/terms/l/longterminvestments.asp) may use these accounts as a standard option since they don’t typically buy securities on margin or require rapid trading settlements.
The [settlement date](https://www.investopedia.com/terms/s/settlementdate.asp) is the day when the transaction is deemed to be consummated and the buyer has to complete full payment. Stock trades placed in [cash accounts](https://www.investopedia.com/terms/c/cashaccount.asp) used to require up to three business days for settlement but that was amended in 2017 to two days. Market terminology for settlement is T+2—trade date plus two business days.
The [settlement](https://www.investopedia.com/terms/s/settlement_period.asp) process involves transferring the securities to the buyer’s account and the cash into the seller’s account. The rules governing cash accounts are contained in [Regulation T](https://www.investopedia.com/terms/r/regulationt.asp).
## Special Considerations
The most common types of potential violations that an investor should be aware of if they are cash trading are:
* **Cash liquidation violation**:One cannot buy if there is insufficient cash to cover that trade. For example, a cash trading account has $5,000 available cash and $20,000 tied up in ABC stock. An investor buys $10,000 of EFG stock on Monday and sells $10,000 of ABC stock on Tuesday. The settlement date for EFG stock is Wednesday (T+2), at which time the payment of $10,000 must be made in full. The available cash is still at $5,000 as the sale of $10,000 of ABC stock will not be finalized until Thursday. Therefore, the investor will not be allowed to buy $10,000 of EFG.
* [**Freeriding**](https://www.investopedia.com/terms/f/freeriding.asp): This is another violation that can afflict a cash account. It prohibits investors from buying and selling securities before paying for them from their cash account.
* **Good faith violation**: This occurs when a cash account buys a stock with unsettled funds and liquidates it prior to settlement. For example, an investor has $20,000 of ABC stock though the cash account balance is $0. They sell $10,000 of ABC stock on Monday, which would net $10,000 in cash when it settles on Wednesday. On Tuesday, the investor buys and sells $10,000 of XYZ stock. This is considered to be a good faith violation as the account did not have the cash to buy XYZ in the first place.
## Advantages and Disadvantages of Cash Trading
Cash trading doesn't involve the use of margin, which means they tend to be safer than margin trading accounts. For instance, a trader who purchases $1,000 worth of stock in a cash account can only lose the $1,000 that they invested, whereas a trader who purchases $1,000 worth of stock on margin could potentially lose more than their original investment. Cash trading also saves traders money in [interest costs](https://www.investopedia.com/terms/i/interest_cost.asp) that would be incurred with margin accounts.
The downside of cash trading is that there is less [upside](https://www.investopedia.com/terms/u/upside.asp) potential due to the lack of [leverage](https://www.investopedia.com/terms/l/leverage.asp). For instance, the same dollar gain on a cash account and margin account could represent a difference in percentage return since margin accounts require less money down.
Another potential downside is that cash accounts require funds to settle before they can be used again, which is a process that can take several days at some brokerages.
## Cash Trading vs. Margin Trading
In a cash account, all transactions must be [long positions](https://www.investopedia.com/terms/l/long.asp) made with available cash. When buying securities in a cash account, the investor must deposit cash to settle the trade—or sell an existing position two business days in advance to free up the necessary funds. In this respect, cash trading is fairly straightforward.
A [margin account](https://www.investopedia.com/terms/m/marginaccount.asp), on the other hand, allows an investor to borrow against the value of the assets in the account in order to purchase new positions or [sell short.](https://www.investopedia.com/terms/s/shortselling.asp) Investors can use margin to leverage their positions and profit from both bullish and bearish moves in the market.
Margin can also be used to make cash withdrawals against the value of the account in the form of a short-term loan. For investors seeking to leverage their positions, a margin account can be very useful and cost-effective.
When a margin balance (debit) is created, the outstanding balance is subject to a daily interest rate charged by the firm. These rates are based on the current [prime rate](https://www.investopedia.com/terms/p/primerate.asp), plus an additional amount that is charged by the lending firm. This rate can be quite high. Moreover, leveraged positions will increase the riskiness as well as potential upside.
| What Is Cash Trading?
Cash trading requires that all transactions be paid for by funds available in the account at the time of settlement. It is the buying or selling of securities by providing the capital needed to fund the transaction without relying on the use of margin.
Cash trading can only be carried out if the brokerage account has sufficient cash needed to complete a transaction.
Key Takeaways
Cash trading involves buying or selling securities using cash funds held in a brokerage or clearing account.Cash trading does not involve the use of margin, which means cash trades tend to be safer for brokers than margin trading accounts.The downside of cash trading is that there is less upside potential due to the lack of leverage.
Understanding Cash Trading
Cash trading is simply the buying and selling of securities using cash on hand rather than borrowed capital or margin. Most brokers offer cash trading accounts as a default account option. Since there’s no margin provided, these accounts are much simpler to open and maintain than margin accounts.
The lack of margin makes these accounts inappropriate for most active traders. However, long-term investors may use these accounts as a standard option since they don’t typically buy securities on margin or require rapid trading settlements.
The settlement date is the day when the transaction is deemed to be consummated and the buyer has to complete full payment. Stock trades placed in cash accounts used to require up to three business days for settlement but that was amended in 2017 to two days. Market terminology for settlement is T+2—trade date plus two business days.
The settlement process involves transferring the securities to the buyer’s account and the cash into the seller’s account. The rules governing cash accounts are contained in Regulation T.
Special Considerations
The most common types of potential violations that an investor should be aware of if they are cash trading are:
Cash liquidation violation: One cannot buy if there is insufficient cash to cover that trade. For example, a cash trading account has $5,000 available cash and $20,000 tied up in ABC stock. An investor buys $10,000 of EFG stock on Monday and sells $10,000 of ABC stock on Tuesday. The settlement date for EFG stock is Wednesday (T+2), at which time the payment of $10,000 must be made in full. The available cash is still at $5,000 as the sale of $10,000 of ABC stock will not be finalized until Thursday. Therefore, the investor will not be allowed to buy $10,000 of EFG.
Freeriding: This is another violation that can afflict a cash account. It prohibits investors from buying and selling securities before paying for them from their cash account.
Good faith violation: This occurs when a cash account buys a stock with unsettled funds and liquidates it prior to settlement. For example, an investor has $20,000 of ABC stock though the cash account balance is $0. They sell $10,000 of ABC stock on Monday, which would net $10,000 in cash when it settles on Wednesday. On Tuesday, the investor buys and sells $10,000 of XYZ stock. This is considered to be a good faith violation as the account did not have the cash to buy XYZ in the first place.
Advantages and Disadvantages of Cash Trading
Cash trading doesn't involve the use of margin, which means they tend to be safer than margin trading accounts. For instance, a trader who purchases $1,000 worth of stock in a cash account can only lose the $1,000 that they invested, whereas a trader who purchases $1,000 worth of stock on margin could potentially lose more than their original investment. Cash trading also saves traders money in interest costs that would be incurred with margin accounts.
The downside of cash trading is that there is less upside potential due to the lack of leverage. For instance, the same dollar gain on a cash account and margin account could represent a difference in percentage return since margin accounts require less money down.
Another potential downside is that cash accounts require funds to settle before they can be used again, which is a process that can take several days at some brokerages.
Cash Trading vs. Margin Trading
In a cash account, all transactions must be long positions made with available cash. When buying securities in a cash account, the investor must deposit cash to settle the trade—or sell an existing position two business days in advance to free up the necessary funds. In this respect, cash trading is fairly straightforward.
A margin account, on the other hand, allows an investor to borrow against the value of the assets in the account in order to purchase new positions or sell short. Investors can use margin to leverage their positions and profit from both bullish and bearish moves in the market.
Margin can also be used to make cash withdrawals against the value of the account in the form of a short-term loan. For investors seeking to leverage their positions, a margin account can be very useful and cost-effective.
When a margin balance (debit) is created, the outstanding balance is subject to a daily interest rate charged by the firm. These rates are based on the current prime rate, plus an additional amount that is charged by the lending firm. This rate can be quite high. Moreover, leveraged positions will increase the riskiness as well as potential upside.
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https://www.investopedia.com/terms/c/coolingoffrule.asp | Cooling-Off Rule | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-cooling-off-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 Cooling-Off Rule? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The phrase "cooling-off rule" is actually applied to three specific yet unrelated situations in the business world. The first usage of the phrase refers to 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) Regulation M, which specifies key points in the process of floating stock shares or issuing bond offerings. It stipulates a restriction on activity and communication during the period just before these issues are offered for sale to the public.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The second more common usage refers to a long-standing requirement regulated by the vendors to provide consumers with a three-day return period.<span class="ql-inline-citation" data-cite="2"></span> A third usage refers to a period of time when government employees (specifically SEC or FINRA employees) who join the private sector should be prohibited from engaging in lobbying activities with the agency where they were formerly employed.<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>This phrase gets used in multiple ways that have unrelated meanings so context is important for understanding the implication.</li><li>The period between issuing prospectus and selling new stock or bond offerings is a cooling-off period where communication between underwriter and issuing company must be minimized or silenced altogether.<span class="ql-inline-citation" data-cite="1"></span></li><li>Consumers who make purchases for hundreds of dollars or more are allowed a cooling-off period where they can return their purchase within three days.<span class="ql-inline-citation" data-cite="2"></span></li><li>Government agencies also expect former employees not to lobby their old agency for a cooling-off period after employment.<span class="ql-inline-citation" data-cite="3"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-cooling-off-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 Cooling-Off Rule </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> When someone refers to the cooling-off rule regarding the issuance of new securities, they may loosely be referring to the SEC's Regulation M, so called because it refers to a "cooling-off period." The restriction is not officially known as the cooling-off rule; it is known as the SEC's Regulation M (not to be confused with a different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulationm.asp">Regulation M</a> issued by the IRS).<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"> The SEC's regulation refers to the time in between the day the preliminary prospectus is filed with the SEC and the day when the new security is actually available for sale or trade. This is also known as a quiet period because the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriter.asp">underwriter</a> and the issuing company are not allowed to discuss the issue with investors during this time.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<span class="heading-toc" id="toc-three-day-return-policy"></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"> Three-Day Return Policy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> In consumer-facing businesses, the cooling-off rule more commonly refers to a consumer protection law regulated by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ftc.asp">Federal Trade Commission</a> (FTC) that allows a buyer to release themselves from a purchase agreement within a set number of days of a purchase. The number of days the buyer has to change their mind without incurring any penalty is different for various products and situations. Many businesses will allow for a longer grace period than three days, but they are not required to do so.<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"> One particular exception to this cooling-off rule comes to bear in the purchase of motor vehicles. If a person buys a car from a dealership and completes the transaction at the physical location of the dealer's business address, then the three-day right of rescission is waived. The sale is final from the moment the contract of sale is signed.<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"> However, if someone were to buy a car from an auto show or in any other location that was not the primary business location of the dealer, then the three-day cooling-off rule actually does apply. Since auto auction houses are actually dealers themselves, the location of the auction is their place of business, which is how such transactions are also considered final once purchased.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<span class="heading-toc" id="toc-lobbying-restrictions"></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"> Lobbying Restrictions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The third usage for the phrase "cooling-off rule" refers to an expected practice that is much less concrete in nature. Government agencies, particularly those involved in finance, such as the SEC, FINRA, the U.S. Treasury Department, or other similar organizations, may find that many of their employees find their way into finance or investment banking careers.<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"> In this capacity, their new employer might find an employee's former connections to government agencies quite valuable when it comes to getting clarification on rules and regulations. However, firms are expected to refrain from sending former employees into lobbying activities immediately after employing them. A one-year cooling-off period is expected.<span class="ql-inline-citation" data-cite="3"></span>
</p></div> | ## What Is the Cooling-Off Rule?
The phrase "cooling-off rule" is actually applied to three specific yet unrelated situations in the business world. The first usage of the phrase refers to the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) Regulation M, which specifies key points in the process of floating stock shares or issuing bond offerings. It stipulates a restriction on activity and communication during the period just before these issues are offered for sale to the public.
The second more common usage refers to a long-standing requirement regulated by the vendors to provide consumers with a three-day return period. A third usage refers to a period of time when government employees (specifically SEC or FINRA employees) who join the private sector should be prohibited from engaging in lobbying activities with the agency where they were formerly employed.
### Key Takeaways
* This phrase gets used in multiple ways that have unrelated meanings so context is important for understanding the implication.
* The period between issuing prospectus and selling new stock or bond offerings is a cooling-off period where communication between underwriter and issuing company must be minimized or silenced altogether.
* Consumers who make purchases for hundreds of dollars or more are allowed a cooling-off period where they can return their purchase within three days.
* Government agencies also expect former employees not to lobby their old agency for a cooling-off period after employment.
## Understanding the Cooling-Off Rule
When someone refers to the cooling-off rule regarding the issuance of new securities, they may loosely be referring to the SEC's Regulation M, so called because it refers to a "cooling-off period." The restriction is not officially known as the cooling-off rule; it is known as the SEC's Regulation M (not to be confused with a different [Regulation M](https://www.investopedia.com/terms/r/regulationm.asp) issued by the IRS).
The SEC's regulation refers to the time in between the day the preliminary prospectus is filed with the SEC and the day when the new security is actually available for sale or trade. This is also known as a quiet period because the [underwriter](https://www.investopedia.com/terms/u/underwriter.asp) and the issuing company are not allowed to discuss the issue with investors during this time.
## Three-Day Return Policy
In consumer-facing businesses, the cooling-off rule more commonly refers to a consumer protection law regulated by the [Federal Trade Commission](https://www.investopedia.com/terms/f/ftc.asp) (FTC) that allows a buyer to release themselves from a purchase agreement within a set number of days of a purchase. The number of days the buyer has to change their mind without incurring any penalty is different for various products and situations. Many businesses will allow for a longer grace period than three days, but they are not required to do so.
One particular exception to this cooling-off rule comes to bear in the purchase of motor vehicles. If a person buys a car from a dealership and completes the transaction at the physical location of the dealer's business address, then the three-day right of rescission is waived. The sale is final from the moment the contract of sale is signed.
However, if someone were to buy a car from an auto show or in any other location that was not the primary business location of the dealer, then the three-day cooling-off rule actually does apply. Since auto auction houses are actually dealers themselves, the location of the auction is their place of business, which is how such transactions are also considered final once purchased.
## Lobbying Restrictions
The third usage for the phrase "cooling-off rule" refers to an expected practice that is much less concrete in nature. Government agencies, particularly those involved in finance, such as the SEC, FINRA, the U.S. Treasury Department, or other similar organizations, may find that many of their employees find their way into finance or investment banking careers.
In this capacity, their new employer might find an employee's former connections to government agencies quite valuable when it comes to getting clarification on rules and regulations. However, firms are expected to refrain from sending former employees into lobbying activities immediately after employing them. A one-year cooling-off period is expected.
| What Is the Cooling-Off Rule?
The phrase "cooling-off rule" is actually applied to three specific yet unrelated situations in the business world. The first usage of the phrase refers to the Securities and Exchange Commission (SEC) Regulation M, which specifies key points in the process of floating stock shares or issuing bond offerings. It stipulates a restriction on activity and communication during the period just before these issues are offered for sale to the public.
The second more common usage refers to a long-standing requirement regulated by the vendors to provide consumers with a three-day return period. A third usage refers to a period of time when government employees (specifically SEC or FINRA employees) who join the private sector should be prohibited from engaging in lobbying activities with the agency where they were formerly employed.
Key Takeaways
This phrase gets used in multiple ways that have unrelated meanings so context is important for understanding the implication.The period between issuing prospectus and selling new stock or bond offerings is a cooling-off period where communication between underwriter and issuing company must be minimized or silenced altogether.Consumers who make purchases for hundreds of dollars or more are allowed a cooling-off period where they can return their purchase within three days.Government agencies also expect former employees not to lobby their old agency for a cooling-off period after employment.
Understanding the Cooling-Off Rule
When someone refers to the cooling-off rule regarding the issuance of new securities, they may loosely be referring to the SEC's Regulation M, so called because it refers to a "cooling-off period." The restriction is not officially known as the cooling-off rule; it is known as the SEC's Regulation M (not to be confused with a different Regulation M issued by the IRS).
The SEC's regulation refers to the time in between the day the preliminary prospectus is filed with the SEC and the day when the new security is actually available for sale or trade. This is also known as a quiet period because the underwriter and the issuing company are not allowed to discuss the issue with investors during this time.
Three-Day Return Policy
In consumer-facing businesses, the cooling-off rule more commonly refers to a consumer protection law regulated by the Federal Trade Commission (FTC) that allows a buyer to release themselves from a purchase agreement within a set number of days of a purchase. The number of days the buyer has to change their mind without incurring any penalty is different for various products and situations. Many businesses will allow for a longer grace period than three days, but they are not required to do so.
One particular exception to this cooling-off rule comes to bear in the purchase of motor vehicles. If a person buys a car from a dealership and completes the transaction at the physical location of the dealer's business address, then the three-day right of rescission is waived. The sale is final from the moment the contract of sale is signed.
However, if someone were to buy a car from an auto show or in any other location that was not the primary business location of the dealer, then the three-day cooling-off rule actually does apply. Since auto auction houses are actually dealers themselves, the location of the auction is their place of business, which is how such transactions are also considered final once purchased.
Lobbying Restrictions
The third usage for the phrase "cooling-off rule" refers to an expected practice that is much less concrete in nature. Government agencies, particularly those involved in finance, such as the SEC, FINRA, the U.S. Treasury Department, or other similar organizations, may find that many of their employees find their way into finance or investment banking careers.
In this capacity, their new employer might find an employee's former connections to government agencies quite valuable when it comes to getting clarification on rules and regulations. However, firms are expected to refrain from sending former employees into lobbying activities immediately after employing them. A one-year cooling-off period is expected.
| [
[
"Securities and Exchange Commission",
"https://www.investopedia.com/terms/s/sec.asp"
],
[
"Regulation M",
"https://www.investopedia.com/terms/r/regulationm.asp"
],
[
"underwriter",
"https://www.investopedia.com/terms/u/underwriter.asp"
],
[
"Federal Trade Commission",
"https://www.investopedia.com/terms/f/ftc.asp"
]
] |
https://www.investopedia.com/terms/c/carding.asp | What Is Carding? How It Works, Prevention Methods, 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-carding"></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 Carding? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Carding is a form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fraud.asp">fraud</a> where stolen credit or debit card information is used to charge prepaid cards, purchase gift cards, or assist other schemes. Stolen cards can be used to purchase store-branded gift cards, which can then be sold or used to purchase other goods that can be sold for cash. Stolen card information can also be sold to others. Credit and debit card thieves who are involved in this type of fraud are called “carders.”<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" 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 Takeways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Carding is a third-party attack on an individual's financial information.</li><li>Card forums are online venues for stolen credit and debit card information and criminal techniques.<br/></li><li>Newer technologies like CVVs, CAPTCHA, and multifactor authentication protect users against carders.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-how-carding-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 Carding Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Carding typically starts with a hacker gaining access to a store’s or website’s <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> processing system, with the hacker obtaining a list of credit or debit cards that were recently used to make purchases. Hackers might exploit weaknesses in the security software and technology intended to protect credit card accounts. They might also procure credit card information by using scanners to copy the coding from the magnetic strips.
</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"> Credit card information might also be compromised by accessing the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primary-account-holder.asp">account holder’s</a> other personal information, such as bank accounts the hacker has already gained entry to, targeting the information at its source. The hacker then sells the list of credit or debit card numbers to a third party—a carder—who uses the stolen information to purchase a gift card.<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"> Carding forums are websites that teach fraudsters about this illicit trade. Fraudsters use these sites to buy and sell their illegally-gained credit and debit card information.<span class="ql-inline-citation" data-cite="3"></span> They also use them for money laundering.<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"> PINs and chips have made it more difficult to use stolen cards in point of sale transactions, but card-not-present sales remain the mainstay of card thieves and are much discussed on carding forums.
</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"> Most credit card companies offer cardholders <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/stolen-credit-card.asp">protection from fraudulent charges if a credit or debit card is reported stolen</a>, but by the time the cards are canceled, the carder has often already made a purchase. The gift cards are used to buy high-value goods, such as cell phones, televisions, and computers, as these goods do not require registration and can be resold later. If the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/organized-retail-crime-7097862">carder purchases a gift card</a> from an electronics retailer, such as Amazon, they may use a third party to receive the goods and then ship them to other locations. This limits the carder’s risk of drawing attention to themselves. The carder may also sell the goods on websites offering a degree of anonymity.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Because credit cards are often canceled quickly after being lost, a major part of carding involves testing the stolen card information to see if it still works. This may involve submitting card-not-present purchase requests on the Internet.</p></div></div></div>
<span class="heading-toc" id="toc-terminology"></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"> Terminology </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Carding comes with its own language. A couple of terms are discussed below.<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"> Fullz </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fullz-definition-4684000">Fullz</a> is slang for "full information". It refers to the information package containing a person's real name, address, and form of identification. The information is used for identity theft and financial fraud. The person whose "fullz" is sold is not a party to the transactions.<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_24-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Credit Card Dump </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-card-dump.asp">credit card dump</a> occurs when a criminal makes an unauthorized digital copy of a credit card. It is performed by physically copying information from the card or hacking the issuer's payments network.<span class="ql-inline-citation" data-cite="5"></span> Although the technique is not new, its scale has expanded tremendously in recent years, with some attacks including millions of victims.
</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-how-companies-prevent-carding-fraud"></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"> How Companies Prevent Carding Fraud </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Companies are implementing various techniques to stay ahead of carders. Some of the more interesting recent changes include requiring more information from the user that is not as easily available to the carder.
</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"> Address Verification System (AVS) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> An AVS system compares the billing address supplied at checkout in an online purchase to the address on record with the credit card company. The results are immediately returned to the seller with a full match, address match, ZIP code match, and no match at all. A properly-functioning AVS system can stop no-match transactions if the card is reported lost or stolen. For the address-only or ZIP-only matches, the seller has discretion to accept or not. AVS is currently used in the United States, Canada, and the United Kingdom.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="7"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> IP Geolocation Check </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> An IP geolocation system compares the IP location of the user's computer to the bill address entered on the checkout page. If they don't match, fraud may be indicated.<span class="ql-inline-citation" data-cite="7"></span> There are legitimate reasons, such as travel, for a failure to match up, but these incidents often warrant further investigation.
</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"> Card Verification Value (CVV) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> A card verification value (CVV) code is a three- or four-digit number on a credit card that adds an extra layer of security for making purchases when the buyer is not physically present. Since it is on the card itself, it verifies that the person making a phone or online purchase actually has a physical copy of the card.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> If your card number is stolen, a thief without the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/validation-code.asp">CVV</a> will have difficulty using it. The CVV can be stored in the card's magnetic strip or in the card's chip. The seller submits the CVV with all other data as part of the transaction authorization request. The issuer can approve, refer, or decline transactions that fail CVV validation, depending on the issuer's procedures.
</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"> Multifactor Authentication (MFA) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Multifactor authentication (MFA) is a security technology that requires more than one method of authentication from independent credentials to verify a user's login or other transaction. It can use two or more independent information bits, such as a password, authenticator token, or biometric data. Using MFA creates a layered process that makes it more difficult for an unauthorized person to access their target, because the attacker probably won't hack all of the layers. MFA originally used only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp">two factors</a>, but more factors are no longer uncommon.<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_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"> CAPTCHA </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart) is a security measure of the challenge-response authentication type. It protects users from password decryption by asking the user to complete a test that proves the test taker is human and not a computer attempting to break into the account.
</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"> CAPTCHA typically uses a random series of images in a block and requires the user to identify them. These are anomaly-spotting systems (e.g. click on the squares with motorcycles). The challenges are designed to be easy for humans, but less so for computers.<span class="ql-inline-citation" data-cite="10"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<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"> Velocity Checks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Velocity checks look at the number of transactions attempted by the same card or site visitor within a given number of seconds or minutes of one another. Typically, users do not make multiple payments in quick succession, especially payments so rapid as to be beyond the capacity of a human being.<span class="ql-inline-citation" data-cite="11"></span> Velocity can be monitored by dollar amount, user IP address, billing address, Bank Identification Number (BIN), and device.
</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-carding-faqs"></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"> Carding FAQs </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-what-is-a-credit-card-skimmer"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Credit Card Skimmer?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A credit card <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/skimming.asp">skimmer</a> is a fraudulent instrument or device placed inside a legitimate reader, such as an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atm.asp">automated teller machine (ATM)</a> or a gas pump to copy the data off cards used in that ATM or pump.<span class="ql-inline-citation" data-cite="13"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_56-0"><span class="heading-toc" id="toc-how-do-criminals-steal-credit-card-information"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Criminals Steal Credit Card Information?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Fraudsters steal credit card information in various ways. They use skimmers, which steal credit and debit card information from ATMs and gas pumps in which they have been installed. They also gain information through phishing scams, site compromises, and by purchasing the information on carder forums.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_58-0"><span class="heading-toc" id="toc-what-is-a-carding-attack"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Carding Attack?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A carding attack is an attempt to place multiple fraudulent orders on a website in rapid succession. It can usually be recognized by a sharp, sudden spike in orders, which usually have the same shipping address. Often the customer information given will be clearly fraudulent.<span class="ql-inline-citation" data-cite="12"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-how-can-you-protect-yourself-from-carding"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Protect Yourself from Carding?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As a seller, you can protect yourself from carding by using one or more of the newly-developed fraud prevention methods like CAPTCHA and CVV. Cardholders should also be careful with their cards and be on the lookout for signs of tampering when using ATMs and gas stations.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Carding is a crime that often involves the purchase of gift cards which can then be spent on relatively difficult-to-trace goods. The goods are then re-sold online or elsewhere. The credit or debit card information may also be resold to others for use in various illicit schemes, such as identity theft and money laundering.
</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"> In the long run, carding can only be prevented if cardholders and those who accept cards aggressively take advantage of every available method to prevent carding. Sellers should use as many prevention aids as they can practically afford, while cardholders should keep an eye out for physical signs of tampering any time they use a card in an ATM or gas pump.
</p></div> | ## What Is Carding?
Carding is a form of [fraud](https://www.investopedia.com/terms/f/fraud.asp) where stolen credit or debit card information is used to charge prepaid cards, purchase gift cards, or assist other schemes. Stolen cards can be used to purchase store-branded gift cards, which can then be sold or used to purchase other goods that can be sold for cash. Stolen card information can also be sold to others. Credit and debit card thieves who are involved in this type of fraud are called “carders.”
### Key Takeways
* Carding is a third-party attack on an individual's financial information.
* Card forums are online venues for stolen credit and debit card information and criminal techniques.
* Newer technologies like CVVs, CAPTCHA, and multifactor authentication protect users against carders.
## How Carding Works
Carding typically starts with a hacker gaining access to a store’s or website’s [credit card](https://www.investopedia.com/terms/c/creditcard.asp) processing system, with the hacker obtaining a list of credit or debit cards that were recently used to make purchases. Hackers might exploit weaknesses in the security software and technology intended to protect credit card accounts. They might also procure credit card information by using scanners to copy the coding from the magnetic strips.
Credit card information might also be compromised by accessing the [account holder’s](https://www.investopedia.com/terms/p/primary-account-holder.asp) other personal information, such as bank accounts the hacker has already gained entry to, targeting the information at its source. The hacker then sells the list of credit or debit card numbers to a third party—a carder—who uses the stolen information to purchase a gift card.
Carding forums are websites that teach fraudsters about this illicit trade. Fraudsters use these sites to buy and sell their illegally-gained credit and debit card information. They also use them for money laundering.
PINs and chips have made it more difficult to use stolen cards in point of sale transactions, but card-not-present sales remain the mainstay of card thieves and are much discussed on carding forums.
Most credit card companies offer cardholders [protection from fraudulent charges if a credit or debit card is reported stolen](https://www.investopedia.com/ask/answers/09/stolen-credit-card.asp), but by the time the cards are canceled, the carder has often already made a purchase. The gift cards are used to buy high-value goods, such as cell phones, televisions, and computers, as these goods do not require registration and can be resold later. If the [carder purchases a gift card](https://www.investopedia.com/organized-retail-crime-7097862) from an electronics retailer, such as Amazon, they may use a third party to receive the goods and then ship them to other locations. This limits the carder’s risk of drawing attention to themselves. The carder may also sell the goods on websites offering a degree of anonymity.
###
Because credit cards are often canceled quickly after being lost, a major part of carding involves testing the stolen card information to see if it still works. This may involve submitting card-not-present purchase requests on the Internet.
## Terminology
Carding comes with its own language. A couple of terms are discussed below.
### Fullz
[Fullz](https://www.investopedia.com/fullz-definition-4684000) is slang for "full information". It refers to the information package containing a person's real name, address, and form of identification. The information is used for identity theft and financial fraud. The person whose "fullz" is sold is not a party to the transactions.
### Credit Card Dump
A [credit card dump](https://www.investopedia.com/terms/c/credit-card-dump.asp) occurs when a criminal makes an unauthorized digital copy of a credit card. It is performed by physically copying information from the card or hacking the issuer's payments network. Although the technique is not new, its scale has expanded tremendously in recent years, with some attacks including millions of victims.
## How Companies Prevent Carding Fraud
Companies are implementing various techniques to stay ahead of carders. Some of the more interesting recent changes include requiring more information from the user that is not as easily available to the carder.
### Address Verification System (AVS)
An AVS system compares the billing address supplied at checkout in an online purchase to the address on record with the credit card company. The results are immediately returned to the seller with a full match, address match, ZIP code match, and no match at all. A properly-functioning AVS system can stop no-match transactions if the card is reported lost or stolen. For the address-only or ZIP-only matches, the seller has discretion to accept or not. AVS is currently used in the United States, Canada, and the United Kingdom.
### IP Geolocation Check
An IP geolocation system compares the IP location of the user's computer to the bill address entered on the checkout page. If they don't match, fraud may be indicated. There are legitimate reasons, such as travel, for a failure to match up, but these incidents often warrant further investigation.
### Card Verification Value (CVV)
A card verification value (CVV) code is a three- or four-digit number on a credit card that adds an extra layer of security for making purchases when the buyer is not physically present. Since it is on the card itself, it verifies that the person making a phone or online purchase actually has a physical copy of the card.
If your card number is stolen, a thief without the [CVV](https://www.investopedia.com/terms/v/validation-code.asp) will have difficulty using it. The CVV can be stored in the card's magnetic strip or in the card's chip. The seller submits the CVV with all other data as part of the transaction authorization request. The issuer can approve, refer, or decline transactions that fail CVV validation, depending on the issuer's procedures.
### Multifactor Authentication (MFA)
Multifactor authentication (MFA) is a security technology that requires more than one method of authentication from independent credentials to verify a user's login or other transaction. It can use two or more independent information bits, such as a password, authenticator token, or biometric data. Using MFA creates a layered process that makes it more difficult for an unauthorized person to access their target, because the attacker probably won't hack all of the layers. MFA originally used only [two factors](https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp), but more factors are no longer uncommon.
### CAPTCHA
CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart) is a security measure of the challenge-response authentication type. It protects users from password decryption by asking the user to complete a test that proves the test taker is human and not a computer attempting to break into the account.
CAPTCHA typically uses a random series of images in a block and requires the user to identify them. These are anomaly-spotting systems (e.g. click on the squares with motorcycles). The challenges are designed to be easy for humans, but less so for computers.
### Velocity Checks
Velocity checks look at the number of transactions attempted by the same card or site visitor within a given number of seconds or minutes of one another. Typically, users do not make multiple payments in quick succession, especially payments so rapid as to be beyond the capacity of a human being. Velocity can be monitored by dollar amount, user IP address, billing address, Bank Identification Number (BIN), and device.
## Carding FAQs
## What Is a Credit Card Skimmer?
A credit card [skimmer](https://www.investopedia.com/terms/s/skimming.asp) is a fraudulent instrument or device placed inside a legitimate reader, such as an [automated teller machine (ATM)](https://www.investopedia.com/terms/a/atm.asp) or a gas pump to copy the data off cards used in that ATM or pump.
## How Do Criminals Steal Credit Card Information?
Fraudsters steal credit card information in various ways. They use skimmers, which steal credit and debit card information from ATMs and gas pumps in which they have been installed. They also gain information through phishing scams, site compromises, and by purchasing the information on carder forums.
## What Is a Carding Attack?
A carding attack is an attempt to place multiple fraudulent orders on a website in rapid succession. It can usually be recognized by a sharp, sudden spike in orders, which usually have the same shipping address. Often the customer information given will be clearly fraudulent.
## How Can You Protect Yourself from Carding?
As a seller, you can protect yourself from carding by using one or more of the newly-developed fraud prevention methods like CAPTCHA and CVV. Cardholders should also be careful with their cards and be on the lookout for signs of tampering when using ATMs and gas stations.
## The Bottom Line
Carding is a crime that often involves the purchase of gift cards which can then be spent on relatively difficult-to-trace goods. The goods are then re-sold online or elsewhere. The credit or debit card information may also be resold to others for use in various illicit schemes, such as identity theft and money laundering.
In the long run, carding can only be prevented if cardholders and those who accept cards aggressively take advantage of every available method to prevent carding. Sellers should use as many prevention aids as they can practically afford, while cardholders should keep an eye out for physical signs of tampering any time they use a card in an ATM or gas pump.
| What Is Carding?
Carding is a form of fraud where stolen credit or debit card information is used to charge prepaid cards, purchase gift cards, or assist other schemes. Stolen cards can be used to purchase store-branded gift cards, which can then be sold or used to purchase other goods that can be sold for cash. Stolen card information can also be sold to others. Credit and debit card thieves who are involved in this type of fraud are called “carders.”
Key Takeways
Carding is a third-party attack on an individual's financial information.Card forums are online venues for stolen credit and debit card information and criminal techniques.Newer technologies like CVVs, CAPTCHA, and multifactor authentication protect users against carders.
How Carding Works
Carding typically starts with a hacker gaining access to a store’s or website’s credit card processing system, with the hacker obtaining a list of credit or debit cards that were recently used to make purchases. Hackers might exploit weaknesses in the security software and technology intended to protect credit card accounts. They might also procure credit card information by using scanners to copy the coding from the magnetic strips.
Credit card information might also be compromised by accessing the account holder’s other personal information, such as bank accounts the hacker has already gained entry to, targeting the information at its source. The hacker then sells the list of credit or debit card numbers to a third party—a carder—who uses the stolen information to purchase a gift card.
Carding forums are websites that teach fraudsters about this illicit trade. Fraudsters use these sites to buy and sell their illegally-gained credit and debit card information. They also use them for money laundering.
PINs and chips have made it more difficult to use stolen cards in point of sale transactions, but card-not-present sales remain the mainstay of card thieves and are much discussed on carding forums.
Most credit card companies offer cardholders protection from fraudulent charges if a credit or debit card is reported stolen, but by the time the cards are canceled, the carder has often already made a purchase. The gift cards are used to buy high-value goods, such as cell phones, televisions, and computers, as these goods do not require registration and can be resold later. If the carder purchases a gift card from an electronics retailer, such as Amazon, they may use a third party to receive the goods and then ship them to other locations. This limits the carder’s risk of drawing attention to themselves. The carder may also sell the goods on websites offering a degree of anonymity.
Because credit cards are often canceled quickly after being lost, a major part of carding involves testing the stolen card information to see if it still works. This may involve submitting card-not-present purchase requests on the Internet.
Terminology
Carding comes with its own language. A couple of terms are discussed below.
Fullz
Fullz is slang for "full information". It refers to the information package containing a person's real name, address, and form of identification. The information is used for identity theft and financial fraud. The person whose "fullz" is sold is not a party to the transactions.
Credit Card Dump
A credit card dump occurs when a criminal makes an unauthorized digital copy of a credit card. It is performed by physically copying information from the card or hacking the issuer's payments network. Although the technique is not new, its scale has expanded tremendously in recent years, with some attacks including millions of victims.
How Companies Prevent Carding Fraud
Companies are implementing various techniques to stay ahead of carders. Some of the more interesting recent changes include requiring more information from the user that is not as easily available to the carder.
Address Verification System (AVS)
An AVS system compares the billing address supplied at checkout in an online purchase to the address on record with the credit card company. The results are immediately returned to the seller with a full match, address match, ZIP code match, and no match at all. A properly-functioning AVS system can stop no-match transactions if the card is reported lost or stolen. For the address-only or ZIP-only matches, the seller has discretion to accept or not. AVS is currently used in the United States, Canada, and the United Kingdom.
IP Geolocation Check
An IP geolocation system compares the IP location of the user's computer to the bill address entered on the checkout page. If they don't match, fraud may be indicated. There are legitimate reasons, such as travel, for a failure to match up, but these incidents often warrant further investigation.
Card Verification Value (CVV)
A card verification value (CVV) code is a three- or four-digit number on a credit card that adds an extra layer of security for making purchases when the buyer is not physically present. Since it is on the card itself, it verifies that the person making a phone or online purchase actually has a physical copy of the card.
If your card number is stolen, a thief without the CVV will have difficulty using it. The CVV can be stored in the card's magnetic strip or in the card's chip. The seller submits the CVV with all other data as part of the transaction authorization request. The issuer can approve, refer, or decline transactions that fail CVV validation, depending on the issuer's procedures.
Multifactor Authentication (MFA)
Multifactor authentication (MFA) is a security technology that requires more than one method of authentication from independent credentials to verify a user's login or other transaction. It can use two or more independent information bits, such as a password, authenticator token, or biometric data. Using MFA creates a layered process that makes it more difficult for an unauthorized person to access their target, because the attacker probably won't hack all of the layers. MFA originally used only two factors, but more factors are no longer uncommon.
CAPTCHA
CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart) is a security measure of the challenge-response authentication type. It protects users from password decryption by asking the user to complete a test that proves the test taker is human and not a computer attempting to break into the account.
CAPTCHA typically uses a random series of images in a block and requires the user to identify them. These are anomaly-spotting systems (e.g. click on the squares with motorcycles). The challenges are designed to be easy for humans, but less so for computers.
Velocity Checks
Velocity checks look at the number of transactions attempted by the same card or site visitor within a given number of seconds or minutes of one another. Typically, users do not make multiple payments in quick succession, especially payments so rapid as to be beyond the capacity of a human being. Velocity can be monitored by dollar amount, user IP address, billing address, Bank Identification Number (BIN), and device.
Carding FAQs
What Is a Credit Card Skimmer?
A credit card skimmer is a fraudulent instrument or device placed inside a legitimate reader, such as an automated teller machine (ATM) or a gas pump to copy the data off cards used in that ATM or pump.
How Do Criminals Steal Credit Card Information?
Fraudsters steal credit card information in various ways. They use skimmers, which steal credit and debit card information from ATMs and gas pumps in which they have been installed. They also gain information through phishing scams, site compromises, and by purchasing the information on carder forums.
What Is a Carding Attack?
A carding attack is an attempt to place multiple fraudulent orders on a website in rapid succession. It can usually be recognized by a sharp, sudden spike in orders, which usually have the same shipping address. Often the customer information given will be clearly fraudulent.
How Can You Protect Yourself from Carding?
As a seller, you can protect yourself from carding by using one or more of the newly-developed fraud prevention methods like CAPTCHA and CVV. Cardholders should also be careful with their cards and be on the lookout for signs of tampering when using ATMs and gas stations.
The Bottom Line
Carding is a crime that often involves the purchase of gift cards which can then be spent on relatively difficult-to-trace goods. The goods are then re-sold online or elsewhere. The credit or debit card information may also be resold to others for use in various illicit schemes, such as identity theft and money laundering.
In the long run, carding can only be prevented if cardholders and those who accept cards aggressively take advantage of every available method to prevent carding. Sellers should use as many prevention aids as they can practically afford, while cardholders should keep an eye out for physical signs of tampering any time they use a card in an ATM or gas pump.
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https://www.investopedia.com/5-takeaways-from-alphabets-google-io-keynote-2024-8648319 | 5 Takeaways From Alphabet's Google I/O Developer Conference Keynote | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">Artificial intelligence (AI)</a> took center stage at Alphabet's (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>) annual developer conference, Google I/O, with the company unveiling several new AI initiatives.<span class="ql-inline-citation" data-cite="4"></span> Here are the key takeaways.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<span class="heading-toc" id="toc-gemini-powered-ai-assistant-with-voice-and-video-capabilities-coming-soon"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> Gemini-Powered AI Assistant With Voice and Video Capabilities Coming Soon </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Google introduced Gemini Live, a voice AI agent, and Project Astra, a prototype AI assistant that responds to video input.
</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"> Gemini Live, which is set to come in the summer, expands upon Gemini’s multimodal capabilities to allow the user to "have an in-depth two-way conversation using your voice."<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Google also showed a video demonstration where its AI agent, Project Astra, was able to identify objects shown on the camera feed and understand code shown on a computer screen, among other tasks.<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"> The Google news comes the day after Microsoft-backed (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>) <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/microsoft-backed-openai-unveils-most-capable-ai-model-gpt-4o-8647639">OpenAI announced</a> improved voice capabilities on ChatGPT powered by the new GPT-4o model.<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-image-video-and-music-generated-by-ai"></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"> Image, Video, and Music Generated by AI </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Google unveiled AI-powered generation tools for images, videos, and music called Imagen 3, Veo, and Music AI Sandbox, respectively.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The company introduced Imagen 3, a text-to-image generation model. Google said that the image generator is preferred in side-by-side comparisons with other image generators.
</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"> Alphabet's chief executive officer, Sundar Pichai, said it is the "best model yet for rendering text" which has often been an indicator that an image is AI-generated. Users can sign up to try Imagen 3 on Labs.Google, its AI workspace, and it will later come to developers and enterprise customers.
</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"> For generative video, Google announced Veo, which can create video content from text and video prompts. The system also has an experimental Video Effects tool. The company said that some of the Veo features will be available to some creators on Labs.Google.
</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"> Google reported that it has been working with YouTube to create a music generator called Music AI Sandbox. The company said that the tool has been designed and tested with artists.<br>
</br></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-ai-overview-in-google-search-rolling-out-in-the-us"></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"> AI Overview in Google Search Rolling Out in the US </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> AI Overview powered by Gemini, which brings multi-step reasoning to Google Search, is starting its rollout in the U.S. Tuesday.
</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 tool summarizes content from Search at the top of the page. It can use data from Google's other services like Maps to answer users' typed questions as well as respond to video inputs.
</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 company said that AI Overview will be available in other countries soon.
</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"> "Google Search is generative AI at the scale of human curiosity," Pichai said, adding that "this is our most exciting chapter of Search yet."
</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-integrating-google-ai-into-android-devices"></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"> Integrating Google AI Into Android Devices </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Google announced that its AI tech will be integrated into Android devices through Gemini Nano, the smallest Gemini model, to run AI locally.
</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 company said that later this year Pixel phones will have multi-modality AI capabilities through Gemini Nano. "This means your phone can understand the world the way you understand," a Google employee explained at the event, adding that with Google Nano a device can respond to text, visual, and audio inputs.
</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 model uses context gathered from the user's phone and runs the workload locally on the device, which could minimize some privacy concerns. The locally run AI tech minimizes latency that can occur when running AI on remote servers and can work without an internet connection since all the work is happening on the device.<br/>
</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-gemini-15-gemma-updates-and-next-generation-hardware"></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"> Gemini 1.5, Gemma Updates and Next Generation Hardware </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The company announced improvements to its AI model, Gemini 1.5 Pro, launched the new Gemini 1.5 Flash model, and added two new Gemma models, as well as unveiled a new version of its tensor processing unit (TPU).
</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 Gemini 1.5 Pro changes include improvements for translation, coding, reasoning, and other uses to improve quality.<span class="ql-inline-citation" data-cite="1"></span> The new Gemini 1.5 Flash is a smaller model that is optimized for more defined tasks where speed is the priority. Both Gemini 1.5 Pro and Gemini 1.5 Flash are available in preview starting Tuesday and will be generally available in June.
</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"> Google also launched two new models, PaliGemma and Gemma 2, for Gemma, Google's family of "lightweight open models." PaliGemma is a vision-language open model, which the company says is the first of its kind, available Tuesday. Gemma 2 is the next generation of Gemma coming in June.
</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"> Google unveiled the sixth generation of its TPU, Trillium, which the company said delivers 4.7 times improved computing performance per chip compared to its predecessor. The company also reiterated that it would be one of the first cloud providers to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-google-expand-partnership-with-nvidia-blackwell-coming-to-google-cloud-in-2025-8628792">offer Nvidia's Blackwell GPUs in early 2025</a>.<br/>
</p>
<div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div>
<a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div> | [Artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) took center stage at Alphabet's ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL)) annual developer conference, Google I/O, with the company unveiling several new AI initiatives. Here are the key takeaways.
## Gemini-Powered AI Assistant With Voice and Video Capabilities Coming Soon
Google introduced Gemini Live, a voice AI agent, and Project Astra, a prototype AI assistant that responds to video input.
Gemini Live, which is set to come in the summer, expands upon Gemini’s multimodal capabilities to allow the user to "have an in-depth two-way conversation using your voice."
Google also showed a video demonstration where its AI agent, Project Astra, was able to identify objects shown on the camera feed and understand code shown on a computer screen, among other tasks.
The Google news comes the day after Microsoft-backed ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) [OpenAI announced](https://www.investopedia.com/microsoft-backed-openai-unveils-most-capable-ai-model-gpt-4o-8647639) improved voice capabilities on ChatGPT powered by the new GPT-4o model.
## Image, Video, and Music Generated by AI
Google unveiled AI-powered generation tools for images, videos, and music called Imagen 3, Veo, and Music AI Sandbox, respectively.
The company introduced Imagen 3, a text-to-image generation model. Google said that the image generator is preferred in side-by-side comparisons with other image generators.
Alphabet's chief executive officer, Sundar Pichai, said it is the "best model yet for rendering text" which has often been an indicator that an image is AI-generated. Users can sign up to try Imagen 3 on Labs.Google, its AI workspace, and it will later come to developers and enterprise customers.
For generative video, Google announced Veo, which can create video content from text and video prompts. The system also has an experimental Video Effects tool. The company said that some of the Veo features will be available to some creators on Labs.Google.
Google reported that it has been working with YouTube to create a music generator called Music AI Sandbox. The company said that the tool has been designed and tested with artists.
## AI Overview in Google Search Rolling Out in the US
AI Overview powered by Gemini, which brings multi-step reasoning to Google Search, is starting its rollout in the U.S. Tuesday.
The tool summarizes content from Search at the top of the page. It can use data from Google's other services like Maps to answer users' typed questions as well as respond to video inputs.
The company said that AI Overview will be available in other countries soon.
"Google Search is generative AI at the scale of human curiosity," Pichai said, adding that "this is our most exciting chapter of Search yet."
## Integrating Google AI Into Android Devices
Google announced that its AI tech will be integrated into Android devices through Gemini Nano, the smallest Gemini model, to run AI locally.
The company said that later this year Pixel phones will have multi-modality AI capabilities through Gemini Nano. "This means your phone can understand the world the way you understand," a Google employee explained at the event, adding that with Google Nano a device can respond to text, visual, and audio inputs.
The model uses context gathered from the user's phone and runs the workload locally on the device, which could minimize some privacy concerns. The locally run AI tech minimizes latency that can occur when running AI on remote servers and can work without an internet connection since all the work is happening on the device.
## Gemini 1.5, Gemma Updates and Next Generation Hardware
The company announced improvements to its AI model, Gemini 1.5 Pro, launched the new Gemini 1.5 Flash model, and added two new Gemma models, as well as unveiled a new version of its tensor processing unit (TPU).
The Gemini 1.5 Pro changes include improvements for translation, coding, reasoning, and other uses to improve quality. The new Gemini 1.5 Flash is a smaller model that is optimized for more defined tasks where speed is the priority. Both Gemini 1.5 Pro and Gemini 1.5 Flash are available in preview starting Tuesday and will be generally available in June.
Google also launched two new models, PaliGemma and Gemma 2, for Gemma, Google's family of "lightweight open models." PaliGemma is a vision-language open model, which the company says is the first of its kind, available Tuesday. Gemma 2 is the next generation of Gemma coming in June.
Google unveiled the sixth generation of its TPU, Trillium, which the company said delivers 4.7 times improved computing performance per chip compared to its predecessor. The company also reiterated that it would be one of the first cloud providers to [offer Nvidia's Blackwell GPUs in early 2025](https://www.investopedia.com/nvidia-google-expand-partnership-with-nvidia-blackwell-coming-to-google-cloud-in-2025-8628792).
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Artificial intelligence (AI) took center stage at Alphabet's (GOOGL) annual developer conference, Google I/O, with the company unveiling several new AI initiatives. Here are the key takeaways.
Gemini-Powered AI Assistant With Voice and Video Capabilities Coming Soon
Google introduced Gemini Live, a voice AI agent, and Project Astra, a prototype AI assistant that responds to video input.
Gemini Live, which is set to come in the summer, expands upon Gemini’s multimodal capabilities to allow the user to "have an in-depth two-way conversation using your voice."
Google also showed a video demonstration where its AI agent, Project Astra, was able to identify objects shown on the camera feed and understand code shown on a computer screen, among other tasks.
The Google news comes the day after Microsoft-backed (MSFT) OpenAI announced improved voice capabilities on ChatGPT powered by the new GPT-4o model.
Image, Video, and Music Generated by AI
Google unveiled AI-powered generation tools for images, videos, and music called Imagen 3, Veo, and Music AI Sandbox, respectively.
The company introduced Imagen 3, a text-to-image generation model. Google said that the image generator is preferred in side-by-side comparisons with other image generators.
Alphabet's chief executive officer, Sundar Pichai, said it is the "best model yet for rendering text" which has often been an indicator that an image is AI-generated. Users can sign up to try Imagen 3 on Labs.Google, its AI workspace, and it will later come to developers and enterprise customers.
For generative video, Google announced Veo, which can create video content from text and video prompts. The system also has an experimental Video Effects tool. The company said that some of the Veo features will be available to some creators on Labs.Google.
Google reported that it has been working with YouTube to create a music generator called Music AI Sandbox. The company said that the tool has been designed and tested with artists.
AI Overview in Google Search Rolling Out in the US
AI Overview powered by Gemini, which brings multi-step reasoning to Google Search, is starting its rollout in the U.S. Tuesday.
The tool summarizes content from Search at the top of the page. It can use data from Google's other services like Maps to answer users' typed questions as well as respond to video inputs.
The company said that AI Overview will be available in other countries soon.
"Google Search is generative AI at the scale of human curiosity," Pichai said, adding that "this is our most exciting chapter of Search yet."
Integrating Google AI Into Android Devices
Google announced that its AI tech will be integrated into Android devices through Gemini Nano, the smallest Gemini model, to run AI locally.
The company said that later this year Pixel phones will have multi-modality AI capabilities through Gemini Nano. "This means your phone can understand the world the way you understand," a Google employee explained at the event, adding that with Google Nano a device can respond to text, visual, and audio inputs.
The model uses context gathered from the user's phone and runs the workload locally on the device, which could minimize some privacy concerns. The locally run AI tech minimizes latency that can occur when running AI on remote servers and can work without an internet connection since all the work is happening on the device.
Gemini 1.5, Gemma Updates and Next Generation Hardware
The company announced improvements to its AI model, Gemini 1.5 Pro, launched the new Gemini 1.5 Flash model, and added two new Gemma models, as well as unveiled a new version of its tensor processing unit (TPU).
The Gemini 1.5 Pro changes include improvements for translation, coding, reasoning, and other uses to improve quality. The new Gemini 1.5 Flash is a smaller model that is optimized for more defined tasks where speed is the priority. Both Gemini 1.5 Pro and Gemini 1.5 Flash are available in preview starting Tuesday and will be generally available in June.
Google also launched two new models, PaliGemma and Gemma 2, for Gemma, Google's family of "lightweight open models." PaliGemma is a vision-language open model, which the company says is the first of its kind, available Tuesday. Gemma 2 is the next generation of Gemma coming in June.
Google unveiled the sixth generation of its TPU, Trillium, which the company said delivers 4.7 times improved computing performance per chip compared to its predecessor. The company also reiterated that it would be one of the first cloud providers to offer Nvidia's Blackwell GPUs in early 2025.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/chase-improves-benefits-for-marriott-boundless-card-offers-new-sign-up-bonus-5218656 | Chase Improves Benefits for Marriott Boundless Card, Offers New Sign-Up Bonus | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 benefits for the Marriott Boundless Credit Card without increasing the annual fee. New and existing cardholders will earn accelerated rewards on select everyday spending categories and can also earn elite night credits when they meet spending requirements.
</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"> Additionally, new cardholders will earn 100,000 bonus points when they meet the minimum spending requirement.
</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 Marriott Bonvoy Boundless Credit Card has received an upgrade, offering more value to loyal Marriott Bonvoy members.</li><li>In addition to making it easier to earn bonus points, the card also adds the ability to earn elite night credits with your spending.</li><li>On top of the new benefits, which are available for both new and existing cardholders, Chase is offering a limited-time bonus for new applicants.</li></ul></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-subheading__text"> The Marriott Bonvoy Boundless Credit Card Adds More Value </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The Marriott Bonvoy Boundless Credit Card is a mid-tier consumer credit card designed for Marriott loyalists. In addition to a sign-up bonus, cardholders can also earn Marriott Bonvoy points with their everyday spending and get automatic silver elite status.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> But now, it'll be even easier to rack up rewards. Chase is now offering 3 points per dollar on up to $6,000 spent annually in combined purchases at grocery stores, gas stations and on dining.
</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 card already offers up to 17 points per dollar on purchases made with participating Marriott hotels—that's 6 points per dollar with the card, up to 10 points per dollar as a Bonvoy member and 1 point per dollar for having Silver elite status. All other purchases net 2 points per dollar.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> On top of the new bonus categories, the card also offers one elite night credit for every $5,000 you spend, with no cap on how many elite night credits you can earn. This is in addition to the 15 elite night credits you get automatically every year as a cardholder.
</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"> To give you an idea of what that means, it takes 25 elite night credits in a year to upgrade your status to Gold (though you can also earn that level when you spend $35,000 in a year on the card), and 50 elite night credits to reach Platinum status.<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"> For most people, the new elite night credit benefit may not make much of a difference in their standing with the Marriott Bonvoy program. But being able to earn up to 6,000 bonus points every year—the base rewards rate is 2 points per dollar, so you're technically only getting an extra 1 point per dollar in those categories—can add up. In fact, 6,000 points are almost enough points for a standard night at a Category 1 hotel (and more than enough for a Category 1 property during off-peak times).<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> On top of the new benefits, Chase is offering a new sign-up bonus for new cardholders. You can earn 100,000 bonus points after you spend at least $3,000 in the first three months from account opening.
</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"> Other benefits the card offers include a free anniversary night award every year, baggage delay insurance, lost luggage reimbursement, trip delay reimbursement and no foreign transaction fees.
</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 benefits for the Marriott Boundless Credit Card without increasing the annual fee. New and existing cardholders will earn accelerated rewards on select everyday spending categories and can also earn elite night credits when they meet spending requirements.
Additionally, new cardholders will earn 100,000 bonus points when they meet the minimum spending requirement.
### Key Takeaways
* The Marriott Bonvoy Boundless Credit Card has received an upgrade, offering more value to loyal Marriott Bonvoy members.
* In addition to making it easier to earn bonus points, the card also adds the ability to earn elite night credits with your spending.
* On top of the new benefits, which are available for both new and existing cardholders, Chase is offering a limited-time bonus for new applicants.
### The Marriott Bonvoy Boundless Credit Card Adds More Value
The Marriott Bonvoy Boundless Credit Card is a mid-tier consumer credit card designed for Marriott loyalists. In addition to a sign-up bonus, cardholders can also earn Marriott Bonvoy points with their everyday spending and get automatic silver elite status.
But now, it'll be even easier to rack up rewards. Chase is now offering 3 points per dollar on up to $6,000 spent annually in combined purchases at grocery stores, gas stations and on dining.
The card already offers up to 17 points per dollar on purchases made with participating Marriott hotels—that's 6 points per dollar with the card, up to 10 points per dollar as a Bonvoy member and 1 point per dollar for having Silver elite status. All other purchases net 2 points per dollar.
On top of the new bonus categories, the card also offers one elite night credit for every $5,000 you spend, with no cap on how many elite night credits you can earn. This is in addition to the 15 elite night credits you get automatically every year as a cardholder.
To give you an idea of what that means, it takes 25 elite night credits in a year to upgrade your status to Gold (though you can also earn that level when you spend $35,000 in a year on the card), and 50 elite night credits to reach Platinum status.
For most people, the new elite night credit benefit may not make much of a difference in their standing with the Marriott Bonvoy program. But being able to earn up to 6,000 bonus points every year—the base rewards rate is 2 points per dollar, so you're technically only getting an extra 1 point per dollar in those categories—can add up. In fact, 6,000 points are almost enough points for a standard night at a Category 1 hotel (and more than enough for a Category 1 property during off-peak times).
On top of the new benefits, Chase is offering a new sign-up bonus for new cardholders. You can earn 100,000 bonus points after you spend at least $3,000 in the first three months from account opening.
Other benefits the card offers include a free anniversary night award every year, baggage delay insurance, lost luggage reimbursement, trip delay reimbursement and no foreign transaction fees.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Today, Chase announced new benefits for the Marriott Boundless Credit Card without increasing the annual fee. New and existing cardholders will earn accelerated rewards on select everyday spending categories and can also earn elite night credits when they meet spending requirements.
Additionally, new cardholders will earn 100,000 bonus points when they meet the minimum spending requirement.
Key Takeaways
The Marriott Bonvoy Boundless Credit Card has received an upgrade, offering more value to loyal Marriott Bonvoy members.In addition to making it easier to earn bonus points, the card also adds the ability to earn elite night credits with your spending.On top of the new benefits, which are available for both new and existing cardholders, Chase is offering a limited-time bonus for new applicants.
The Marriott Bonvoy Boundless Credit Card Adds More Value
The Marriott Bonvoy Boundless Credit Card is a mid-tier consumer credit card designed for Marriott loyalists. In addition to a sign-up bonus, cardholders can also earn Marriott Bonvoy points with their everyday spending and get automatic silver elite status.
But now, it'll be even easier to rack up rewards. Chase is now offering 3 points per dollar on up to $6,000 spent annually in combined purchases at grocery stores, gas stations and on dining.
The card already offers up to 17 points per dollar on purchases made with participating Marriott hotels—that's 6 points per dollar with the card, up to 10 points per dollar as a Bonvoy member and 1 point per dollar for having Silver elite status. All other purchases net 2 points per dollar.
On top of the new bonus categories, the card also offers one elite night credit for every $5,000 you spend, with no cap on how many elite night credits you can earn. This is in addition to the 15 elite night credits you get automatically every year as a cardholder.
To give you an idea of what that means, it takes 25 elite night credits in a year to upgrade your status to Gold (though you can also earn that level when you spend $35,000 in a year on the card), and 50 elite night credits to reach Platinum status.
For most people, the new elite night credit benefit may not make much of a difference in their standing with the Marriott Bonvoy program. But being able to earn up to 6,000 bonus points every year—the base rewards rate is 2 points per dollar, so you're technically only getting an extra 1 point per dollar in those categories—can add up. In fact, 6,000 points are almost enough points for a standard night at a Category 1 hotel (and more than enough for a Category 1 property during off-peak times).
On top of the new benefits, Chase is offering a new sign-up bonus for new cardholders. You can earn 100,000 bonus points after you spend at least $3,000 in the first three months from account opening.
Other benefits the card offers include a free anniversary night award every year, baggage delay insurance, lost luggage reimbursement, trip delay reimbursement and no foreign transaction fees.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/lowes-q1-fy-2024-earnings-preview-8650047 | What You Need To Know Ahead of Lowe's Earnings | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Lowe's posts first-quarter earnings Tuesday, a week after rival Home Depot reported results.</li><li>Analysts expect a decline in revenue and earnings from a year ago, amid a pullback in home-improvement spending as inflation weighs on consumers.</li><li>Lowe's and Home Depot have focused on increasing their share of the professional contractor market, in part to compensate for the slowdown in do-it-yourself spending.</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"> Home-improvement retailer Lowe's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW">LOW</a>) reports first-quarter earnings before the bell Tuesday, a week after rival Home Depot (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD">HD</a>) <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-depot-earnings-q1-fy-2024-results-8648018">reported its own</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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Both Lowe's and Home Depot have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lowes-4q-earnings-beat-expectations-but-2024-outlook-remains-bleak-8600856">said several times</a> over <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-depot-q4-fiscal-2023-earnings-8585053">the last year</a> that a slowdown in consumer spending on do-it-yourself (DIY) projects has impacted sales, as inflation weighs on many consumers.
</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 expect Lowe's to report revenue of $21.12 billion, with profits of $1.68 billion or $2.93 per share, according to consensus estimates compiled by Visible Alpha. All of those figures would be below what Lowe's posted in the first quarter of fiscal 2023, when the company reported $22.35 billion in revenue, with net income of $2.26 billion or $3.77 per share.<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_8-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_9-0"> <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 2024</td>
<td>Q4 2023</td>
<td>Q1 2023</td>
</tr>
<tr>
<td>Revenue</td>
<td>$21.12 billion</td>
<td>$18.6 billion</td>
<td>$22.35 billion</td>
</tr>
<tr>
<td>Diluted EPS</td>
<td>$2.93</td>
<td>$1.77</td>
<td>$3.77</td>
</tr>
<tr>
<td>Net Income</td>
<td>$1.68 billion</td>
<td>$1.02 billion</td>
<td>$2.26 billion</td>
</tr>
</tbody>
</table>
</div></figure>
<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-key-metric-big-ticket-spending"></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"> Key Metric: Big-Ticket Spending </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-depot-q1-fy-2024-earnings-preview-8643751">Like Home Depot</a>, Lowe's could mention a pullback in "<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/big-ticket-item.asp">big-ticket</a> spending" in its report, as inflation-weary consumers have become less likely to take on significant home-improvement projects.
</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"> "Macroeconomic factors like persistent inflation and a stagnant housing market continue to make DIY customers and consumers hesitant to spend on big ticket purchases for their homes," Lowe's CEO Marvin Ellison said in the company's fourth-quarter call in February. "And those who did engage in home improvement activities took on smaller, nondiscretionary projects with a heightened focus on value."<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 retailer launched a new rewards program in January to entice homeowners to become repeat customers, with Tuesday's report set to be the first earnings report since the program was announced.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Ellison said it's "very difficult to predict" when the home-improvement market will pick up steam, as the Federal Reserve waits for inflation to fall further before cutting interest rates. Once that happens, Ellison said, it's also unknown how long it will take for those shifts to impact consumers and their spending habits.
</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-business-spotlight-pro-digital-markets"></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"> Business Spotlight: Pro, Digital Markets </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Lowe's also sells home-improvement goods to professional contractors—a market both it and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-depot-buys-srs-distribution-for-usd18-25b-in-move-to-expand-pro-market-8621457">Home Depot are looking to grow</a>, in part to offset the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lowes-cuts-its-forecast-as-sales-drop-amid-decline-in-diy-project-spending-8405307">DIY spending slowdown</a>. Lowe's is also trying to grow its digital presence, like many other retailers.
</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 the fourth quarter, comparable Pro sales were flat with the prior-year period, with harsh winter weather impacting sales in some areas of the country, Lowe's said.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> In the February earnings call, Ellison said the company's technology team is working to develop more new products and features like the retailer's "immersive kitchen design app" for the Apple Vision Pro, along with its website's ChatGPT plugin that aims to guide consumers in their home-improvement search.
</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"> Lowe's shares have gained about 3.8% so far this year, at $230.71 as of 11:30 a.m. ET Monday.
</p></div> | ### Key Takeaways
* Lowe's posts first-quarter earnings Tuesday, a week after rival Home Depot reported results.
* Analysts expect a decline in revenue and earnings from a year ago, amid a pullback in home-improvement spending as inflation weighs on consumers.
* Lowe's and Home Depot have focused on increasing their share of the professional contractor market, in part to compensate for the slowdown in do-it-yourself spending.
Home-improvement retailer Lowe's ([LOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW)) reports first-quarter earnings before the bell Tuesday, a week after rival Home Depot ([HD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD)) [reported its own](https://www.investopedia.com/home-depot-earnings-q1-fy-2024-results-8648018).
Both Lowe's and Home Depot have [said several times](https://www.investopedia.com/lowes-4q-earnings-beat-expectations-but-2024-outlook-remains-bleak-8600856) over [the last year](https://www.investopedia.com/home-depot-q4-fiscal-2023-earnings-8585053) that a slowdown in consumer spending on do-it-yourself (DIY) projects has impacted sales, as inflation weighs on many consumers.
Analysts expect Lowe's to report revenue of $21.12 billion, with profits of $1.68 billion or $2.93 per share, according to consensus estimates compiled by Visible Alpha. All of those figures would be below what Lowe's posted in the first quarter of fiscal 2023, when the company reported $22.35 billion in revenue, with net income of $2.26 billion or $3.77 per share.
| | Analyst Estimates for Q1 2024 | Q4 2023 | Q1 2023 |
| --- | --- | --- | --- |
| Revenue | $21.12 billion | $18.6 billion | $22.35 billion |
| Diluted EPS | $2.93 | $1.77 | $3.77 |
| Net Income | $1.68 billion | $1.02 billion | $2.26 billion |
## Key Metric: Big-Ticket Spending
[Like Home Depot](https://www.investopedia.com/home-depot-q1-fy-2024-earnings-preview-8643751), Lowe's could mention a pullback in "[big-ticket](https://www.investopedia.com/terms/b/big-ticket-item.asp) spending" in its report, as inflation-weary consumers have become less likely to take on significant home-improvement projects.
"Macroeconomic factors like persistent inflation and a stagnant housing market continue to make DIY customers and consumers hesitant to spend on big ticket purchases for their homes," Lowe's CEO Marvin Ellison said in the company's fourth-quarter call in February. "And those who did engage in home improvement activities took on smaller, nondiscretionary projects with a heightened focus on value."
The retailer launched a new rewards program in January to entice homeowners to become repeat customers, with Tuesday's report set to be the first earnings report since the program was announced.
Ellison said it's "very difficult to predict" when the home-improvement market will pick up steam, as the Federal Reserve waits for inflation to fall further before cutting interest rates. Once that happens, Ellison said, it's also unknown how long it will take for those shifts to impact consumers and their spending habits.
## Business Spotlight: Pro, Digital Markets
Lowe's also sells home-improvement goods to professional contractors—a market both it and [Home Depot are looking to grow](https://www.investopedia.com/home-depot-buys-srs-distribution-for-usd18-25b-in-move-to-expand-pro-market-8621457), in part to offset the [DIY spending slowdown](https://www.investopedia.com/lowes-cuts-its-forecast-as-sales-drop-amid-decline-in-diy-project-spending-8405307). Lowe's is also trying to grow its digital presence, like many other retailers.
For the fourth quarter, comparable Pro sales were flat with the prior-year period, with harsh winter weather impacting sales in some areas of the country, Lowe's said.
In the February earnings call, Ellison said the company's technology team is working to develop more new products and features like the retailer's "immersive kitchen design app" for the Apple Vision Pro, along with its website's ChatGPT plugin that aims to guide consumers in their home-improvement search.
Lowe's shares have gained about 3.8% so far this year, at $230.71 as of 11:30 a.m. ET Monday.
| Key Takeaways
Lowe's posts first-quarter earnings Tuesday, a week after rival Home Depot reported results.Analysts expect a decline in revenue and earnings from a year ago, amid a pullback in home-improvement spending as inflation weighs on consumers.Lowe's and Home Depot have focused on increasing their share of the professional contractor market, in part to compensate for the slowdown in do-it-yourself spending.
Home-improvement retailer Lowe's (LOW) reports first-quarter earnings before the bell Tuesday, a week after rival Home Depot (HD) reported its own.
Both Lowe's and Home Depot have said several times over the last year that a slowdown in consumer spending on do-it-yourself (DIY) projects has impacted sales, as inflation weighs on many consumers.
Analysts expect Lowe's to report revenue of $21.12 billion, with profits of $1.68 billion or $2.93 per share, according to consensus estimates compiled by Visible Alpha. All of those figures would be below what Lowe's posted in the first quarter of fiscal 2023, when the company reported $22.35 billion in revenue, with net income of $2.26 billion or $3.77 per share.
Analyst Estimates for Q1 2024
Q4 2023
Q1 2023
Revenue
$21.12 billion
$18.6 billion
$22.35 billion
Diluted EPS
$2.93
$1.77
$3.77
Net Income
$1.68 billion
$1.02 billion
$2.26 billion
Key Metric: Big-Ticket Spending
Like Home Depot, Lowe's could mention a pullback in "big-ticket spending" in its report, as inflation-weary consumers have become less likely to take on significant home-improvement projects.
"Macroeconomic factors like persistent inflation and a stagnant housing market continue to make DIY customers and consumers hesitant to spend on big ticket purchases for their homes," Lowe's CEO Marvin Ellison said in the company's fourth-quarter call in February. "And those who did engage in home improvement activities took on smaller, nondiscretionary projects with a heightened focus on value."
The retailer launched a new rewards program in January to entice homeowners to become repeat customers, with Tuesday's report set to be the first earnings report since the program was announced.
Ellison said it's "very difficult to predict" when the home-improvement market will pick up steam, as the Federal Reserve waits for inflation to fall further before cutting interest rates. Once that happens, Ellison said, it's also unknown how long it will take for those shifts to impact consumers and their spending habits.
Business Spotlight: Pro, Digital Markets
Lowe's also sells home-improvement goods to professional contractors—a market both it and Home Depot are looking to grow, in part to offset the DIY spending slowdown. Lowe's is also trying to grow its digital presence, like many other retailers.
For the fourth quarter, comparable Pro sales were flat with the prior-year period, with harsh winter weather impacting sales in some areas of the country, Lowe's said.
In the February earnings call, Ellison said the company's technology team is working to develop more new products and features like the retailer's "immersive kitchen design app" for the Apple Vision Pro, along with its website's ChatGPT plugin that aims to guide consumers in their home-improvement search.
Lowe's shares have gained about 3.8% so far this year, at $230.71 as of 11:30 a.m. ET Monday.
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https://www.investopedia.com/urban-outfitters-stock-jumps-after-non-namesake-brands-drive-q1-earnings-beat-8652135 | Urban Outfitters Stock Jumps After Non-Namesake Brands Drive Earnings Beat | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Urban Outfitters shares moved higher in extended trading Tuesday evening after the apparel retailer posted earnings and sales that topped Wall Street expectations.</li><li>Strength in the company's Free People, Anthropologie, and Nuuly brands during the quarter helped offset weakness in its namesake Urban Outfitters brand.</li><li>CFO Melanie Marein-Efron said that consumer demand has remained strong to start the current quarter.</li><li>Urban Outfitters shares may encounter resistance around $43.80 near a horizontal line connecting recent sideways price action.</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"> Urban Outfitters (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=urbn">URBN</a>) shares jumped more than 6% in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/extended_trading.asp">extended-hours</a> trading Tuesday evening after the apparel retailer posted quarterly results that came in ahead of analysts’ expectations amid strength in the company’s non-namesake brands.<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"> For the three month period ending April 30, the company reported <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20provides%20a%20measurement,with%20performance%20in%20previous%20years.">adjusted earnings</a> of 69 cents per shares, beating Wall Street forecasts of 53 cents a share. Revenue in the quarter increased 7.8% to $1.2 billion, edging past the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/streetexpectation.asp#:~:text=The%20Street%20expectation%20is%20the,research%20coverage%20on%20the%20company.">Street expectation</a> of $1.18 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_6-0"></div>
<span class="heading-toc" id="toc-free-people-anthropologie-nuuly-brands-gain"></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"> Free People, Anthropologie, Nuuly Brands Gain </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Retail segment comparable net sales for the Free People and Anthropologie high-end women's brands rose 17.1% and 10.4%, respectively, helping to offset weakness in its namesake Urban Outfitters brand, which reported a 13.7% sales decline from a year earlier. The retailer’s Nuuly clothing rental division also performed strongly in the quarter, posting a 51.4% <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 (YOY)</a> jump in sales, driven by a surge of average active subscribers.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> “We are pleased to report record first quarter sales and earnings driven by continued strength at the Anthropologie, Free People, FP Movement and Nuuly brands,” Urban Outfitters CEO Richard Hayne said in the company’s earnings statement.
</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"> Looking ahead, the company sees current-quarter net sales growth in the mid-single digits, with CFO Melanie Marein-Efron telling analysts on the post <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnings-call.asp#:~:text=Key%20Takeaways,earnings%20for%20a%20specific%20period.">earnings call</a> that consumer demand remains strong. “We are pleased that overall consumer demand has remained strong to start the quarter, and we are planning for this strength to continue throughout the second quarter,” she said.<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>
<span class="heading-toc" id="toc-monitor-this-level-amid-earnings-related-buying"></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"> Monitor This Level Amid Earnings-Related Buying </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Since gaping above two prominent peaks in January, Urban Outfitters shares have traded within a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/112601.asp">chart pattern</a> that closely resembles a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/descendingtriangle.asp">descending triangle</a>. More recently, the price has consolidated between the pattern’s top trendline and the 50-day moving average leading into the company’s quarterly results, indicating a lack of conviction among market participants.
</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"> Given the stock looks set to move higher after the retailer's better-than-expected report, investors should monitor the $43.80 level, an area where the shares may encounter selling pressure near a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Understanding%20a%20Horizontal%20Line&text=For%20a%20horizontal%20resistance%20line,considered%20to%20be%20range%2Dbound.">horizontal line</a> connecting recent <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sidewaysmarket.asp">sideways</a> price action. A decisive move through this level could see the stock retest its late February high at $47.29.
</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"> Urban Outfitters shares gained 6.5% to $43.99 in extended trading.
</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"> <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_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <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
* Urban Outfitters shares moved higher in extended trading Tuesday evening after the apparel retailer posted earnings and sales that topped Wall Street expectations.
* Strength in the company's Free People, Anthropologie, and Nuuly brands during the quarter helped offset weakness in its namesake Urban Outfitters brand.
* CFO Melanie Marein-Efron said that consumer demand has remained strong to start the current quarter.
* Urban Outfitters shares may encounter resistance around $43.80 near a horizontal line connecting recent sideways price action.
Urban Outfitters ([URBN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=urbn)) shares jumped more than 6% in [extended-hours](https://www.investopedia.com/terms/e/extended_trading.asp) trading Tuesday evening after the apparel retailer posted quarterly results that came in ahead of analysts’ expectations amid strength in the company’s non-namesake brands.
For the three month period ending April 30, the company reported [adjusted earnings](https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20provides%20a%20measurement,with%20performance%20in%20previous%20years.) of 69 cents per shares, beating Wall Street forecasts of 53 cents a share. Revenue in the quarter increased 7.8% to $1.2 billion, edging past the [Street expectation](https://www.investopedia.com/terms/s/streetexpectation.asp#:~:text=The%20Street%20expectation%20is%20the,research%20coverage%20on%20the%20company.) of $1.18 billion.
## Free People, Anthropologie, Nuuly Brands Gain
Retail segment comparable net sales for the Free People and Anthropologie high-end women's brands rose 17.1% and 10.4%, respectively, helping to offset weakness in its namesake Urban Outfitters brand, which reported a 13.7% sales decline from a year earlier. The retailer’s Nuuly clothing rental division also performed strongly in the quarter, posting a 51.4% [year-over-year (YOY)](https://www.investopedia.com/terms/y/year-over-year.asp) jump in sales, driven by a surge of average active subscribers.
“We are pleased to report record first quarter sales and earnings driven by continued strength at the Anthropologie, Free People, FP Movement and Nuuly brands,” Urban Outfitters CEO Richard Hayne said in the company’s earnings statement.
Looking ahead, the company sees current-quarter net sales growth in the mid-single digits, with CFO Melanie Marein-Efron telling analysts on the post [earnings call](https://www.investopedia.com/terms/e/earnings-call.asp#:~:text=Key%20Takeaways,earnings%20for%20a%20specific%20period.) that consumer demand remains strong. “We are pleased that overall consumer demand has remained strong to start the quarter, and we are planning for this strength to continue throughout the second quarter,” she said.
## Monitor This Level Amid Earnings-Related Buying
Since gaping above two prominent peaks in January, Urban Outfitters shares have traded within a [chart pattern](https://www.investopedia.com/articles/technical/112601.asp) that closely resembles a [descending triangle](https://www.investopedia.com/terms/d/descendingtriangle.asp). More recently, the price has consolidated between the pattern’s top trendline and the 50-day moving average leading into the company’s quarterly results, indicating a lack of conviction among market participants.
Given the stock looks set to move higher after the retailer's better-than-expected report, investors should monitor the $43.80 level, an area where the shares may encounter selling pressure near a [horizontal line](https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Understanding%20a%20Horizontal%20Line&text=For%20a%20horizontal%20resistance%20line,considered%20to%20be%20range%2Dbound.) connecting recent [sideways](https://www.investopedia.com/terms/s/sidewaysmarket.asp) price action. A decisive move through this level could see the stock retest its late February high at $47.29.
Urban Outfitters shares gained 6.5% to $43.99 in extended trading.
*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
Urban Outfitters shares moved higher in extended trading Tuesday evening after the apparel retailer posted earnings and sales that topped Wall Street expectations.Strength in the company's Free People, Anthropologie, and Nuuly brands during the quarter helped offset weakness in its namesake Urban Outfitters brand.CFO Melanie Marein-Efron said that consumer demand has remained strong to start the current quarter.Urban Outfitters shares may encounter resistance around $43.80 near a horizontal line connecting recent sideways price action.
Urban Outfitters (URBN) shares jumped more than 6% in extended-hours trading Tuesday evening after the apparel retailer posted quarterly results that came in ahead of analysts’ expectations amid strength in the company’s non-namesake brands.
For the three month period ending April 30, the company reported adjusted earnings of 69 cents per shares, beating Wall Street forecasts of 53 cents a share. Revenue in the quarter increased 7.8% to $1.2 billion, edging past the Street expectation of $1.18 billion.
Free People, Anthropologie, Nuuly Brands Gain
Retail segment comparable net sales for the Free People and Anthropologie high-end women's brands rose 17.1% and 10.4%, respectively, helping to offset weakness in its namesake Urban Outfitters brand, which reported a 13.7% sales decline from a year earlier. The retailer’s Nuuly clothing rental division also performed strongly in the quarter, posting a 51.4% year-over-year (YOY) jump in sales, driven by a surge of average active subscribers.
“We are pleased to report record first quarter sales and earnings driven by continued strength at the Anthropologie, Free People, FP Movement and Nuuly brands,” Urban Outfitters CEO Richard Hayne said in the company’s earnings statement.
Looking ahead, the company sees current-quarter net sales growth in the mid-single digits, with CFO Melanie Marein-Efron telling analysts on the post earnings call that consumer demand remains strong. “We are pleased that overall consumer demand has remained strong to start the quarter, and we are planning for this strength to continue throughout the second quarter,” she said.
Monitor This Level Amid Earnings-Related Buying
Since gaping above two prominent peaks in January, Urban Outfitters shares have traded within a chart pattern that closely resembles a descending triangle. More recently, the price has consolidated between the pattern’s top trendline and the 50-day moving average leading into the company’s quarterly results, indicating a lack of conviction among market participants.
Given the stock looks set to move higher after the retailer's better-than-expected report, investors should monitor the $43.80 level, an area where the shares may encounter selling pressure near a horizontal line connecting recent sideways price action. A decisive move through this level could see the stock retest its late February high at $47.29.
Urban Outfitters shares gained 6.5% to $43.99 in extended trading.
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? Please email us at
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https://www.investopedia.com/race-and-insurance-5224764 | Actuarial Group Takes Steps to Identify Racial Bias in Insurance Rates | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> As the insurance industry grapples with potential racial bias in the pricing of insurance products in the age of artificial intelligence and modeling, a group of property casualty actuaries have issued two new research reports to help guide the insurance industry away from the discriminatory effects higher insurance pricing for Black people and others of color.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Two new papers from property casualty actuaries delve into issues of historical and ongoing bias in insurance pricing.</li><li>These papers are on potential Influences among four rating factors and attempts to actually define discrimination in insurance.</li><li><span data-tts="true">Factors such as geography, credit scoring, home ownership, and motor vehicle records affect homeowners and auto insurance rates and can cause Black consumers to pay higher premiums.</span></li><li><span data-tts="true">Actuaries and regulators are trying to untangle factors from societal prejudice for fairer pricing</span></li><li>AI or machine learning can augment or amplify these biases with their vast inputs, and data scientists will be analyzing outcomes for discriminatory pricing effects.</li><li>States have been taking action through regulation or pending legislation to extinguish some factors that can lead to racial bias or to examine data modeling to check for discriminatory effects.<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"> The Casualty Actuarial Society (CAS) published two <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://u7061146.ct.sendgrid.net/ls/click?upn=4tNED-2FM8iDZJQyQ53jATUeFRUYVn5jPYJ45m3WVe9ujXsnxfpgJ2MvR0ZTucs6p-2FFik5_TfH3jrCWpgOH10UfKQmymA7zasSjD6w-2Bj4hdKTZaAog-2FzK2b3ElU9PeqsI8umaSGFpRI2yk9qbMMtfxIRiH-2Fs9I5XolOUL-2F4Czx4BvvQaSXgf87h62ODk1P0UNb-2FPkdvYVE4H0VNlqhIauRsQupg2P271Yh6v8-2By4c1nGxZsBsQXVBEHs-2FgSuJcLgkYHS-2B7sqCZPoMqlQjNTQNxCTWTCfRhsx-2Bs4YPKztJsBAgyfMrxvvsPDKLWgHxydqOEG4e40m7ogTs6IznL6mB2JydJyZRvHqMWXEl3-2BVwW-2BQsNUxe4NWfQhcxLGj5xqd3vKMHOoGwyMgNd3w9SJJ37cPI6sZJvQbe2ZfSBJU0pTQWEYm0o-3D" rel="nofollow">new reports</a> March 31 to examine methods to identify and measure racial bias when pricing products like auto and homeowners insurance after a history of redlining in the industry.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> “We hope with this series to serve as a thought leader and role model for other insurance organizations and corporations in promoting fairness and progress,” stated Victor Carter-Bey, CEO of CAS, an international <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.casact.org/about">organization</a> for credentialing and professional education for actuaries employed in assessing property and casualty risk.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-subheading__text"> These four rating factors loom large in pricing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> One of the two new papers explores <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.casact.org/sites/default/files/2022-03/Research-Paper_Understanding_Potential_Influences.pdf?utm_source=Press+Release&utm_medium=Newswire&utm_campaign=RIP+Series">four specific rating factors</a> that policymakers and insurance regulators have been scrutinizing to ferret out bias in setting homeowners and auto insurance rates. These four widely used insurance rating factors are: credit-based insurance scores; geographic location; homeownership; and motor vehicle records.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For example, geographic location can affect loss and severity in homeowners and auto pricing, two risk factors, but geographic location can often be a result of “historical policies and practices primarily directed at Black people.”
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Black people and families were explicitly segregated and then redlined by banks and racially restrictive covenants through the first half of the 20th century, according to research cited in the paper. Redlining was the term used by the Home Owners’ Loan Corp. in the 1930s for its color-coding maps —neighborhoods deemed “undesirable” colored red, the paper showed. The long and sad history of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redlining.asp">redlining</a> Black communities is pictured and detailed in the CAS paper.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Even today, societal stereotypes can determine where people live. CAS research cited shows White home seekers are more likely to be favored than minorities in houses for sale and in rentals and apartments.
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<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"> Variables might be predictive but also problematic </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> While actuaries might price higher in cities with older housing stock with property risks such as dated electrical wiring systems and higher crime, these variables are not race neutral, in fact, the paper on factors that lead to bias points out. The higher predicted losses leading to higher premiums are also correlated with race, and be a result of decades of inequities and biased long-standing societal approaches to living areas and home ownership, CAS explains.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> There is also a widely demonstrated disproportionate impact of natural disasters on minority groups, as witnessed in recent years by Hurricane Katrina and Harvey.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> "Hurricane Katrina had lasting effects on residents whose homes flooded, in the form of lower credit scores and lower rates of homeownership, compared to neighbors who did not experience flooding," CAS stated, citing outside research.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The CAS researchers noted that all four of these factors have correlated to actual insurance loss over the years, but also can be a strong proxy for race and ethnicity so can have a strong negative impact on low income and minority communities.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> As insurance consumer activist Birny Birnbaum from the center for Economic Justice wrote last spring in an address to CAS, there is "recognition that the historical discrimination has long-lasting effects that disadvantage those groups. Stated differently, you can’t enslave a population for two hundred years and then expect the legacy of that enslavement will disappear overnight."<span class="ql-inline-citation" data-cite="3"></span>
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<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"> Correlation but not causation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Credit scores are also highly controversial because they are predictive of loss but not associated --a credit loss does not mean a property loss -- with it, and insurers use propriety models off-limit to outsiders. But, again, credit-scoring could correlate to race and also reflect decades of discriminatory banking lending practices to Black individuals, CAS explains.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> As a first step, the actuarial group recommends that actuaries and insurance professionals think about “value judgments and stereotypes often assigned to policyholders concentrated in higher insurance risk categories.”
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Many other factors could influence insurance risk, the researchers said, and when actuaries combine these dozens of other factors in a rating model, the outcomes for policyholders could be much improved. CAS also called for more analysis on social bias on individual raising factors as well as the complex models used.
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<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 does unfair discrimination mean? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The second report released recently strives to identify what discrimination in insurance is, and teases out terms such as protected class, unfair discrimination, proxy discrimination, disparate impact, disparate treatment, and disproportionate impact.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> While these are insurance industry rating terms that might reveal different pricing for minority groups, the different definitions applied can lead to higher prices for some consumers. Whether this is fair or right is often a matter of debate for insurers, but if it does cause disparate impact, regulators and now a growing number of actuaries are concerned, the research paper shows.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Actuaries, as part of their job for property insurers, examine whether the rates they charge homeowners vehicle owners are supported by loss experience for the various rating factors employed. While they can be different depending on risk, most U.S. states regulate their scope and impact so they are not “unfairly discriminatory” to protected classes.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Do these individual factors or combinations of factors derive their predictive power in full or in part from their correlation with a prohibited characteristic, or act as a proxy for it, the second paper ponders.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> “If so, then it must also be determined whether this results in disproportionately higher or lower rates for certain groups within that protected class,” CAS says. The organization notes it is not up to them to decide how much correlation between a rating characteristic and race should be tolerated but wants to be at the table with policymakers for the discussion.
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<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"> AI can continue and amplify racial discrimination in pricing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Of great concern and attention among state insurance regulators and CAS is the baking discrimination into artificial intelligence (AI) models through proxy or other characteristics identified and selected with machine learning.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> AI can “propagate that bias into the choices made from the models’ predictions,” the CAS paper on discrimination points out, and effect a consumers insurance rates through statistical bias and mathematical modeling, as a machine does not know what is unfair. Even when subjective human bias is uprooted or not used in any inputs, the inputs themselves can reflect historical bias.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> These factors “may be woven into historical data could still make their way through the modeling process and affect the model’s output, the CAS report notes.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> For this reason, research is underway among the casualty industry, academics and regulators on model fairness and one approach suggests adding other components to the model to blast out bias, while AI data scientists are working on ways to construct methods for bias detection and mitigation.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The National Association of Insurance Commissioners (NAIC), which is meeting this week in Kansas City, has been exploring bias, AI, machine learning and disparate impact more in depth in the past few years through its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="mailto:https://content.naic.org/cmte_ex_race_and_insurance.htm">Special Committee on Insurance and Race.</a> The group is studying longstanding and continuing issues of unfair treatment, proxy discrimination, and disparate impact and making recommendations for statutory and regulatory changes, as well as exploring bias in machine learning, in a discussion slated for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://content.naic.org/sites/default/files/national_meeting/RaceIns%20FINAL_1.pdf">April 6</a>.
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<span class="heading-toc" id="toc-some-states--companies-taking-action"></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"> Some states & companies taking action </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> At least one state focused on fair outcomes for protected classes has turned down insurers' rate applications because of lack of model information. Connecticut has hired a data scientist. Expect more depending on a states’ resources as the NAIC ramps up detection of bias in machine learning and how to minimize bad outcomes — i.e. unwarranted higher pricing — for consumers.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> And, while California already prevents the use of insurance scores in setting consumer property casualty rates, a few other leading states have legislation prohibiting some factors such as credit-based insurance scores in setting rates, and instead relying on driving record and miles driven and years licensed. These states are Maryland, Washington State and Oregon, the CAS report notes.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> While Washington State Insurance Commissioner Mike Kreidler, the longest-serving state insurance commissioner today, issued an emergency order banning credit scores for three years in 2021, it was overturned, also last year. Kreidler, who has served for two decades, is now working on a permanent rule to replace the rejected emergency order, CAS notes.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> CAS identified a few companies, like Root Insurance and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://techcrunch.com/2021/01/13/loop-launches-out-of-stealth-to-make-auto-insurance-more-equitable/">Loop</a>, an insure tech, who have also been taking action on how auto insurance rates are set. Root Insurance announced back in 2020 that they would be discontinuing the use of credit-based insurance scores by 2025 and have also called on other insurance companies to do the same.<span class="ql-inline-citation" data-cite="2"></span>
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<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"> Further reading </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> CAS released two other research reports on race and insurance earlier in March as it evolves in its ways of thinking about the causes and effects of insurance pricing for consumers. These reports are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://u7061146.ct.sendgrid.net/ls/click?upn=4tNED-2FM8iDZJQyQ53jATUZXh6KfEwakGKJsdqJ2bup8Xd9Lp1X0qCQvd9OQZQ2xxsAKn_TfH3jrCWpgOH10UfKQmymA7zasSjD6w-2Bj4hdKTZaAog-2FzK2b3ElU9PeqsI8umaSGFpRI2yk9qbMMtfxIRiH-2Fs9I5XolOUL-2F4Czx4BvvQaSXgf87h62ODk1P0UNb-2FPkdvYVE4H0VNlqhIauRsQupg2P271Yh6v8-2By4c1nGxZsBsQXVBEHs-2FgSuJcLgkYHS-2B7sqCZPoMqlQjNTQNxCTWTCfdcwByUxJy-2B87ltpoJB0IzIU7cL7oCGVZppzqP65IGZblZwtHCstYo34v7sQVCmq7USMsBTLeeQETnxQOum-2FVwvkwKA6DG5blG62vh7uSPV6hzWJ7z4FBgrep2EvXJlp5oLdehavnSoET15mxFjXoXg-3D" rel="nofollow">Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance</a>, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://u7061146.ct.sendgrid.net/ls/click?upn=4tNED-2FM8iDZJQyQ53jATUbyy0O3TscXxdmlOkiDb5R9nrRgjXwO6eEWB2BVxoefTcBI6_TfH3jrCWpgOH10UfKQmymA7zasSjD6w-2Bj4hdKTZaAog-2FzK2b3ElU9PeqsI8umaSGFpRI2yk9qbMMtfxIRiH-2Fs9I5XolOUL-2F4Czx4BvvQaSXgf87h62ODk1P0UNb-2FPkdvYVE4H0VNlqhIauRsQupg2P271Yh6v8-2By4c1nGxZsBsQXVBEHs-2FgSuJcLgkYHS-2B7sqCZPoMqlQjNTQNxCTWTCfVueDm0k-2BH8m0bncPAALgBg1B-2BqSLMgAEjb1JgnHru9XT69FeY45n8rXzUZJv9awQMOhRkXrZQK5rUhgMy0E9YcZ0AudnXa3pXPI5blGnhwzjbr4Co28XT084Slf7OvMKrl6ZzP998-2FQEFs5BGcgoBo-3D" rel="nofollow">Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> The NAIC's committee on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://content.naic.org/sites/default/files/national_meeting/RaceIns%20FINAL_1.pdf">Race and Insurance</a> also has much work outlined and ahead, and archives extensive <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://content.naic.org/sites/default/files/call_materials/2021%20Comment%20Letters%20-%20July%201.pdf">comments</a> from industry and consumer activists on the issue.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> The NAIC said it created a team to review rate models that use predictive analytics with currently three expert actuaries, one of whom is also a behavioral data scientist. The standard-setting organization said that while there is no nationwide tool used by regulators to evaluate algorithmic bias in modes, either in the input or the output, such a development is being evaluated by different states and will be discussed by the NAIC’s new Innovation, Cybersecurity, and Technology Committee.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> However, “Regulators do look for unfairly discriminatory variables and, where the relationship between the variable is risk is not clear, may ask the company for more information to clarify,” the NAIC told <em>Investopedia</em>.
</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> | As the insurance industry grapples with potential racial bias in the pricing of insurance products in the age of artificial intelligence and modeling, a group of property casualty actuaries have issued two new research reports to help guide the insurance industry away from the discriminatory effects higher insurance pricing for Black people and others of color.
###
* Two new papers from property casualty actuaries delve into issues of historical and ongoing bias in insurance pricing.
* These papers are on potential Influences among four rating factors and attempts to actually define discrimination in insurance.
* Factors such as geography, credit scoring, home ownership, and motor vehicle records affect homeowners and auto insurance rates and can cause Black consumers to pay higher premiums.
* Actuaries and regulators are trying to untangle factors from societal prejudice for fairer pricing
* AI or machine learning can augment or amplify these biases with their vast inputs, and data scientists will be analyzing outcomes for discriminatory pricing effects.
* States have been taking action through regulation or pending legislation to extinguish some factors that can lead to racial bias or to examine data modeling to check for discriminatory effects.
The Casualty Actuarial Society (CAS) published two [new reports](https://u7061146.ct.sendgrid.net/ls/click?upn=4tNED-2FM8iDZJQyQ53jATUeFRUYVn5jPYJ45m3WVe9ujXsnxfpgJ2MvR0ZTucs6p-2FFik5_TfH3jrCWpgOH10UfKQmymA7zasSjD6w-2Bj4hdKTZaAog-2FzK2b3ElU9PeqsI8umaSGFpRI2yk9qbMMtfxIRiH-2Fs9I5XolOUL-2F4Czx4BvvQaSXgf87h62ODk1P0UNb-2FPkdvYVE4H0VNlqhIauRsQupg2P271Yh6v8-2By4c1nGxZsBsQXVBEHs-2FgSuJcLgkYHS-2B7sqCZPoMqlQjNTQNxCTWTCfRhsx-2Bs4YPKztJsBAgyfMrxvvsPDKLWgHxydqOEG4e40m7ogTs6IznL6mB2JydJyZRvHqMWXEl3-2BVwW-2BQsNUxe4NWfQhcxLGj5xqd3vKMHOoGwyMgNd3w9SJJ37cPI6sZJvQbe2ZfSBJU0pTQWEYm0o-3D) March 31 to examine methods to identify and measure racial bias when pricing products like auto and homeowners insurance after a history of redlining in the industry.
“We hope with this series to serve as a thought leader and role model for other insurance organizations and corporations in promoting fairness and progress,” stated Victor Carter-Bey, CEO of CAS, an international [organization](https://www.casact.org/about) for credentialing and professional education for actuaries employed in assessing property and casualty risk.
### These four rating factors loom large in pricing
One of the two new papers explores [four specific rating factors](https://www.casact.org/sites/default/files/2022-03/Research-Paper_Understanding_Potential_Influences.pdf?utm_source=Press+Release&utm_medium=Newswire&utm_campaign=RIP+Series) that policymakers and insurance regulators have been scrutinizing to ferret out bias in setting homeowners and auto insurance rates. These four widely used insurance rating factors are: credit-based insurance scores; geographic location; homeownership; and motor vehicle records.
For example, geographic location can affect loss and severity in homeowners and auto pricing, two risk factors, but geographic location can often be a result of “historical policies and practices primarily directed at Black people.”
Black people and families were explicitly segregated and then redlined by banks and racially restrictive covenants through the first half of the 20th century, according to research cited in the paper. Redlining was the term used by the Home Owners’ Loan Corp. in the 1930s for its color-coding maps —neighborhoods deemed “undesirable” colored red, the paper showed. The long and sad history of [redlining](https://www.investopedia.com/terms/r/redlining.asp) Black communities is pictured and detailed in the CAS paper.
Even today, societal stereotypes can determine where people live. CAS research cited shows White home seekers are more likely to be favored than minorities in houses for sale and in rentals and apartments.
### Variables might be predictive but also problematic
While actuaries might price higher in cities with older housing stock with property risks such as dated electrical wiring systems and higher crime, these variables are not race neutral, in fact, the paper on factors that lead to bias points out. The higher predicted losses leading to higher premiums are also correlated with race, and be a result of decades of inequities and biased long-standing societal approaches to living areas and home ownership, CAS explains.
There is also a widely demonstrated disproportionate impact of natural disasters on minority groups, as witnessed in recent years by Hurricane Katrina and Harvey.
"Hurricane Katrina had lasting effects on residents whose homes flooded, in the form of lower credit scores and lower rates of homeownership, compared to neighbors who did not experience flooding," CAS stated, citing outside research.
The CAS researchers noted that all four of these factors have correlated to actual insurance loss over the years, but also can be a strong proxy for race and ethnicity so can have a strong negative impact on low income and minority communities.
As insurance consumer activist Birny Birnbaum from the center for Economic Justice wrote last spring in an address to CAS, there is "recognition that the historical discrimination has long-lasting effects that disadvantage those groups. Stated differently, you can’t enslave a population for two hundred years and then expect the legacy of that enslavement will disappear overnight."
### Correlation but not causation
Credit scores are also highly controversial because they are predictive of loss but not associated --a credit loss does not mean a property loss -- with it, and insurers use propriety models off-limit to outsiders. But, again, credit-scoring could correlate to race and also reflect decades of discriminatory banking lending practices to Black individuals, CAS explains.
As a first step, the actuarial group recommends that actuaries and insurance professionals think about “value judgments and stereotypes often assigned to policyholders concentrated in higher insurance risk categories.”
Many other factors could influence insurance risk, the researchers said, and when actuaries combine these dozens of other factors in a rating model, the outcomes for policyholders could be much improved. CAS also called for more analysis on social bias on individual raising factors as well as the complex models used.
### What does unfair discrimination mean?
The second report released recently strives to identify what discrimination in insurance is, and teases out terms such as protected class, unfair discrimination, proxy discrimination, disparate impact, disparate treatment, and disproportionate impact.
While these are insurance industry rating terms that might reveal different pricing for minority groups, the different definitions applied can lead to higher prices for some consumers. Whether this is fair or right is often a matter of debate for insurers, but if it does cause disparate impact, regulators and now a growing number of actuaries are concerned, the research paper shows.
Actuaries, as part of their job for property insurers, examine whether the rates they charge homeowners vehicle owners are supported by loss experience for the various rating factors employed. While they can be different depending on risk, most U.S. states regulate their scope and impact so they are not “unfairly discriminatory” to protected classes.
Do these individual factors or combinations of factors derive their predictive power in full or in part from their correlation with a prohibited characteristic, or act as a proxy for it, the second paper ponders.
“If so, then it must also be determined whether this results in disproportionately higher or lower rates for certain groups within that protected class,” CAS says. The organization notes it is not up to them to decide how much correlation between a rating characteristic and race should be tolerated but wants to be at the table with policymakers for the discussion.
### AI can continue and amplify racial discrimination in pricing
Of great concern and attention among state insurance regulators and CAS is the baking discrimination into artificial intelligence (AI) models through proxy or other characteristics identified and selected with machine learning.
AI can “propagate that bias into the choices made from the models’ predictions,” the CAS paper on discrimination points out, and effect a consumers insurance rates through statistical bias and mathematical modeling, as a machine does not know what is unfair. Even when subjective human bias is uprooted or not used in any inputs, the inputs themselves can reflect historical bias.
These factors “may be woven into historical data could still make their way through the modeling process and affect the model’s output, the CAS report notes.
For this reason, research is underway among the casualty industry, academics and regulators on model fairness and one approach suggests adding other components to the model to blast out bias, while AI data scientists are working on ways to construct methods for bias detection and mitigation.
The National Association of Insurance Commissioners (NAIC), which is meeting this week in Kansas City, has been exploring bias, AI, machine learning and disparate impact more in depth in the past few years through its [Special Committee on Insurance and Race.](mailto:https://content.naic.org/cmte_ex_race_and_insurance.htm) The group is studying longstanding and continuing issues of unfair treatment, proxy discrimination, and disparate impact and making recommendations for statutory and regulatory changes, as well as exploring bias in machine learning, in a discussion slated for [April 6](https://content.naic.org/sites/default/files/national_meeting/RaceIns%20FINAL_1.pdf).
## Some states & companies taking action
At least one state focused on fair outcomes for protected classes has turned down insurers' rate applications because of lack of model information. Connecticut has hired a data scientist. Expect more depending on a states’ resources as the NAIC ramps up detection of bias in machine learning and how to minimize bad outcomes — i.e. unwarranted higher pricing — for consumers.
And, while California already prevents the use of insurance scores in setting consumer property casualty rates, a few other leading states have legislation prohibiting some factors such as credit-based insurance scores in setting rates, and instead relying on driving record and miles driven and years licensed. These states are Maryland, Washington State and Oregon, the CAS report notes.
While Washington State Insurance Commissioner Mike Kreidler, the longest-serving state insurance commissioner today, issued an emergency order banning credit scores for three years in 2021, it was overturned, also last year. Kreidler, who has served for two decades, is now working on a permanent rule to replace the rejected emergency order, CAS notes.
CAS identified a few companies, like Root Insurance and [Loop](https://techcrunch.com/2021/01/13/loop-launches-out-of-stealth-to-make-auto-insurance-more-equitable/), an insure tech, who have also been taking action on how auto insurance rates are set. Root Insurance announced back in 2020 that they would be discontinuing the use of credit-based insurance scores by 2025 and have also called on other insurance companies to do the same.
### Further reading
CAS released two other research reports on race and insurance earlier in March as it evolves in its ways of thinking about the causes and effects of insurance pricing for consumers. These reports are [Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance](https://u7061146.ct.sendgrid.net/ls/click?upn=4tNED-2FM8iDZJQyQ53jATUZXh6KfEwakGKJsdqJ2bup8Xd9Lp1X0qCQvd9OQZQ2xxsAKn_TfH3jrCWpgOH10UfKQmymA7zasSjD6w-2Bj4hdKTZaAog-2FzK2b3ElU9PeqsI8umaSGFpRI2yk9qbMMtfxIRiH-2Fs9I5XolOUL-2F4Czx4BvvQaSXgf87h62ODk1P0UNb-2FPkdvYVE4H0VNlqhIauRsQupg2P271Yh6v8-2By4c1nGxZsBsQXVBEHs-2FgSuJcLgkYHS-2B7sqCZPoMqlQjNTQNxCTWTCfdcwByUxJy-2B87ltpoJB0IzIU7cL7oCGVZppzqP65IGZblZwtHCstYo34v7sQVCmq7USMsBTLeeQETnxQOum-2FVwvkwKA6DG5blG62vh7uSPV6hzWJ7z4FBgrep2EvXJlp5oLdehavnSoET15mxFjXoXg-3D), and [Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry](https://u7061146.ct.sendgrid.net/ls/click?upn=4tNED-2FM8iDZJQyQ53jATUbyy0O3TscXxdmlOkiDb5R9nrRgjXwO6eEWB2BVxoefTcBI6_TfH3jrCWpgOH10UfKQmymA7zasSjD6w-2Bj4hdKTZaAog-2FzK2b3ElU9PeqsI8umaSGFpRI2yk9qbMMtfxIRiH-2Fs9I5XolOUL-2F4Czx4BvvQaSXgf87h62ODk1P0UNb-2FPkdvYVE4H0VNlqhIauRsQupg2P271Yh6v8-2By4c1nGxZsBsQXVBEHs-2FgSuJcLgkYHS-2B7sqCZPoMqlQjNTQNxCTWTCfVueDm0k-2BH8m0bncPAALgBg1B-2BqSLMgAEjb1JgnHru9XT69FeY45n8rXzUZJv9awQMOhRkXrZQK5rUhgMy0E9YcZ0AudnXa3pXPI5blGnhwzjbr4Co28XT084Slf7OvMKrl6ZzP998-2FQEFs5BGcgoBo-3D).
The NAIC's committee on [Race and Insurance](https://content.naic.org/sites/default/files/national_meeting/RaceIns%20FINAL_1.pdf) also has much work outlined and ahead, and archives extensive [comments](https://content.naic.org/sites/default/files/call_materials/2021%20Comment%20Letters%20-%20July%201.pdf) from industry and consumer activists on the issue.
The NAIC said it created a team to review rate models that use predictive analytics with currently three expert actuaries, one of whom is also a behavioral data scientist. The standard-setting organization said that while there is no nationwide tool used by regulators to evaluate algorithmic bias in modes, either in the input or the output, such a development is being evaluated by different states and will be discussed by the NAIC’s new Innovation, Cybersecurity, and Technology Committee.
However, “Regulators do look for unfairly discriminatory variables and, where the relationship between the variable is risk is not clear, may ask the company for more information to clarify,” the NAIC told *Investopedia*.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | As the insurance industry grapples with potential racial bias in the pricing of insurance products in the age of artificial intelligence and modeling, a group of property casualty actuaries have issued two new research reports to help guide the insurance industry away from the discriminatory effects higher insurance pricing for Black people and others of color.
Two new papers from property casualty actuaries delve into issues of historical and ongoing bias in insurance pricing.These papers are on potential Influences among four rating factors and attempts to actually define discrimination in insurance.Factors such as geography, credit scoring, home ownership, and motor vehicle records affect homeowners and auto insurance rates and can cause Black consumers to pay higher premiums.Actuaries and regulators are trying to untangle factors from societal prejudice for fairer pricingAI or machine learning can augment or amplify these biases with their vast inputs, and data scientists will be analyzing outcomes for discriminatory pricing effects.States have been taking action through regulation or pending legislation to extinguish some factors that can lead to racial bias or to examine data modeling to check for discriminatory effects.
The Casualty Actuarial Society (CAS) published two new reports March 31 to examine methods to identify and measure racial bias when pricing products like auto and homeowners insurance after a history of redlining in the industry.
“We hope with this series to serve as a thought leader and role model for other insurance organizations and corporations in promoting fairness and progress,” stated Victor Carter-Bey, CEO of CAS, an international organization for credentialing and professional education for actuaries employed in assessing property and casualty risk.
These four rating factors loom large in pricing
One of the two new papers explores four specific rating factors that policymakers and insurance regulators have been scrutinizing to ferret out bias in setting homeowners and auto insurance rates. These four widely used insurance rating factors are: credit-based insurance scores; geographic location; homeownership; and motor vehicle records.
For example, geographic location can affect loss and severity in homeowners and auto pricing, two risk factors, but geographic location can often be a result of “historical policies and practices primarily directed at Black people.”
Black people and families were explicitly segregated and then redlined by banks and racially restrictive covenants through the first half of the 20th century, according to research cited in the paper. Redlining was the term used by the Home Owners’ Loan Corp. in the 1930s for its color-coding maps —neighborhoods deemed “undesirable” colored red, the paper showed. The long and sad history of redlining Black communities is pictured and detailed in the CAS paper.
Even today, societal stereotypes can determine where people live. CAS research cited shows White home seekers are more likely to be favored than minorities in houses for sale and in rentals and apartments.
Variables might be predictive but also problematic
While actuaries might price higher in cities with older housing stock with property risks such as dated electrical wiring systems and higher crime, these variables are not race neutral, in fact, the paper on factors that lead to bias points out. The higher predicted losses leading to higher premiums are also correlated with race, and be a result of decades of inequities and biased long-standing societal approaches to living areas and home ownership, CAS explains.
There is also a widely demonstrated disproportionate impact of natural disasters on minority groups, as witnessed in recent years by Hurricane Katrina and Harvey.
"Hurricane Katrina had lasting effects on residents whose homes flooded, in the form of lower credit scores and lower rates of homeownership, compared to neighbors who did not experience flooding," CAS stated, citing outside research.
The CAS researchers noted that all four of these factors have correlated to actual insurance loss over the years, but also can be a strong proxy for race and ethnicity so can have a strong negative impact on low income and minority communities.
As insurance consumer activist Birny Birnbaum from the center for Economic Justice wrote last spring in an address to CAS, there is "recognition that the historical discrimination has long-lasting effects that disadvantage those groups. Stated differently, you can’t enslave a population for two hundred years and then expect the legacy of that enslavement will disappear overnight."
Correlation but not causation
Credit scores are also highly controversial because they are predictive of loss but not associated --a credit loss does not mean a property loss -- with it, and insurers use propriety models off-limit to outsiders. But, again, credit-scoring could correlate to race and also reflect decades of discriminatory banking lending practices to Black individuals, CAS explains.
As a first step, the actuarial group recommends that actuaries and insurance professionals think about “value judgments and stereotypes often assigned to policyholders concentrated in higher insurance risk categories.”
Many other factors could influence insurance risk, the researchers said, and when actuaries combine these dozens of other factors in a rating model, the outcomes for policyholders could be much improved. CAS also called for more analysis on social bias on individual raising factors as well as the complex models used.
What does unfair discrimination mean?
The second report released recently strives to identify what discrimination in insurance is, and teases out terms such as protected class, unfair discrimination, proxy discrimination, disparate impact, disparate treatment, and disproportionate impact.
While these are insurance industry rating terms that might reveal different pricing for minority groups, the different definitions applied can lead to higher prices for some consumers. Whether this is fair or right is often a matter of debate for insurers, but if it does cause disparate impact, regulators and now a growing number of actuaries are concerned, the research paper shows.
Actuaries, as part of their job for property insurers, examine whether the rates they charge homeowners vehicle owners are supported by loss experience for the various rating factors employed. While they can be different depending on risk, most U.S. states regulate their scope and impact so they are not “unfairly discriminatory” to protected classes.
Do these individual factors or combinations of factors derive their predictive power in full or in part from their correlation with a prohibited characteristic, or act as a proxy for it, the second paper ponders.
“If so, then it must also be determined whether this results in disproportionately higher or lower rates for certain groups within that protected class,” CAS says. The organization notes it is not up to them to decide how much correlation between a rating characteristic and race should be tolerated but wants to be at the table with policymakers for the discussion.
AI can continue and amplify racial discrimination in pricing
Of great concern and attention among state insurance regulators and CAS is the baking discrimination into artificial intelligence (AI) models through proxy or other characteristics identified and selected with machine learning.
AI can “propagate that bias into the choices made from the models’ predictions,” the CAS paper on discrimination points out, and effect a consumers insurance rates through statistical bias and mathematical modeling, as a machine does not know what is unfair. Even when subjective human bias is uprooted or not used in any inputs, the inputs themselves can reflect historical bias.
These factors “may be woven into historical data could still make their way through the modeling process and affect the model’s output, the CAS report notes.
For this reason, research is underway among the casualty industry, academics and regulators on model fairness and one approach suggests adding other components to the model to blast out bias, while AI data scientists are working on ways to construct methods for bias detection and mitigation.
The National Association of Insurance Commissioners (NAIC), which is meeting this week in Kansas City, has been exploring bias, AI, machine learning and disparate impact more in depth in the past few years through its Special Committee on Insurance and Race. The group is studying longstanding and continuing issues of unfair treatment, proxy discrimination, and disparate impact and making recommendations for statutory and regulatory changes, as well as exploring bias in machine learning, in a discussion slated for April 6.
Some states & companies taking action
At least one state focused on fair outcomes for protected classes has turned down insurers' rate applications because of lack of model information. Connecticut has hired a data scientist. Expect more depending on a states’ resources as the NAIC ramps up detection of bias in machine learning and how to minimize bad outcomes — i.e. unwarranted higher pricing — for consumers.
And, while California already prevents the use of insurance scores in setting consumer property casualty rates, a few other leading states have legislation prohibiting some factors such as credit-based insurance scores in setting rates, and instead relying on driving record and miles driven and years licensed. These states are Maryland, Washington State and Oregon, the CAS report notes.
While Washington State Insurance Commissioner Mike Kreidler, the longest-serving state insurance commissioner today, issued an emergency order banning credit scores for three years in 2021, it was overturned, also last year. Kreidler, who has served for two decades, is now working on a permanent rule to replace the rejected emergency order, CAS notes.
CAS identified a few companies, like Root Insurance and Loop, an insure tech, who have also been taking action on how auto insurance rates are set. Root Insurance announced back in 2020 that they would be discontinuing the use of credit-based insurance scores by 2025 and have also called on other insurance companies to do the same.
Further reading
CAS released two other research reports on race and insurance earlier in March as it evolves in its ways of thinking about the causes and effects of insurance pricing for consumers. These reports are Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance, and Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry.
The NAIC's committee on Race and Insurance also has much work outlined and ahead, and archives extensive comments from industry and consumer activists on the issue.
The NAIC said it created a team to review rate models that use predictive analytics with currently three expert actuaries, one of whom is also a behavioral data scientist. The standard-setting organization said that while there is no nationwide tool used by regulators to evaluate algorithmic bias in modes, either in the input or the output, such a development is being evaluated by different states and will be discussed by the NAIC’s new Innovation, Cybersecurity, and Technology Committee.
However, “Regulators do look for unfairly discriminatory variables and, where the relationship between the variable is risk is not clear, may ask the company for more information to clarify,” the NAIC told Investopedia.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/discover-bank-review-5069129 | Discover Bank Review | <div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body">
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<div class="primary-image__media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="Discover" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/Jh744ZwqkAD0xQaUACrug4eUfQg=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/discover-b52ba30736294824b1313fc27fe4f149.jpg" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhEwADAPMAAAAAAAYGBjExMfBOAPRTAPpZAP9iAP92AP+IAP+WAKenp////wAAAAAAAAAAAAAAACwAAAAAEwADAEMIKgABAFiwQMECAAEWECgwUKDDgwMPQlyAIIHEhxIJRlwwwMCBBQIgClwQEAA7')" width="1500"/>
<noscript>
<img alt="Discover" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/Jh744ZwqkAD0xQaUACrug4eUfQg=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/discover-b52ba30736294824b1313fc27fe4f149.jpg" width="1500"/>
</noscript>
</div> </div>
<figcaption class="comp primary-image__figcap mntl-figure-caption figure-article-caption" id="primary-image__figcap_1-0">
<span class="figure-article-caption-owner"><p>Discover</p></span>
</figcaption><!-- end: comp primary-image__figcap mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image -->
<div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0">
<a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.discover.com/" id="commerce-button_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link -->
</div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0">
A division of Discover Financial Services—the company best-known for its pioneering cashback credit card—Discover Online Banking began offering accounts in 2013.<span class="ql-inline-citation" data-cite="32"></span> Virtually, a digital institution, it operates online, through its app and via a vast network of more than 60,000 ATMs.<span class="ql-inline-citation" data-cite="33"></span>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div>
<div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review">
<ul class="tabbed-sc-block__tabs">
<li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros & Cons</span></li>
<li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li>
</ul>
<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
<span class="tabbed-sc-block__text">Pros & Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-2">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Cash-back bonus on debit card purchases</p></li>
<li><p>No fees</p></li>
<li><p>Large ATM network</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Only one brick-and-mortar branch</p></li>
<li><p>High minimum CD deposit</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
</div>
<div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2">
<span class="tabbed-sc-block__text">Company Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2">
<div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-4">
<div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0">
<ul class="definition-list__container">
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Year Founded</span>
<span class="definition-list__item-content definition-list__item-content-0">
1911
</span>
</span>
</li>
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Official Website</span>
<span class="definition-list__item-content definition-list__item-content-1">
www.discover.com
</span>
</span>
</li>
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Banking Products Offered</span>
<span class="definition-list__item-content definition-list__item-content-2">
Savings, checking, CDs, MMA
</span>
</span>
</li>
<li class="definition-list__item">
<span class="definition-list__item-content-container">
<span class="definition-list__item-title">Customer Support</span>
<span class="definition-list__item-content definition-list__item-content-3">
24/7 Phone: 1-800-347-7000
</span>
</span>
</li>
</ul>
</div><!-- end: comp product-spec-tool definition-list -->
</div><!-- end: comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block -->
</div>
</div>
</div>
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</div><!-- end: comp js-toc-appear article-container article-intro mntl-block -->
<div class="loc body-content article-container">
<div class="comp article-body article-content mntl-block" id="article-content_1-0">
<div class="comp left-nav js-sticky-container product-review__left-nav mntl-block" id="product-review__left-nav_1-0">
<div class="comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block" data-desktop-bp="54em" data-tracking-container="true" id="product-review__toc_1-0">
<div class="comp sticky-toc-widget__product-container mntl-block" id="sticky-toc-widget__product-container_1-0">
<figure class="comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image" id="sticky-toc-widget__image_1-0">
<div class="primary-image__media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="Discover" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/Jh744ZwqkAD0xQaUACrug4eUfQg=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/discover-b52ba30736294824b1313fc27fe4f149.jpg" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhEwADAPMAAAAAAAYGBjExMfBOAPRTAPpZAP9iAP92AP+IAP+WAKenp////wAAAAAAAAAAAAAAACwAAAAAEwADAEMIKgABAFiwQMECAAEWECgwUKDDgwMPQlyAIIHEhxIJRlwwwMCBBQIgClwQEAA7')" width="1500"/>
<noscript>
<img alt="Discover" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/Jh744ZwqkAD0xQaUACrug4eUfQg=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/discover-b52ba30736294824b1313fc27fe4f149.jpg" width="1500"/>
</noscript>
</div> </div>
<figcaption class="comp primary-image__figcap mntl-figure-caption figure-article-caption" id="primary-image__figcap_2-0">
<span class="figure-article-caption-owner"><p>Discover</p></span>
</figcaption><!-- end: comp primary-image__figcap mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image -->
<div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0">
<a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.discover.com/" id="commerce-button_2-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link -->
</div><!-- end: comp sticky-toc-widget__cta commerce-block mntl-block -->
</div><!-- end: comp sticky-toc-widget__product-container mntl-block -->
<div class="comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="sticky-toc-widget__toc_3-0">
<div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_3-0">
<div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_3-0">
<div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_3-0">
<span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_5-0">
Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
<div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_3-0">
<button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="View All" id="mntl-toc-toggle__btn_3-0">
View All</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block -->
</div><!-- end: comp mntl-toc-toggle mntl-block -->
</div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block -->
<div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-Discover Bank Review" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0">
<span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0">
Discover Bank Review</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
</div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block -->
<ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0">
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-1">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-1">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Cons Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-cons-explained" id="mntl-toc__list-item-link_3-0-1" rel="nocaes"><span class="link__wrapper">Cons Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-2">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-2">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Best For" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-is-discover-online-banking-best-for" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Best For</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-3">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-3">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bank Offerings" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-does-discover-online-banking-offer" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Bank Offerings</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-4">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-4">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Other Products" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-other-financial-services-offered-by-discover" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Other Products</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-5">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-5">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Service" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-discover-bank-customer-service" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">Customer Service</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-6">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-bank-with-discover-online-banking" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">How to Bank</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-7">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-7">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Final Verdict" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-final-verdict" id="mntl-toc__list-item-link_3-0-7" rel="nocaes"><span class="link__wrapper">Final Verdict</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
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<li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-8">
<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-8">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-8" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
</div><!-- end: comp mntl-toc__list-item-heading mntl-block -->
</li><!-- end: comp mntl-toc__list-item mntl-block -->
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<div class="comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block" data-tracking-container="true" id="product-review__content_1-0">
<div class="comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_2-0">
<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/GuX8B/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Capital One Announces Agreement to Acquire Discover Financial Services"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
</div><!-- end: comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block -->
<span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-1"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-2">
<li><strong>Cash-back bonus on debit card purchases</strong>.<strong> </strong>Cash back on credit cards is pretty standard, but Discover rather uniquely offers a 1% cash-back bonus on anything you buy with your debit card, up to $3,000 in purchases a month. You could potentially earn up to $360 annually.<span class="ql-inline-citation" data-cite="34"></span> </li><li><strong>No fees. </strong>Discover Bank's checking account boasts no fees—no monthly minimum fees or fees for insufficient funds. Plus, you won’t get dinged with a charge for returned items, or should you close your account.</li><li><strong>Large ATM network.</strong> The Discover debit card is accepted at 415,000 ATMs in the U.S overall. Account-holders can make withdrawals at no charge at some 60,000 ATMs belonging to the Allpoint and MoneyPass networks.<span class="ql-inline-citation" data-cite="33"></span> Using a machine outside these networks might incur a surcharge imposed by the third-party ATM owner. Discover itself, however, never charges a fee for ATM use.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-3"> <span class="mntl-sc-block-heading__text"> Cons Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-4">
<li><strong>One brick-and-mortar location.</strong> True to its name, Discover Online Banking has but one actual branch, in Greenwood, Delaware. So if you like face-to-face contact, this isn't the institution for you.</li>
<li><strong>High minimum CD deposits. </strong>While Discover Bank's interest rates for its certificate of deposit stack up nicely against the competition's, you'll need at least $2,500 to get started.<span class="ql-inline-citation" data-cite="36"></span> Other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bank-cd-rates-4801462">online banks</a> allow you to open a CD with as little as $500 or $1,000.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-what-is-discover-online-banking-best-for"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-5"> <span class="mntl-sc-block-heading__text"> What Is Discover Online Banking Best For? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6">
<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking" rel="noopener noreferrer sponsored nofollow">Discover Online Banking</a> should be a good fit for those seeking a digital bank that offers a suite of different services.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-7">
It might be a particularly good fit for those who:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-8">
<li>Prefer paperless, digital transactions</li><li>Hate paying fees</li><li>Typically use their debit card for day-to-day transactions </li><li>Prefer to bank with an established "name" financial institution </li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-what-does-discover-online-banking-offer"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-9"> <span class="mntl-sc-block-heading__text"> What Does Discover Online Banking Offer? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-10">
As you might expect from the banking division of a major financial services company, Discover Bank offers an array of products and services:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11">
<li>Checking account</li><li>Savings account</li><li>Money market account </li><li>Certificates of Deposit</li><li>IRAs</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-12"> <span class="mntl-sc-block-subheading__text"> Discover Checking Account </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-13">
A major feature of the Discover Checking Account is its cash-back debit card. The 1% cash-back reward strictly applies to purchases, though. ATM transactions, money orders, loan payments made with your debit card, and payments using peer-to-peer platforms aren’t eligible for cash-back rewards.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-14">
Besides cash-back on your cards, there are no monthly maintenance fees, insufficient funds, or a fee for returned items or stop payment orders. There’s no minimum to open an account, and there’s no monthly minimum balance to keep the account open.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15">
Other perks include free checks.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-16">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0">
<p>Digital-only banks like Discover's only allow you to withdraw cash from ATMs; you can't deposit cash or physical checks. Discover lets you deposit paper checks via its mobile banking app, or by mail to a Salt Lake City processing center.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-17"> <span class="mntl-sc-block-subheading__text"> Discover Savings Account </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-18">
Like the checking account, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-savings-account-interest-rates-7500041">Discover Savings Account</a> doesn't require any minimum to open or maintain the account. As of March 2024, the annual percentage yield (APY) is 4.25%, which is higher than the average national savings rate of 0.46%.<span class="ql-inline-citation" data-cite="30"></span><span class="ql-inline-citation" data-cite="29"></span>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-19">
Discover Bank’s no-fees features apply here too: The account is free of no monthly maintenance or insufficient funds charges.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-20"> <span class="mntl-sc-block-subheading__text"> Discover Money Market Account </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-21">
While there’s no ongoing minimum required to maintain a Discover Money Market account, you’ll need at least $2,500 minimum to open it.<span class="ql-inline-citation" data-cite="38"></span> There are two interest rates: If your balance is less than $100,000, you’ll earn an APY of 4.00%. If it’s more than $100,000, you’ll get a slight bump of 4.05%.<span class="ql-inline-citation" data-cite="37"></span>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-22">
Once opened, the account generates no monthly maintenance fees, no fees for insufficient funds, or if you make more than six withdrawals or transfers in a given month.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-note mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-23">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-1">
<p>Money market accounts are similar to savings accounts in that they’re a deposit account that generates interest on your money. However, you can typically withdraw funds more easily, usually via a linked debit card; the account may also come with check-writing privileges.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-note mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-24"> <span class="mntl-sc-block-subheading__text"> Discover Certificate of Deposit (CD) </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-25">
Discover’s high-yield certificates of deposit (CD) give you the option of tucking away a sum of money for a set amount of time. CDs usually earn a higher interest rate than a standard savings or checking account. And the longer your term, the more you can earn. The minimum amount for an opening deposit is $2,500.<span class="ql-inline-citation" data-cite="38"></span> Discover’s high-yield CDs range from three months to 10 years, and the interest rates are as follows:<span class="ql-inline-citation" data-cite="36"></span>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-26">
<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">Discover Bank CD Rates</th>
</tr>
<tr>
<th><b>Term</b></th>
<th><b>APY</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>3 Months</td>
<td>2.00%</td>
</tr>
<tr>
<td>6 Months</td>
<td>4.25%</td>
</tr>
<tr>
<td>9 Months</td>
<td>4.25%</td>
</tr>
<tr>
<td>12 Months</td>
<td>4.70%</td>
</tr>
<tr>
<td>18 Months</td>
<td>4.40%</td>
</tr>
<tr>
<td>24 Months</td>
<td>4.00%</td>
</tr>
<tr>
<td>30 Months</td>
<td>3.75%</td>
</tr>
<tr>
<td>36 Months</td>
<td>3.75%</td>
</tr>
<tr>
<td>48 Months</td>
<td>3.75%</td>
</tr>
<tr>
<td>60 Months</td>
<td>3.75%</td>
</tr>
<tr>
<td>7 Years</td>
<td>3.75%</td>
</tr>
<tr>
<td>10 Years</td>
<td>3.75%</td>
</tr>
</tbody>
</table>
<figcaption>As of March 14, 2024</figcaption>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27">
Should you need to take your money out early, you’ll get hit with an early withdrawal penalty. How much you’ll get dinged depends on the term of the CD:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-28">
<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">Discover Bank CD Early Withdrawal Penalties</th>
</tr>
<tr>
<th><b>Term</b></th>
<th><b>Early Withdrawal Fee </b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Less than 1 year</td>
<td>3 months simple interest</td>
</tr>
<tr>
<td>1 year to less than 4 years</td>
<td>6 months simple interest</td>
</tr>
<tr>
<td>4 years to less than 5 years</td>
<td>9 months simple interest </td>
</tr>
<tr>
<td>5 years to less than 7 years </td>
<td>18 months simple interest </td>
</tr>
<tr>
<td>7 years to less than 10 years </td>
<td>24 months simple interest </td>
</tr>
</tbody>
</table>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-29">
Your CD needs to be open for at least eight days before you can pull money.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-30"> <span class="mntl-sc-block-subheading__text"> Discover IRAs </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-31">
Discover offers both an Individual Retirement Account CD and an IRA Savings Account. The IRA CD requires a $2,500 minimum and offers APYs comparable to those of the regular CDs. The IRA Savings has no minimum and currently offers a 4.25% APY.<span class="ql-inline-citation" data-cite="31"></span> The retirement accounts can be either traditional or Roth IRAs.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-32"> <span class="mntl-sc-block-subheading__text"> Discover Credit Cards </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-33">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-2">
<p>Discover has a handful of no-annual-fee credit cards in its network, including a travel card, student card, and gas and restaurant card. Technically speaking, though, these cards are not part of Online Banking but offered through another division of its parent, Discover Financial Services, rather confusingly known as Discover Bank. You don't need to be an Online Banking customer to apply for a Discover credit card; nor does being an Online Banking account-holder or grant you special access to these cards.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-34">
<strong>Cash-Back Cards</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-35">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-it-cash-back-credit-card-review-4798910">Discover it Cash Back</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-it-chrome-credit-card-review-4798690">Discover it Chrome</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-it-chrome-for-students-credit-card-review-4798753">Discover it Chrome for Students</a></li>
<li>NHL Discover it </li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-36">
<strong>General Travel Rewards Cards</strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-37">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-it-miles-credit-card-review-4798934">Discover it Miles</a></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-38">
<strong>Secured Credit Cards </strong>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-39">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-it-secured-credit-card-review-4795882">Discover it Secured Credit Card</a></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-other-financial-services-offered-by-discover"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-40"> <span class="mntl-sc-block-heading__text"> Other Financial Services Offered by Discover </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-41">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-3">
<p>As with the credit cards, the products listed below are technically offered not through Online Banking, but since they are part of Discover Financial Services, the parent company, we list them here as a service.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-42">
<li>Home equity loans </li>
<li>Refinanced mortgages </li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-personal-loans-review-4799530">Personal loans</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-student-loans-review-4796391">Student loans</a> </li>
<li>Debt consolidation </li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-discover-bank-customer-service"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-43"> <span class="mntl-sc-block-heading__text"> Discover Bank Customer Service </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-44">
Discover Online Banking offers 24/7 customer phone support, 365 days a year at 1-800-347-2683 —with reps based entirely in the U.S., as the company likes to emphasize. You can also reach out to customer support by chat. And like most banks, you can deposit a check and access your banking information and financial transactions through its mobile app.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-45">
According to the J.D. Power 2022 U.S. Credit Card Satisfaction Study, among credit card issuers, Discover has the second highest ranking with a score of 841.<span class="ql-inline-citation" data-cite="27"></span> And per the J.D. Power 2022 U.S. Banking Mobile App Satisfaction Study, Discover also ranked in first place in online credit card satisfaction.<span class="ql-inline-citation" data-cite="28"></span>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-warning mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-46">
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-4">
<p>In 2012, Discover Financial Services paid out $200 million to 3.5 million customers for deceptive practices—such as enrolling clients in products like its payment protection plans, without their permission. Discover also paid a civil fine of $7 million both to the Consumer Financial Protection Bureau's (CFPB) Civil Penalty Fund and to the U.S. Treasury.<span class="ql-inline-citation" data-cite="26"></span></p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-warning mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<span class="heading-toc" id="toc-how-to-bank-with-discover-online-banking"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-47"> <span class="mntl-sc-block-heading__text"> How to Bank With Discover Online Banking </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-48">
Opening an Online Bank account is a simple and straightforward process. Whether you’re an existing Discover customer (a card-holder, loan borrower) or are a new one, you can open an account online in minutes.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-final-verdict"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-49"> <span class="mntl-sc-block-heading__text"> Final Verdict </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-50">
Discover Online Banking is an excellent option for those who feel comfortable with a completely digital financial platform. The generous cash-back bonus on its debit card, lack of fees, and around-the-clock service make it a standout in many ways. The interest rates offered on its accounts are competitive. However, Discover Online Banking's options are limited to the bare bones of banks: checking, savings, certificates of deposits, and money market accounts. Beyond that, there are a few IRA account options available. If you're looking for a financial institution that offers a full suite of products and services (i.e., credit cards, mortgages, personal loans, and wealth management), you might be better off looking elsewhere. While other Discover divisions do offer some of these options, it's not clear if there's much interaction among them—and if using one product benefits you with getting another. Likewise, if you like to do your banking in person, Discover Online Banking probably isn't for you. The company's customer reps are friendly and knowledgeable, but it's not the same as developing a relationship with the personnel at a physical branch.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-methodology"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-51"> <span class="mntl-sc-block-heading__text"> Methodology </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks including products available, interest rates, fees, and accessibility to ensure that our content helps users make the right decision for their savings and banking needs.
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<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-retailer-type="none" data-tracking-container="true" href="https://www.discover.com/" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button -->
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<div class="comp mntl-article-sources__citation-sources-1 mntl-citation-sources mntl-sources" data-tracking-container="true" id="mntl-article-sources__citation-sources-1_1-0"> <ol class="mntl-sources__content">
<li class="mntl-sources__source" id="citation-33"><p>Discover Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/cash-atm-locator" rel="nofollow sponsored">ATM Locator</a>."</p></li>
<li class="mntl-sources__source" id="citation-34"><p>Discover Card. "<a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking/banking-topics/how-to-use-your-debit-card-cash-back-to-the-fullest/#:~:text=With%20Discover%20Cashback%20Debit%2C%20you%20can%20earn%201%25%20cash%20back,debit%20card%20purchases%20each%20month.&text=That's%20up%20to%20%24360%20a,your%20daily%20debit%20card%20spending." rel="nofollow sponsored">How to Use Your Debit Card Cash Back to the Fullest</a>."</p></li>
<li class="mntl-sources__source" id="citation-36"><p>Discover Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking/cd-rates/" rel="nofollow sponsored">CD Rates</a>."</p></li>
<li class="mntl-sources__source" id="citation-30"><p>Discover. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking/savings-account/" rel="nofollow sponsored">Online Savings Account</a>.”</p></li>
<li class="mntl-sources__source" id="citation-29"><p>FDIC. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fdic.gov/resources/bankers/national-rates/">National Rates and Rate Caps</a>."</p></li>
<li class="mntl-sources__source" id="citation-38"><p>Discover Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking/money-market/" rel="nofollow sponsored">Money Market Account With High Interest Rates</a>," Select "What Is the Minimum Deposit Amount to Open My Account?"</p></li>
<li class="mntl-sources__source" id="citation-37"><p>Discover Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking/money-market/" rel="nofollow sponsored">Money Market Account With High Interest Rates</a>."</p></li>
<li class="mntl-sources__source" id="citation-31"><p>Discover. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/online-banking/retirement/ira-savings-account/" rel="nofollow sponsored">IRA Savings</a>.”</p></li>
<li class="mntl-sources__source" id="citation-27"><p>J.D. Power. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.jdpower.com/business/press-releases/2022-us-credit-card-satisfaction-study">2022 U.S. Credit Card Satisfaction Study</a>."</p></li>
<li class="mntl-sources__source" id="citation-28"><p>J.D. Power. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.jdpower.com/business/press-releases/2022-us-banking-and-credit-card-mobile-app-satisfaction-studies">2022 U.S. Banking and Credit Card Mobile App</a>."</p></li>
<li class="mntl-sources__source" id="citation-26"><p>Consumer Financial Protection Bureau. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.consumerfinance.gov/about-us/newsroom/discover-consent-order/">Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau Order Discover to Pay $200 Million Consumer Refund for Deceptive Marketing</a>."</p></li>
</ol>
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Discover
[Open Account](https://www.discover.com/)
A division of Discover Financial Services—the company best-known for its pioneering cashback credit card—Discover Online Banking began offering accounts in 2013. Virtually, a digital institution, it operates online, through its app and via a vast network of more than 60,000 ATMs.
* Pros & Cons
* Company Overview
Pros & Cons
Pros
* Cash-back bonus on debit card purchases
* No fees
* Large ATM network
Cons
* Only one brick-and-mortar branch
* High minimum CD deposit
Company Overview
* Year Founded
1911
* Official Website
www.discover.com
* Banking Products Offered
Savings, checking, CDs, MMA
* Customer Support
24/7 Phone: 1-800-347-7000
:fill(white):max_bytes(150000):strip_icc()/discover-b52ba30736294824b1313fc27fe4f149.jpg)
:fill(white):max_bytes(150000):strip_icc()/discover-b52ba30736294824b1313fc27fe4f149.jpg)
Discover
[Open Account](https://www.discover.com/)
Table of Contents
View All
Discover Bank Review
* [Pros Explained](#toc-pros-explained)
* [Cons Explained](#toc-cons-explained)
* [Best For](#toc-what-is-discover-online-banking-best-for)
* [Bank Offerings](#toc-what-does-discover-online-banking-offer)
* [Other Products](#toc-other-financial-services-offered-by-discover)
* [Customer Service](#toc-discover-bank-customer-service)
* [How to Bank](#toc-how-to-bank-with-discover-online-banking)
* [Final Verdict](#toc-final-verdict)
* [Methodology](#toc-methodology)
## Pros Explained
* **Cash-back bonus on debit card purchases**.Cash back on credit cards is pretty standard, but Discover rather uniquely offers a 1% cash-back bonus on anything you buy with your debit card, up to $3,000 in purchases a month. You could potentially earn up to $360 annually.
* **No fees.**Discover Bank's checking account boasts no fees—no monthly minimum fees or fees for insufficient funds. Plus, you won’t get dinged with a charge for returned items, or should you close your account.
* **Large ATM network.** The Discover debit card is accepted at 415,000 ATMs in the U.S overall. Account-holders can make withdrawals at no charge at some 60,000 ATMs belonging to the Allpoint and MoneyPass networks. Using a machine outside these networks might incur a surcharge imposed by the third-party ATM owner. Discover itself, however, never charges a fee for ATM use.
## Cons Explained
* **One brick-and-mortar location.** True to its name, Discover Online Banking has but one actual branch, in Greenwood, Delaware. So if you like face-to-face contact, this isn't the institution for you.
* **High minimum CD deposits.** While Discover Bank's interest rates for its certificate of deposit stack up nicely against the competition's, you'll need at least $2,500 to get started. Other [online banks](https://www.investopedia.com/best-bank-cd-rates-4801462) allow you to open a CD with as little as $500 or $1,000.
## What Is Discover Online Banking Best For?
[Discover Online Banking](https://www.discover.com/online-banking) should be a good fit for those seeking a digital bank that offers a suite of different services.
It might be a particularly good fit for those who:
* Prefer paperless, digital transactions
* Hate paying fees
* Typically use their debit card for day-to-day transactions
* Prefer to bank with an established "name" financial institution
## What Does Discover Online Banking Offer?
As you might expect from the banking division of a major financial services company, Discover Bank offers an array of products and services:
* Checking account
* Savings account
* Money market account
* Certificates of Deposit
* IRAs
### Discover Checking Account
A major feature of the Discover Checking Account is its cash-back debit card. The 1% cash-back reward strictly applies to purchases, though. ATM transactions, money orders, loan payments made with your debit card, and payments using peer-to-peer platforms aren’t eligible for cash-back rewards.
Besides cash-back on your cards, there are no monthly maintenance fees, insufficient funds, or a fee for returned items or stop payment orders. There’s no minimum to open an account, and there’s no monthly minimum balance to keep the account open.
Other perks include free checks.
Digital-only banks like Discover's only allow you to withdraw cash from ATMs; you can't deposit cash or physical checks. Discover lets you deposit paper checks via its mobile banking app, or by mail to a Salt Lake City processing center.
### Discover Savings Account
Like the checking account, [Discover Savings Account](https://www.investopedia.com/discover-savings-account-interest-rates-7500041) doesn't require any minimum to open or maintain the account. As of March 2024, the annual percentage yield (APY) is 4.25%, which is higher than the average national savings rate of 0.46%.
Discover Bank’s no-fees features apply here too: The account is free of no monthly maintenance or insufficient funds charges.
### Discover Money Market Account
While there’s no ongoing minimum required to maintain a Discover Money Market account, you’ll need at least $2,500 minimum to open it. There are two interest rates: If your balance is less than $100,000, you’ll earn an APY of 4.00%. If it’s more than $100,000, you’ll get a slight bump of 4.05%.
Once opened, the account generates no monthly maintenance fees, no fees for insufficient funds, or if you make more than six withdrawals or transfers in a given month.
Money market accounts are similar to savings accounts in that they’re a deposit account that generates interest on your money. However, you can typically withdraw funds more easily, usually via a linked debit card; the account may also come with check-writing privileges.
### Discover Certificate of Deposit (CD)
Discover’s high-yield certificates of deposit (CD) give you the option of tucking away a sum of money for a set amount of time. CDs usually earn a higher interest rate than a standard savings or checking account. And the longer your term, the more you can earn. The minimum amount for an opening deposit is $2,500. Discover’s high-yield CDs range from three months to 10 years, and the interest rates are as follows:
| Discover Bank CD Rates | |
| --- | --- |
| **Term** | **APY** |
| 3 Months | 2.00% |
| 6 Months | 4.25% |
| 9 Months | 4.25% |
| 12 Months | 4.70% |
| 18 Months | 4.40% |
| 24 Months | 4.00% |
| 30 Months | 3.75% |
| 36 Months | 3.75% |
| 48 Months | 3.75% |
| 60 Months | 3.75% |
| 7 Years | 3.75% |
| 10 Years | 3.75% |
As of March 14, 2024
Should you need to take your money out early, you’ll get hit with an early withdrawal penalty. How much you’ll get dinged depends on the term of the CD:
| Discover Bank CD Early Withdrawal Penalties | |
| --- | --- |
| **Term** | **Early Withdrawal Fee** |
| Less than 1 year | 3 months simple interest |
| 1 year to less than 4 years | 6 months simple interest |
| 4 years to less than 5 years | 9 months simple interest |
| 5 years to less than 7 years | 18 months simple interest |
| 7 years to less than 10 years | 24 months simple interest |
Your CD needs to be open for at least eight days before you can pull money.
### Discover IRAs
Discover offers both an Individual Retirement Account CD and an IRA Savings Account. The IRA CD requires a $2,500 minimum and offers APYs comparable to those of the regular CDs. The IRA Savings has no minimum and currently offers a 4.25% APY. The retirement accounts can be either traditional or Roth IRAs.
### Discover Credit Cards
Discover has a handful of no-annual-fee credit cards in its network, including a travel card, student card, and gas and restaurant card. Technically speaking, though, these cards are not part of Online Banking but offered through another division of its parent, Discover Financial Services, rather confusingly known as Discover Bank. You don't need to be an Online Banking customer to apply for a Discover credit card; nor does being an Online Banking account-holder or grant you special access to these cards.
**Cash-Back Cards**
* [Discover it Cash Back](https://www.investopedia.com/discover-it-cash-back-credit-card-review-4798910)
* [Discover it Chrome](https://www.investopedia.com/discover-it-chrome-credit-card-review-4798690)
* [Discover it Chrome for Students](https://www.investopedia.com/discover-it-chrome-for-students-credit-card-review-4798753)
* NHL Discover it
**General Travel Rewards Cards**
* [Discover it Miles](https://www.investopedia.com/discover-it-miles-credit-card-review-4798934)
**Secured Credit Cards**
* [Discover it Secured Credit Card](https://www.investopedia.com/discover-it-secured-credit-card-review-4795882)
## Other Financial Services Offered by Discover
As with the credit cards, the products listed below are technically offered not through Online Banking, but since they are part of Discover Financial Services, the parent company, we list them here as a service.
* Home equity loans
* Refinanced mortgages
* [Personal loans](https://www.investopedia.com/discover-personal-loans-review-4799530)
* [Student loans](https://www.investopedia.com/discover-student-loans-review-4796391)
* Debt consolidation
## Discover Bank Customer Service
Discover Online Banking offers 24/7 customer phone support, 365 days a year at 1-800-347-2683 —with reps based entirely in the U.S., as the company likes to emphasize. You can also reach out to customer support by chat. And like most banks, you can deposit a check and access your banking information and financial transactions through its mobile app.
According to the J.D. Power 2022 U.S. Credit Card Satisfaction Study, among credit card issuers, Discover has the second highest ranking with a score of 841. And per the J.D. Power 2022 U.S. Banking Mobile App Satisfaction Study, Discover also ranked in first place in online credit card satisfaction.
In 2012, Discover Financial Services paid out $200 million to 3.5 million customers for deceptive practices—such as enrolling clients in products like its payment protection plans, without their permission. Discover also paid a civil fine of $7 million both to the Consumer Financial Protection Bureau's (CFPB) Civil Penalty Fund and to the U.S. Treasury.
## How to Bank With Discover Online Banking
Opening an Online Bank account is a simple and straightforward process. Whether you’re an existing Discover customer (a card-holder, loan borrower) or are a new one, you can open an account online in minutes.
## Final Verdict
Discover Online Banking is an excellent option for those who feel comfortable with a completely digital financial platform. The generous cash-back bonus on its debit card, lack of fees, and around-the-clock service make it a standout in many ways. The interest rates offered on its accounts are competitive. However, Discover Online Banking's options are limited to the bare bones of banks: checking, savings, certificates of deposits, and money market accounts. Beyond that, there are a few IRA account options available. If you're looking for a financial institution that offers a full suite of products and services (i.e., credit cards, mortgages, personal loans, and wealth management), you might be better off looking elsewhere. While other Discover divisions do offer some of these options, it's not clear if there's much interaction among them—and if using one product benefits you with getting another. Likewise, if you like to do your banking in person, Discover Online Banking probably isn't for you. The company's customer reps are friendly and knowledgeable, but it's not the same as developing a relationship with the personnel at a physical branch.
## Methodology
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks including products available, interest rates, fees, and accessibility to ensure that our content helps users make the right decision for their savings and banking needs.
[Open Account](https://www.discover.com/)
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
[editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy)
1. Discover Bank. "[ATM Locator](https://www.discover.com/cash-atm-locator)."
2. Discover Card. "[How to Use Your Debit Card Cash Back to the Fullest](https://www.discover.com/online-banking/banking-topics/how-to-use-your-debit-card-cash-back-to-the-fullest/#:~:text=With%20Discover%20Cashback%20Debit%2C%20you%20can%20earn%201%25%20cash%20back,debit%20card%20purchases%20each%20month.&text=That's%20up%20to%20%24360%20a,your%20daily%20debit%20card%20spending.)."
3. Discover Bank. "[CD Rates](https://www.discover.com/online-banking/cd-rates/)."
4. Discover. “[Online Savings Account](https://www.discover.com/online-banking/savings-account/).”
5. FDIC. "[National Rates and Rate Caps](https://www.fdic.gov/resources/bankers/national-rates/)."
6. Discover Bank. "[Money Market Account With High Interest Rates](https://www.discover.com/online-banking/money-market/)," Select "What Is the Minimum Deposit Amount to Open My Account?"
7. Discover Bank. "[Money Market Account With High Interest Rates](https://www.discover.com/online-banking/money-market/)."
8. Discover. “[IRA Savings](https://www.discover.com/online-banking/retirement/ira-savings-account/).”
9. J.D. Power. "[2022 U.S. Credit Card Satisfaction Study](https://www.jdpower.com/business/press-releases/2022-us-credit-card-satisfaction-study)."
10. J.D. Power. "[2022 U.S. Banking and Credit Card Mobile App](https://www.jdpower.com/business/press-releases/2022-us-banking-and-credit-card-mobile-app-satisfaction-studies)."
11. Consumer Financial Protection Bureau. "[Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau Order Discover to Pay $200 Million Consumer Refund for Deceptive Marketing](https://www.consumerfinance.gov/about-us/newsroom/discover-consent-order/)."
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Discover Card: History of the Credit Card, Perks, FAQs](https://www.investopedia.com/terms/d/discover-card.asp)
|
Discover
Open Account
A division of Discover Financial Services—the company best-known for its pioneering cashback credit card—Discover Online Banking began offering accounts in 2013. Virtually, a digital institution, it operates online, through its app and via a vast network of more than 60,000 ATMs.
Pros & Cons
Company Overview
Pros & Cons
Pros
Cash-back bonus on debit card purchases
No fees
Large ATM network
Cons
Only one brick-and-mortar branch
High minimum CD deposit
Company Overview
Year Founded
1911
Official Website
www.discover.com
Banking Products Offered
Savings, checking, CDs, MMA
Customer Support
24/7 Phone: 1-800-347-7000
Discover
Open Account
Table of Contents
View All
Discover Bank Review
Pros Explained
Cons Explained
Best For
Bank Offerings
Other Products
Customer Service
How to Bank
Final Verdict
Methodology
Pros Explained
Cash-back bonus on debit card purchases. Cash back on credit cards is pretty standard, but Discover rather uniquely offers a 1% cash-back bonus on anything you buy with your debit card, up to $3,000 in purchases a month. You could potentially earn up to $360 annually. No fees. Discover Bank's checking account boasts no fees—no monthly minimum fees or fees for insufficient funds. Plus, you won’t get dinged with a charge for returned items, or should you close your account.Large ATM network. The Discover debit card is accepted at 415,000 ATMs in the U.S overall. Account-holders can make withdrawals at no charge at some 60,000 ATMs belonging to the Allpoint and MoneyPass networks. Using a machine outside these networks might incur a surcharge imposed by the third-party ATM owner. Discover itself, however, never charges a fee for ATM use.
Cons Explained
One brick-and-mortar location. True to its name, Discover Online Banking has but one actual branch, in Greenwood, Delaware. So if you like face-to-face contact, this isn't the institution for you.
High minimum CD deposits. While Discover Bank's interest rates for its certificate of deposit stack up nicely against the competition's, you'll need at least $2,500 to get started. Other online banks allow you to open a CD with as little as $500 or $1,000.
What Is Discover Online Banking Best For?
Discover Online Banking should be a good fit for those seeking a digital bank that offers a suite of different services.
It might be a particularly good fit for those who:
Prefer paperless, digital transactionsHate paying feesTypically use their debit card for day-to-day transactions Prefer to bank with an established "name" financial institution
What Does Discover Online Banking Offer?
As you might expect from the banking division of a major financial services company, Discover Bank offers an array of products and services:
Checking accountSavings accountMoney market account Certificates of DepositIRAs
Discover Checking Account
A major feature of the Discover Checking Account is its cash-back debit card. The 1% cash-back reward strictly applies to purchases, though. ATM transactions, money orders, loan payments made with your debit card, and payments using peer-to-peer platforms aren’t eligible for cash-back rewards.
Besides cash-back on your cards, there are no monthly maintenance fees, insufficient funds, or a fee for returned items or stop payment orders. There’s no minimum to open an account, and there’s no monthly minimum balance to keep the account open.
Other perks include free checks.
Digital-only banks like Discover's only allow you to withdraw cash from ATMs; you can't deposit cash or physical checks. Discover lets you deposit paper checks via its mobile banking app, or by mail to a Salt Lake City processing center.
Discover Savings Account
Like the checking account, Discover Savings Account doesn't require any minimum to open or maintain the account. As of March 2024, the annual percentage yield (APY) is 4.25%, which is higher than the average national savings rate of 0.46%.
Discover Bank’s no-fees features apply here too: The account is free of no monthly maintenance or insufficient funds charges.
Discover Money Market Account
While there’s no ongoing minimum required to maintain a Discover Money Market account, you’ll need at least $2,500 minimum to open it. There are two interest rates: If your balance is less than $100,000, you’ll earn an APY of 4.00%. If it’s more than $100,000, you’ll get a slight bump of 4.05%.
Once opened, the account generates no monthly maintenance fees, no fees for insufficient funds, or if you make more than six withdrawals or transfers in a given month.
Money market accounts are similar to savings accounts in that they’re a deposit account that generates interest on your money. However, you can typically withdraw funds more easily, usually via a linked debit card; the account may also come with check-writing privileges.
Discover Certificate of Deposit (CD)
Discover’s high-yield certificates of deposit (CD) give you the option of tucking away a sum of money for a set amount of time. CDs usually earn a higher interest rate than a standard savings or checking account. And the longer your term, the more you can earn. The minimum amount for an opening deposit is $2,500. Discover’s high-yield CDs range from three months to 10 years, and the interest rates are as follows:
Discover Bank CD Rates
Term
APY
3 Months
2.00%
6 Months
4.25%
9 Months
4.25%
12 Months
4.70%
18 Months
4.40%
24 Months
4.00%
30 Months
3.75%
36 Months
3.75%
48 Months
3.75%
60 Months
3.75%
7 Years
3.75%
10 Years
3.75%
As of March 14, 2024
Should you need to take your money out early, you’ll get hit with an early withdrawal penalty. How much you’ll get dinged depends on the term of the CD:
Discover Bank CD Early Withdrawal Penalties
Term
Early Withdrawal Fee
Less than 1 year
3 months simple interest
1 year to less than 4 years
6 months simple interest
4 years to less than 5 years
9 months simple interest
5 years to less than 7 years
18 months simple interest
7 years to less than 10 years
24 months simple interest
Your CD needs to be open for at least eight days before you can pull money.
Discover IRAs
Discover offers both an Individual Retirement Account CD and an IRA Savings Account. The IRA CD requires a $2,500 minimum and offers APYs comparable to those of the regular CDs. The IRA Savings has no minimum and currently offers a 4.25% APY. The retirement accounts can be either traditional or Roth IRAs.
Discover Credit Cards
Discover has a handful of no-annual-fee credit cards in its network, including a travel card, student card, and gas and restaurant card. Technically speaking, though, these cards are not part of Online Banking but offered through another division of its parent, Discover Financial Services, rather confusingly known as Discover Bank. You don't need to be an Online Banking customer to apply for a Discover credit card; nor does being an Online Banking account-holder or grant you special access to these cards.
Cash-Back Cards
Discover it Cash Back
Discover it Chrome
Discover it Chrome for Students
NHL Discover it
General Travel Rewards Cards
Discover it Miles
Secured Credit Cards
Discover it Secured Credit Card
Other Financial Services Offered by Discover
As with the credit cards, the products listed below are technically offered not through Online Banking, but since they are part of Discover Financial Services, the parent company, we list them here as a service.
Home equity loans
Refinanced mortgages
Personal loans
Student loans
Debt consolidation
Discover Bank Customer Service
Discover Online Banking offers 24/7 customer phone support, 365 days a year at 1-800-347-2683 —with reps based entirely in the U.S., as the company likes to emphasize. You can also reach out to customer support by chat. And like most banks, you can deposit a check and access your banking information and financial transactions through its mobile app.
According to the J.D. Power 2022 U.S. Credit Card Satisfaction Study, among credit card issuers, Discover has the second highest ranking with a score of 841. And per the J.D. Power 2022 U.S. Banking Mobile App Satisfaction Study, Discover also ranked in first place in online credit card satisfaction.
In 2012, Discover Financial Services paid out $200 million to 3.5 million customers for deceptive practices—such as enrolling clients in products like its payment protection plans, without their permission. Discover also paid a civil fine of $7 million both to the Consumer Financial Protection Bureau's (CFPB) Civil Penalty Fund and to the U.S. Treasury.
How to Bank With Discover Online Banking
Opening an Online Bank account is a simple and straightforward process. Whether you’re an existing Discover customer (a card-holder, loan borrower) or are a new one, you can open an account online in minutes.
Final Verdict
Discover Online Banking is an excellent option for those who feel comfortable with a completely digital financial platform. The generous cash-back bonus on its debit card, lack of fees, and around-the-clock service make it a standout in many ways. The interest rates offered on its accounts are competitive. However, Discover Online Banking's options are limited to the bare bones of banks: checking, savings, certificates of deposits, and money market accounts. Beyond that, there are a few IRA account options available. If you're looking for a financial institution that offers a full suite of products and services (i.e., credit cards, mortgages, personal loans, and wealth management), you might be better off looking elsewhere. While other Discover divisions do offer some of these options, it's not clear if there's much interaction among them—and if using one product benefits you with getting another. Likewise, if you like to do your banking in person, Discover Online Banking probably isn't for you. The company's customer reps are friendly and knowledgeable, but it's not the same as developing a relationship with the personnel at a physical branch.
Methodology
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks including products available, interest rates, fees, and accessibility to ensure that our content helps users make the right decision for their savings and banking needs.
Open Account
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
editorial policy.
Discover Bank. "ATM Locator."
Discover Card. "How to Use Your Debit Card Cash Back to the Fullest."
Discover Bank. "CD Rates."
Discover. “Online Savings Account.”
FDIC. "National Rates and Rate Caps."
Discover Bank. "Money Market Account With High Interest Rates," Select "What Is the Minimum Deposit Amount to Open My Account?"
Discover Bank. "Money Market Account With High Interest Rates."
Discover. “IRA Savings.”
J.D. Power. "2022 U.S. Credit Card Satisfaction Study."
J.D. Power. "2022 U.S. Banking and Credit Card Mobile App."
Consumer Financial Protection Bureau. "Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau Order Discover to Pay $200 Million Consumer Refund for Deceptive Marketing."
Related Articles
KeyBank Review 2024
M&T Bank Review 2024
Discover Bank Bonuses: May 2024
Discover Savings Account Interest Rates: May 2024
The 6 Best Online Banks for May 2024
Discover Card: History of the Credit Card, Perks, FAQs
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https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp | A History of the S&P 500 Dividend Yield | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 S&P 500 index tracks some of the largest U.S. stocks, many of which pay a regular dividends. Reviewing the history of the S&P 500 dividend yield can provide insight into the stock market's direction.
</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"> Dividend yields from blue-chip U.S. companies have been trending downwards over time, evidenced by the Standard & Poor's 500 Index (S&P 500) <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendyield.asp">dividend yield</a> of approximately 1.78% at the end of 2022 and similar yields throughout 2023.<span class="ql-inline-citation" data-cite="1"></span><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"> This is well under the index's long-run average yield of 2.91%. In fact, dividend yields have remained relatively low (below 3%) since 1992. Slowed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendgrowthrate.asp">dividend growth</a> over time is one more sign that small dividends remain the new normal.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A quick review of the history of the S&P 500 reveals just how abnormal sub-3% annual yields have been since the 1800s. Thanks to aggressive <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> and the rise of technology stocks, today's dividend investors have a bigger hill to climb than their predecessors.
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_9-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_10-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The S&P 500 index tracks some of the largest stocks in the United States, many of which pay out a regular dividend.</li><li>The index's dividend yield is the total dividends earned in a year divided by the index's price.</li><li>Historical dividend yields for the S&P 500 have typically ranged from between 3% to 5%.</li><li>Since 1997, dividend yields have tended to remain below the long-run average.</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_11-0"> <div class="figure-media">
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<img alt="History of the S&P 500 Dividend Yield" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/vMUUoWSoK6TI0UHFmyKex2WtjBI=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-history-sp-500-dividend-yield-FINAL-328ee74ab3d54ff1a015335a5e8dc788.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/8_JV0BiGwZa3wyz9yC4g_OqtehU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-history-sp-500-dividend-yield-FINAL-328ee74ab3d54ff1a015335a5e8dc788.jpg" data-srcset="https://www.investopedia.com/thmb/s7WPZ4IqpfYgOLdIXU-C1uSzNak=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-history-sp-500-dividend-yield-FINAL-328ee74ab3d54ff1a015335a5e8dc788.jpg 750w" data-tracking-container="true" height="800" id="mntl-sc-block-image_1-0" width="1200"/>
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<img alt="History of the S&P 500 Dividend Yield" class="img--noscript universal-image__image" height="800" sizes="750px" src="https://www.investopedia.com/thmb/8_JV0BiGwZa3wyz9yC4g_OqtehU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-history-sp-500-dividend-yield-FINAL-328ee74ab3d54ff1a015335a5e8dc788.jpg" srcset="https://www.investopedia.com/thmb/s7WPZ4IqpfYgOLdIXU-C1uSzNak=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-history-sp-500-dividend-yield-FINAL-328ee74ab3d54ff1a015335a5e8dc788.jpg 750w" width="1200"/>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Sabrina Jiang</p></span>
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<span class="heading-toc" id="toc-recent-and-historical-yields"></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"> Recent and Historical Yields </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 46 separate years over the period.<span class="ql-inline-citation" data-cite="1"></span>
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<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 sharp change in S&P 500 dividend yield traces back to the 1990s. For example, the average dividend yield between 1970 and 1990 was 4.21%, according to NYU Stern's Aswath Damodoran. It declined to 1.95% between 1991 and 2007.<span class="ql-inline-citation" data-cite="19"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> After a brief climb to about 3.15% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.98% between 2009 and 2019. From 2020 onward, the dividend yield fell below 2% and has stayed below since then, ranging between 1.24% to 1.78%.<span class="ql-inline-citation" data-cite="19"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> Monetary Policy Effects </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Two significant changes contributed to the collapse of dividend yields. The first was <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alangreenspan.asp">Alan Greenspan</a> becoming chair of the Federal Reserve in 1987, a position he held until 2006.<span class="ql-inline-citation" data-cite="6"></span> Greenspan responded to market downturns in 1987, 1991, and 2000 with sharp drops in interest rates, which drove down the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equityriskpremium.asp">equity risk premium</a> on stocks and flooded asset markets with <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cheap-money.asp">cheap money</a>.<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="5"></span>
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<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"> Prices started climbing much faster than dividends. Despite evidence that these policies contributed to then-recent housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-subheading__text"> The Rise of Tech and Internet Companies </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The second significant change was the rise of internet-based companies in the United States, especially following Netscape’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering</a> (IPO) in 1995.<span class="ql-inline-citation" data-cite="15"></span> Technology stocks proved to be quintessential growth players and typically produced little or no dividends.<span class="ql-inline-citation" data-cite="16"></span> Average dividends declined as the size of the tech sector grew.
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<img alt="S&P 500 Historical Dividend Yield" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/5Z-E2N6waTD9kuTnSHRsFNT8i3k=/890x0/filters:no_upscale():max_bytes(150000):strip_icc()/download2-44e25c07e2a14b0c90ce2dd0570a5dc3.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Ap8Wu6oDyz72CQO9Lu3WDGvNqoE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/download2-44e25c07e2a14b0c90ce2dd0570a5dc3.png" data-srcset="https://www.investopedia.com/thmb/Fq4gXCtYxQdnaHOArry5e_2pIb8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/download2-44e25c07e2a14b0c90ce2dd0570a5dc3.png 750w" data-tracking-container="true" height="384" id="mntl-sc-block-image_2-0" width="890"/>
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<img alt="S&P 500 Historical Dividend Yield" class="img--noscript universal-image__image" height="384" sizes="750px" src="https://www.investopedia.com/thmb/Ap8Wu6oDyz72CQO9Lu3WDGvNqoE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/download2-44e25c07e2a14b0c90ce2dd0570a5dc3.png" srcset="https://www.investopedia.com/thmb/Fq4gXCtYxQdnaHOArry5e_2pIb8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/download2-44e25c07e2a14b0c90ce2dd0570a5dc3.png 750w" width="890"/>
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<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">S&P 500 Historical Dividend Yield.</span>
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<span class="heading-toc" id="toc-sp-500-dividend-yield"></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"> S&P 500 Dividend Yield </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The S&P 500 is the most widely cited single gauge of large-cap equities on U.S. stock exchanges. Standard & Poor's annual survey of assets estimated that more than $11.4 trillion was benchmarked to the index, making it one of the most influential figures in the world of finance. To be included, a company must be publicly traded in the United States and report a market capitalization of $14.5 billion or greater.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="9"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The dividend yield for the S&P 500 is calculated by finding the weighted average of each listed company's most recently reported full-year dividend and dividing it by the current share price. Yields are published and calculated daily by Standard & Poor's and other analysts.
</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-sp-500-components-and-composition-changes"></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"> S&P 500 Components and Composition Changes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The composition of the S&P 500 changes throughout time. Some listed companies <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/08/public-companies-privatize-go-private.asp">de-list and go private</a>, while others merge or split into multiple companies. Listed companies might also undergo profound changes without new stock tickers emerging.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> For example, Bank of America Corp. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac">BAC</a>) joined the S&P 500 in July 1976. In 1998, the bank experienced severe financial distress following a default on Russian bonds. It was subsequently acquired by NationsBank, which decided to keep the more recognizable name Bank of America Corp.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="10"></span>
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<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-note" 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 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 S&P 500 tends to list more than 500 companies because a few have more than one share class listed. In November 2023, the S&P 500 had 503 on the index.<span class="ql-inline-citation" data-cite="20"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Such changes make equivalent comparisons difficult to make over time. Even though the S&P 500 dividend yields from 1976 and 1999 included the reported dividends from the same ticker, BAC, the ticker represents very different companies at different points in time.
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<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_42-0"> <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_43-0"> All annual dividend yields are quoted in nominal terms and do not take into consideration the annual rates of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> present over the same period. Inflation reduces the real impact of all returns, including dividends, and generally makes it more difficult to grow real wealth. Additionally, dividend yields represent absolute values, so they cannot tell you if dividend-paying stocks in the S&P 500 are superior to alternative investments.
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-does-the-sp-500-pay-dividends"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the S&P 500 Pay Dividends?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The S&P 500 is an index, so it does not pay dividends; however, there are mutual funds and exchange-traded funds (ETFs) that track the index, which you can invest in. If the companies in these funds pay dividends, you'll receive yours based on how many shares of the funds you hold.</p></div>
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<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-often-are-sp-500-dividends-paid"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Often Are S&P 500 Dividends Paid?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Many companies listed on the index pay dividends every quarter—others might not. Funds that track the S&P 500, like the SPDR S&P 500 ETF, also pay dividends quarterly to its shareholders.<span class="ql-inline-citation" data-cite="14"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-do-dividends-get-taxed"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Dividends Get Taxed?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, dividends get taxed, but the tax rate depends on the dividend type. Ordinary dividends are taxed at ordinary income tax rates, while qualified dividends are taxed at capital gains tax rates, which are less than income tax rates.<span class="ql-inline-citation" data-cite="18"></span></p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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"> The dividend yield of the S&P 500 index shows how 503 select companies by market cap in the U.S. are paying out dividends. The S&P 500's dividend yield has slowly decreased overall, showing that companies are paying out lower dividends or no dividends at all.
</p></div> | The S&P 500 index tracks some of the largest U.S. stocks, many of which pay a regular dividends. Reviewing the history of the S&P 500 dividend yield can provide insight into the stock market's direction.
Dividend yields from blue-chip U.S. companies have been trending downwards over time, evidenced by the Standard & Poor's 500 Index (S&P 500) [dividend yield](https://www.investopedia.com/terms/d/dividendyield.asp) of approximately 1.78% at the end of 2022 and similar yields throughout 2023.
This is well under the index's long-run average yield of 2.91%. In fact, dividend yields have remained relatively low (below 3%) since 1992. Slowed [dividend growth](https://www.investopedia.com/terms/d/dividendgrowthrate.asp) over time is one more sign that small dividends remain the new normal.
A quick review of the history of the S&P 500 reveals just how abnormal sub-3% annual yields have been since the 1800s. Thanks to aggressive [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) and the rise of technology stocks, today's dividend investors have a bigger hill to climb than their predecessors.
### Key Takeaways
* The S&P 500 index tracks some of the largest stocks in the United States, many of which pay out a regular dividend.
* The index's dividend yield is the total dividends earned in a year divided by the index's price.
* Historical dividend yields for the S&P 500 have typically ranged from between 3% to 5%.
* Since 1997, dividend yields have tended to remain below the long-run average.
![History of the S&P 500 Dividend Yield]()
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Investopedia / Sabrina Jiang
## Recent and Historical Yields
During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 46 separate years over the period.
The sharp change in S&P 500 dividend yield traces back to the 1990s. For example, the average dividend yield between 1970 and 1990 was 4.21%, according to NYU Stern's Aswath Damodoran. It declined to 1.95% between 1991 and 2007.
After a brief climb to about 3.15% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.98% between 2009 and 2019. From 2020 onward, the dividend yield fell below 2% and has stayed below since then, ranging between 1.24% to 1.78%.
### Monetary Policy Effects
Two significant changes contributed to the collapse of dividend yields. The first was [Alan Greenspan](https://www.investopedia.com/terms/a/alangreenspan.asp) becoming chair of the Federal Reserve in 1987, a position he held until 2006. Greenspan responded to market downturns in 1987, 1991, and 2000 with sharp drops in interest rates, which drove down the [equity risk premium](https://www.investopedia.com/terms/e/equityriskpremium.asp) on stocks and flooded asset markets with [cheap money](https://www.investopedia.com/terms/c/cheap-money.asp).
Prices started climbing much faster than dividends. Despite evidence that these policies contributed to then-recent housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.
### The Rise of Tech and Internet Companies
The second significant change was the rise of internet-based companies in the United States, especially following Netscape’s [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO) in 1995. Technology stocks proved to be quintessential growth players and typically produced little or no dividends. Average dividends declined as the size of the tech sector grew.
![S&P 500 Historical Dividend Yield]()
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S&P 500 Historical Dividend Yield.
## S&P 500 Dividend Yield
The S&P 500 is the most widely cited single gauge of large-cap equities on U.S. stock exchanges. Standard & Poor's annual survey of assets estimated that more than $11.4 trillion was benchmarked to the index, making it one of the most influential figures in the world of finance. To be included, a company must be publicly traded in the United States and report a market capitalization of $14.5 billion or greater.
The dividend yield for the S&P 500 is calculated by finding the weighted average of each listed company's most recently reported full-year dividend and dividing it by the current share price. Yields are published and calculated daily by Standard & Poor's and other analysts.
## S&P 500 Components and Composition Changes
The composition of the S&P 500 changes throughout time. Some listed companies [de-list and go private](https://www.investopedia.com/articles/stocks/08/public-companies-privatize-go-private.asp), while others merge or split into multiple companies. Listed companies might also undergo profound changes without new stock tickers emerging.
For example, Bank of America Corp. ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac)) joined the S&P 500 in July 1976. In 1998, the bank experienced severe financial distress following a default on Russian bonds. It was subsequently acquired by NationsBank, which decided to keep the more recognizable name Bank of America Corp.
###
The S&P 500 tends to list more than 500 companies because a few have more than one share class listed. In November 2023, the S&P 500 had 503 on the index.
Such changes make equivalent comparisons difficult to make over time. Even though the S&P 500 dividend yields from 1976 and 1999 included the reported dividends from the same ticker, BAC, the ticker represents very different companies at different points in time.
## Special Considerations
All annual dividend yields are quoted in nominal terms and do not take into consideration the annual rates of [inflation](https://www.investopedia.com/terms/i/inflation.asp) present over the same period. Inflation reduces the real impact of all returns, including dividends, and generally makes it more difficult to grow real wealth. Additionally, dividend yields represent absolute values, so they cannot tell you if dividend-paying stocks in the S&P 500 are superior to alternative investments.
## Does the S&P 500 Pay Dividends?
The S&P 500 is an index, so it does not pay dividends; however, there are mutual funds and exchange-traded funds (ETFs) that track the index, which you can invest in. If the companies in these funds pay dividends, you'll receive yours based on how many shares of the funds you hold.
## How Often Are S&P 500 Dividends Paid?
Many companies listed on the index pay dividends every quarter—others might not. Funds that track the S&P 500, like the SPDR S&P 500 ETF, also pay dividends quarterly to its shareholders.
## Do Dividends Get Taxed?
Yes, dividends get taxed, but the tax rate depends on the dividend type. Ordinary dividends are taxed at ordinary income tax rates, while qualified dividends are taxed at capital gains tax rates, which are less than income tax rates.
## The Bottom Line
The dividend yield of the S&P 500 index shows how 503 select companies by market cap in the U.S. are paying out dividends. The S&P 500's dividend yield has slowly decreased overall, showing that companies are paying out lower dividends or no dividends at all.
| The S&P 500 index tracks some of the largest U.S. stocks, many of which pay a regular dividends. Reviewing the history of the S&P 500 dividend yield can provide insight into the stock market's direction.
Dividend yields from blue-chip U.S. companies have been trending downwards over time, evidenced by the Standard & Poor's 500 Index (S&P 500) dividend yield of approximately 1.78% at the end of 2022 and similar yields throughout 2023.
This is well under the index's long-run average yield of 2.91%. In fact, dividend yields have remained relatively low (below 3%) since 1992. Slowed dividend growth over time is one more sign that small dividends remain the new normal.
A quick review of the history of the S&P 500 reveals just how abnormal sub-3% annual yields have been since the 1800s. Thanks to aggressive monetary policy and the rise of technology stocks, today's dividend investors have a bigger hill to climb than their predecessors.
Key Takeaways
The S&P 500 index tracks some of the largest stocks in the United States, many of which pay out a regular dividend.The index's dividend yield is the total dividends earned in a year divided by the index's price.Historical dividend yields for the S&P 500 have typically ranged from between 3% to 5%.Since 1997, dividend yields have tended to remain below the long-run average.
Investopedia / Sabrina Jiang
Recent and Historical Yields
During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 46 separate years over the period.
The sharp change in S&P 500 dividend yield traces back to the 1990s. For example, the average dividend yield between 1970 and 1990 was 4.21%, according to NYU Stern's Aswath Damodoran. It declined to 1.95% between 1991 and 2007.
After a brief climb to about 3.15% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.98% between 2009 and 2019. From 2020 onward, the dividend yield fell below 2% and has stayed below since then, ranging between 1.24% to 1.78%.
Monetary Policy Effects
Two significant changes contributed to the collapse of dividend yields. The first was Alan Greenspan becoming chair of the Federal Reserve in 1987, a position he held until 2006. Greenspan responded to market downturns in 1987, 1991, and 2000 with sharp drops in interest rates, which drove down the equity risk premium on stocks and flooded asset markets with cheap money.
Prices started climbing much faster than dividends. Despite evidence that these policies contributed to then-recent housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.
The Rise of Tech and Internet Companies
The second significant change was the rise of internet-based companies in the United States, especially following Netscape’s initial public offering (IPO) in 1995. Technology stocks proved to be quintessential growth players and typically produced little or no dividends. Average dividends declined as the size of the tech sector grew.
S&P 500 Historical Dividend Yield.
S&P 500 Dividend Yield
The S&P 500 is the most widely cited single gauge of large-cap equities on U.S. stock exchanges. Standard & Poor's annual survey of assets estimated that more than $11.4 trillion was benchmarked to the index, making it one of the most influential figures in the world of finance. To be included, a company must be publicly traded in the United States and report a market capitalization of $14.5 billion or greater.
The dividend yield for the S&P 500 is calculated by finding the weighted average of each listed company's most recently reported full-year dividend and dividing it by the current share price. Yields are published and calculated daily by Standard & Poor's and other analysts.
S&P 500 Components and Composition Changes
The composition of the S&P 500 changes throughout time. Some listed companies de-list and go private, while others merge or split into multiple companies. Listed companies might also undergo profound changes without new stock tickers emerging.
For example, Bank of America Corp. (BAC) joined the S&P 500 in July 1976. In 1998, the bank experienced severe financial distress following a default on Russian bonds. It was subsequently acquired by NationsBank, which decided to keep the more recognizable name Bank of America Corp.
The S&P 500 tends to list more than 500 companies because a few have more than one share class listed. In November 2023, the S&P 500 had 503 on the index.
Such changes make equivalent comparisons difficult to make over time. Even though the S&P 500 dividend yields from 1976 and 1999 included the reported dividends from the same ticker, BAC, the ticker represents very different companies at different points in time.
Special Considerations
All annual dividend yields are quoted in nominal terms and do not take into consideration the annual rates of inflation present over the same period. Inflation reduces the real impact of all returns, including dividends, and generally makes it more difficult to grow real wealth. Additionally, dividend yields represent absolute values, so they cannot tell you if dividend-paying stocks in the S&P 500 are superior to alternative investments.
Does the S&P 500 Pay Dividends?
The S&P 500 is an index, so it does not pay dividends; however, there are mutual funds and exchange-traded funds (ETFs) that track the index, which you can invest in. If the companies in these funds pay dividends, you'll receive yours based on how many shares of the funds you hold.
How Often Are S&P 500 Dividends Paid?
Many companies listed on the index pay dividends every quarter—others might not. Funds that track the S&P 500, like the SPDR S&P 500 ETF, also pay dividends quarterly to its shareholders.
Do Dividends Get Taxed?
Yes, dividends get taxed, but the tax rate depends on the dividend type. Ordinary dividends are taxed at ordinary income tax rates, while qualified dividends are taxed at capital gains tax rates, which are less than income tax rates.
The Bottom Line
The dividend yield of the S&P 500 index shows how 503 select companies by market cap in the U.S. are paying out dividends. The S&P 500's dividend yield has slowly decreased overall, showing that companies are paying out lower dividends or no dividends at all.
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https://www.investopedia.com/personal-loans-social-security-8410837 | Personal Loans for People on Social Security | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Borrowing money doesn't necessarily stop once you hit retirement age. Even if you're collecting Social Security benefits and have other sources of income, you could face a major expense that exceeds your available funds. If that's the case, you may want to look into taking out a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loan-5076027">personal loan</a>. Here is what you need to know.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>You can take out a personal loan while receiving Social Security benefits.</li><li>The loan proceeds will not affect Social Security retirement benefits.</li><li>However, if you're receiving Supplemental Security Income (SSI) from Social Security, any loan proceeds you don't spend could count against you and reduce your benefits.</li><li>If you don't qualify for a personal loan, you have other borrowing options to choose from, including using a credit card or tapping into your home's equity.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-how-social-security-benefits-work"></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 Social Security Benefits Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/121015/how-social-security-works-after-retirement.asp">Social Security benefits</a> are administered by the U.S. Social Security Administration. They come in several different forms, each with their own qualification requirements. They include:
</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>Retirement benefits</li>
<li>Survivors benefits</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssi.asp">Supplemental Security Income (SSI)</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/social-security-disability-insurance-ssdi-definition-5223624">Social Security Disability Insurance (SSDI)</a></li>
</ul>
<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-to-get-a-personal-loan-on-social-security"></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 to Get a Personal Loan on Social Security </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> When you apply for a personal loan, prospective lenders will want to make sure that you'll be able to repay them when the time comes. The sources of your income aren't necessarily an issue, so long as you can prove you'll have enough money coming in to keep up with the payments on your loan.
</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 filling out a personal loan application, you'll want to include all of your income sources, whether that's through a job where you get a regular paycheck, alimony, child support, investment dividends, retirement income from Social Security or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp">pension</a>, or anything else. How much you bring in each month can not only affect whether you can get a loan but also how much money the financial institution will be willing to lend you.
</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/best-personal-loans-4773300">Getting a personal loan</a> won't impact your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/121015/how-social-security-works-after-retirement.asp">Social Security retirement benefits</a>. However, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-you-get-a-personal-loan-while-on-disability-8413952">if you're receiving SSI</a>, it may affect that. That's because SSI has resource limits, and if you don't spend the funds you borrow in a given month, that amount will count toward your resource limit for the following month.<span class="ql-inline-citation" data-cite="3"></span> In that situation, it makes sense to borrow only as much as you plan on using right away.
</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 current resource limits for SSI recipients are $2,000 for individuals and $3,000 for couples, with certain assets, such as a home and one vehicle, being exempt.<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_18-0"></div>
<span class="heading-toc" id="toc-alternatives-to-personal-loans"></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"> Alternatives to Personal Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If you can't qualify for a personal loan, or simply don't want one, there are other options for borrowing money. These include:
</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"> Credit Cards or Credit Card Cash Advances </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If you can cover your expenses with a credit card you already possess, you won't have to complete a loan application or add a new bill to your budget. Using a credit card could make sense if can pay off your balance the next month or within a few months. If you run a balance for an extended period, however, it can get expensive.
</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 you need cash, you could also consider a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111414/how-does-interest-work-cash-advance-my-credit-card.asp">credit card cash advance</a>. Cash advances carry a different—and typically higher—<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> from normal purchases and usually involve some extra fees. So they can be a very expensive way to borrow.<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>
<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"> Home equity loans or home equity lines of credit (HELOCs) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you own your home, you can borrow against the equity you have in it through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/">home equity loan or home equity line of credit (HELOC)</a>. With the former, you typically receive a lump sum of money that you then pay back in regular installments. With the latter, the lender provides you with a line of credit you can borrow from as needed.
</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"> Interest rates tend to be lower with home equity products compared to personal loans. However, both home equity loans and HELOCs use your home 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>, so if you can't pay the money back, you risk losing it.
</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"> Friends and Family Loans </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> If you're comfortable doing so, you can also ask close friends and family members if they can lend you the money you need. But make sure you work out a payment plan and stick to it to avoid any ill feelings. You may also want to put everything in writing, just in case.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-can-you-get-a-personal-loan-on-social-security"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Get a Personal Loan on Social Security?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can take out a personal loan while you're receiving Social Security benefits if a lender is willing to give you one. Lenders will want to know that you have enough income to repay the loan, and Social Security benefits count toward that.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-what-disqualifies-you-from-getting-a-personal-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Disqualifies You From Getting a Personal Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Every lender has its own requirements for granting personal loans. You could be disqualified for any number of reasons, including an inadequate credit score or poor credit history, asking to borrow too little (or too much), or having insufficient income.<br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-what-is-the-easiest-loan-to-be-approved-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Easiest Loan to Be Approved For?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Some financial institutions have stricter lending standards than others, including minimum credit score requirements in some cases. If you can get <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prequalification.asp">pre-qualified</a> for a loan at a particular lender—which doesn't require a credit check and won't hurt your credit score—you'll know how likely you are to be approved. While pre-qualification doesn't guarantee that you'll get a loan, it helps smooth out the process if you know you're eligible before completing a full application.<br/></p></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-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Social Security benefits are one source of income that can help you qualify for a personal loan if you need one. The proceeds from such a loan won't affect your retirement benefits, but they can have an impact on your benefits if you're receiving SSI.
</p></div> | Borrowing money doesn't necessarily stop once you hit retirement age. Even if you're collecting Social Security benefits and have other sources of income, you could face a major expense that exceeds your available funds. If that's the case, you may want to look into taking out a [personal loan](https://www.investopedia.com/personal-loan-5076027). Here is what you need to know.
### Key Takeaways
* You can take out a personal loan while receiving Social Security benefits.
* The loan proceeds will not affect Social Security retirement benefits.
* However, if you're receiving Supplemental Security Income (SSI) from Social Security, any loan proceeds you don't spend could count against you and reduce your benefits.
* If you don't qualify for a personal loan, you have other borrowing options to choose from, including using a credit card or tapping into your home's equity.
## How Social Security Benefits Work
[Social Security benefits](https://www.investopedia.com/articles/personal-finance/121015/how-social-security-works-after-retirement.asp) are administered by the U.S. Social Security Administration. They come in several different forms, each with their own qualification requirements. They include:
* Retirement benefits
* Survivors benefits
* [Supplemental Security Income (SSI)](https://www.investopedia.com/terms/s/ssi.asp)
* [Social Security Disability Insurance (SSDI)](https://www.investopedia.com/social-security-disability-insurance-ssdi-definition-5223624)
## How to Get a Personal Loan on Social Security
When you apply for a personal loan, prospective lenders will want to make sure that you'll be able to repay them when the time comes. The sources of your income aren't necessarily an issue, so long as you can prove you'll have enough money coming in to keep up with the payments on your loan.
In filling out a personal loan application, you'll want to include all of your income sources, whether that's through a job where you get a regular paycheck, alimony, child support, investment dividends, retirement income from Social Security or a [pension](https://www.investopedia.com/terms/p/pensionplan.asp), or anything else. How much you bring in each month can not only affect whether you can get a loan but also how much money the financial institution will be willing to lend you.
[Getting a personal loan](https://www.investopedia.com/best-personal-loans-4773300) won't impact your [Social Security retirement benefits](https://www.investopedia.com/articles/personal-finance/121015/how-social-security-works-after-retirement.asp). However, [if you're receiving SSI](https://www.investopedia.com/can-you-get-a-personal-loan-while-on-disability-8413952), it may affect that. That's because SSI has resource limits, and if you don't spend the funds you borrow in a given month, that amount will count toward your resource limit for the following month. In that situation, it makes sense to borrow only as much as you plan on using right away.
The current resource limits for SSI recipients are $2,000 for individuals and $3,000 for couples, with certain assets, such as a home and one vehicle, being exempt.
## Alternatives to Personal Loans
If you can't qualify for a personal loan, or simply don't want one, there are other options for borrowing money. These include:
### Credit Cards or Credit Card Cash Advances
If you can cover your expenses with a credit card you already possess, you won't have to complete a loan application or add a new bill to your budget. Using a credit card could make sense if can pay off your balance the next month or within a few months. If you run a balance for an extended period, however, it can get expensive.
If you need cash, you could also consider a [credit card cash advance](https://www.investopedia.com/ask/answers/111414/how-does-interest-work-cash-advance-my-credit-card.asp). Cash advances carry a different—and typically higher—[annual percentage rate (APR)](https://www.investopedia.com/terms/a/apr.asp) from normal purchases and usually involve some extra fees. So they can be a very expensive way to borrow.
### Home equity loans or home equity lines of credit (HELOCs)
If you own your home, you can borrow against the equity you have in it through a [home equity loan or home equity line of credit (HELOC)](https://www.investopedia.com/mortgage/heloc/). With the former, you typically receive a lump sum of money that you then pay back in regular installments. With the latter, the lender provides you with a line of credit you can borrow from as needed.
Interest rates tend to be lower with home equity products compared to personal loans. However, both home equity loans and HELOCs use your home as [collateral](https://www.investopedia.com/terms/c/collateral.asp), so if you can't pay the money back, you risk losing it.
### Friends and Family Loans
If you're comfortable doing so, you can also ask close friends and family members if they can lend you the money you need. But make sure you work out a payment plan and stick to it to avoid any ill feelings. You may also want to put everything in writing, just in case.
## Can You Get a Personal Loan on Social Security?
You can take out a personal loan while you're receiving Social Security benefits if a lender is willing to give you one. Lenders will want to know that you have enough income to repay the loan, and Social Security benefits count toward that.
## What Disqualifies You From Getting a Personal Loan?
Every lender has its own requirements for granting personal loans. You could be disqualified for any number of reasons, including an inadequate credit score or poor credit history, asking to borrow too little (or too much), or having insufficient income.
## What Is the Easiest Loan to Be Approved For?
Some financial institutions have stricter lending standards than others, including minimum credit score requirements in some cases. If you can get [pre-qualified](https://www.investopedia.com/terms/p/prequalification.asp) for a loan at a particular lender—which doesn't require a credit check and won't hurt your credit score—you'll know how likely you are to be approved. While pre-qualification doesn't guarantee that you'll get a loan, it helps smooth out the process if you know you're eligible before completing a full application.
## The Bottom Line
Social Security benefits are one source of income that can help you qualify for a personal loan if you need one. The proceeds from such a loan won't affect your retirement benefits, but they can have an impact on your benefits if you're receiving SSI.
| Borrowing money doesn't necessarily stop once you hit retirement age. Even if you're collecting Social Security benefits and have other sources of income, you could face a major expense that exceeds your available funds. If that's the case, you may want to look into taking out a personal loan. Here is what you need to know.
Key Takeaways
You can take out a personal loan while receiving Social Security benefits.The loan proceeds will not affect Social Security retirement benefits.However, if you're receiving Supplemental Security Income (SSI) from Social Security, any loan proceeds you don't spend could count against you and reduce your benefits.If you don't qualify for a personal loan, you have other borrowing options to choose from, including using a credit card or tapping into your home's equity.
How Social Security Benefits Work
Social Security benefits are administered by the U.S. Social Security Administration. They come in several different forms, each with their own qualification requirements. They include:
Retirement benefits
Survivors benefits
Supplemental Security Income (SSI)
Social Security Disability Insurance (SSDI)
How to Get a Personal Loan on Social Security
When you apply for a personal loan, prospective lenders will want to make sure that you'll be able to repay them when the time comes. The sources of your income aren't necessarily an issue, so long as you can prove you'll have enough money coming in to keep up with the payments on your loan.
In filling out a personal loan application, you'll want to include all of your income sources, whether that's through a job where you get a regular paycheck, alimony, child support, investment dividends, retirement income from Social Security or a pension, or anything else. How much you bring in each month can not only affect whether you can get a loan but also how much money the financial institution will be willing to lend you.
Getting a personal loan won't impact your Social Security retirement benefits. However, if you're receiving SSI, it may affect that. That's because SSI has resource limits, and if you don't spend the funds you borrow in a given month, that amount will count toward your resource limit for the following month. In that situation, it makes sense to borrow only as much as you plan on using right away.
The current resource limits for SSI recipients are $2,000 for individuals and $3,000 for couples, with certain assets, such as a home and one vehicle, being exempt.
Alternatives to Personal Loans
If you can't qualify for a personal loan, or simply don't want one, there are other options for borrowing money. These include:
Credit Cards or Credit Card Cash Advances
If you can cover your expenses with a credit card you already possess, you won't have to complete a loan application or add a new bill to your budget. Using a credit card could make sense if can pay off your balance the next month or within a few months. If you run a balance for an extended period, however, it can get expensive.
If you need cash, you could also consider a credit card cash advance. Cash advances carry a different—and typically higher—annual percentage rate (APR) from normal purchases and usually involve some extra fees. So they can be a very expensive way to borrow.
Home equity loans or home equity lines of credit (HELOCs)
If you own your home, you can borrow against the equity you have in it through a home equity loan or home equity line of credit (HELOC). With the former, you typically receive a lump sum of money that you then pay back in regular installments. With the latter, the lender provides you with a line of credit you can borrow from as needed.
Interest rates tend to be lower with home equity products compared to personal loans. However, both home equity loans and HELOCs use your home as collateral, so if you can't pay the money back, you risk losing it.
Friends and Family Loans
If you're comfortable doing so, you can also ask close friends and family members if they can lend you the money you need. But make sure you work out a payment plan and stick to it to avoid any ill feelings. You may also want to put everything in writing, just in case.
Can You Get a Personal Loan on Social Security?
You can take out a personal loan while you're receiving Social Security benefits if a lender is willing to give you one. Lenders will want to know that you have enough income to repay the loan, and Social Security benefits count toward that.
What Disqualifies You From Getting a Personal Loan?
Every lender has its own requirements for granting personal loans. You could be disqualified for any number of reasons, including an inadequate credit score or poor credit history, asking to borrow too little (or too much), or having insufficient income.
What Is the Easiest Loan to Be Approved For?
Some financial institutions have stricter lending standards than others, including minimum credit score requirements in some cases. If you can get pre-qualified for a loan at a particular lender—which doesn't require a credit check and won't hurt your credit score—you'll know how likely you are to be approved. While pre-qualification doesn't guarantee that you'll get a loan, it helps smooth out the process if you know you're eligible before completing a full application.
The Bottom Line
Social Security benefits are one source of income that can help you qualify for a personal loan if you need one. The proceeds from such a loan won't affect your retirement benefits, but they can have an impact on your benefits if you're receiving SSI.
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https://www.investopedia.com/grayscale-wants-to-launch-a-mini-bitcoin-fund-amid-gbtc-outflows-8607872 | Grayscale Wants To Launch 'Mini' Bitcoin Fund Amid GBTC Outflows | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Grayscale Investments has filed for a new spot bitcoin exchange-traded fund (ETF) with the SEC.</li><li>Grayscale offers the largest spot bitcoin ETF in terms of assets under management, GBTC, but has experienced more than $10 billion in outflows since its conversion to an ETF.</li><li>These outflows may be linked to GBTC's high fees compared with the other nine spot bitcoin ETFs, and Grayscale's new offering is intended to come with more competitive rates.</li><li>Up to this point, Blackrock's IBIT spot bitcoin ETF has been a key beneficiary of GBTC's high fees-driven outflows, growing to nearly $15 billion in size in roughly two 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"> Cryptocurrency asset manager Grayscale Investments wants to launch a second, more affordable spot bitcoin exchange-traded fund (ETF) with a fee rate much lower than its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/">Grayscale Bitcoin Trust ETF</a> (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC">GBTC</a>), according to a filing with the U.S. Securities and Exchange Commission (SEC).<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Grayscale's GBTC has experienced more than $10 billion in outflows, despite major optimism and massive inflows for other spot bitcoin ETFs that started trading in January this year.<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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> According to Bloomberg Senior ETF Analyst Eric Balchunas, these outflows are mainly caused by GBTC's high fees when compared with the other nine spot bitcoin ETFs currently on the market.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<span class="heading-toc" id="toc-what-will-grayscales-mini-bitcoin-etf-offer"></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 Will Grayscale's Mini Bitcoin ETF Offer? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Grayscale wants to offer a new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/where-to-buy-the-new-spot-bitcoin-etfs-8557203">spot bitcoin ETF</a> called the Bitcoin Mini Trust (BTC), with as-yet-undisclosed but certainly lower fees than the 1.5% currently charged by the existing GBTC fund.<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In a first for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity-etf.asp">commodity ETFs</a>, Grayscale also plans for the new fund to be a "spinoff" of GBTC, meaning that it some of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">bitcoin</a> backing the existing fund will be used to seed the new ETF.
</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 asset manager says that move would be beneficial for existing GBTC investors as they will "benefit from a lower blended fee with the same exposure to Bitcoin, spanning ownership of shares of both GBTC and BTC."<span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Another big advantage touted by Grayscale is the ability for GBTC shareholders to acquire shares of the new ETF without a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxableevent.asp">taxable event</a>. Remember, selling your bitcoin for profit or even exchanging your bitcoin for goods or services <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/taxes-and-crypto/#toc-types-of-cryptocurrency-tax-events">may trigger a tax liability</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Recently, the combined assets under management (AUM) of the other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cryptocurrency-market-news-bitcoin-blows-past-usd72k-ether-up-on-dencun-upgrade-optimism-8607058#citation-3">nine spot bitcoin ETFs</a> surpassed GBTC's assets. Blackrock's iShares Bitcoin Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IBIT">IBIT</a>) has been particularly successful, growing to a size of about $14 billion by the end of trading on Monday.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The hype surrounding spot bitcoin ETFs has brought 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>) itself to new all-time highs above $72,000 this week, after falling below $20,000 in the aftermath of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-went-wrong-with-ftx-6828447">crypto exchange FTX's collapse</a> in November 2022.
</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
* Grayscale Investments has filed for a new spot bitcoin exchange-traded fund (ETF) with the SEC.
* Grayscale offers the largest spot bitcoin ETF in terms of assets under management, GBTC, but has experienced more than $10 billion in outflows since its conversion to an ETF.
* These outflows may be linked to GBTC's high fees compared with the other nine spot bitcoin ETFs, and Grayscale's new offering is intended to come with more competitive rates.
* Up to this point, Blackrock's IBIT spot bitcoin ETF has been a key beneficiary of GBTC's high fees-driven outflows, growing to nearly $15 billion in size in roughly two months.
Cryptocurrency asset manager Grayscale Investments wants to launch a second, more affordable spot bitcoin exchange-traded fund (ETF) with a fee rate much lower than its [Grayscale Bitcoin Trust ETF](https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/) ([GBTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC)), according to a filing with the U.S. Securities and Exchange Commission (SEC).
Grayscale's GBTC has experienced more than $10 billion in outflows, despite major optimism and massive inflows for other spot bitcoin ETFs that started trading in January this year.
According to Bloomberg Senior ETF Analyst Eric Balchunas, these outflows are mainly caused by GBTC's high fees when compared with the other nine spot bitcoin ETFs currently on the market.
## What Will Grayscale's Mini Bitcoin ETF Offer?
Grayscale wants to offer a new [spot bitcoin ETF](https://www.investopedia.com/where-to-buy-the-new-spot-bitcoin-etfs-8557203) called the Bitcoin Mini Trust (BTC), with as-yet-undisclosed but certainly lower fees than the 1.5% currently charged by the existing GBTC fund.
In a first for [commodity ETFs](https://www.investopedia.com/terms/c/commodity-etf.asp), Grayscale also plans for the new fund to be a "spinoff" of GBTC, meaning that it some of the [bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp) backing the existing fund will be used to seed the new ETF.
The asset manager says that move would be beneficial for existing GBTC investors as they will "benefit from a lower blended fee with the same exposure to Bitcoin, spanning ownership of shares of both GBTC and BTC."
Another big advantage touted by Grayscale is the ability for GBTC shareholders to acquire shares of the new ETF without a [taxable event](https://www.investopedia.com/terms/t/taxableevent.asp). Remember, selling your bitcoin for profit or even exchanging your bitcoin for goods or services [may trigger a tax liability](https://www.investopedia.com/tech/taxes-and-crypto/#toc-types-of-cryptocurrency-tax-events).
Recently, the combined assets under management (AUM) of the other [nine spot bitcoin ETFs](https://www.investopedia.com/cryptocurrency-market-news-bitcoin-blows-past-usd72k-ether-up-on-dencun-upgrade-optimism-8607058#citation-3) surpassed GBTC's assets. Blackrock's iShares Bitcoin Trust ([IBIT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IBIT)) has been particularly successful, growing to a size of about $14 billion by the end of trading on Monday.
The hype surrounding spot bitcoin ETFs has brought bitcoin ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD)) itself to new all-time highs above $72,000 this week, after falling below $20,000 in the aftermath of [crypto exchange FTX's collapse](https://www.investopedia.com/what-went-wrong-with-ftx-6828447) in November 2022.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Grayscale Investments has filed for a new spot bitcoin exchange-traded fund (ETF) with the SEC.Grayscale offers the largest spot bitcoin ETF in terms of assets under management, GBTC, but has experienced more than $10 billion in outflows since its conversion to an ETF.These outflows may be linked to GBTC's high fees compared with the other nine spot bitcoin ETFs, and Grayscale's new offering is intended to come with more competitive rates.Up to this point, Blackrock's IBIT spot bitcoin ETF has been a key beneficiary of GBTC's high fees-driven outflows, growing to nearly $15 billion in size in roughly two months.
Cryptocurrency asset manager Grayscale Investments wants to launch a second, more affordable spot bitcoin exchange-traded fund (ETF) with a fee rate much lower than its Grayscale Bitcoin Trust ETF (GBTC), according to a filing with the U.S. Securities and Exchange Commission (SEC).
Grayscale's GBTC has experienced more than $10 billion in outflows, despite major optimism and massive inflows for other spot bitcoin ETFs that started trading in January this year.
According to Bloomberg Senior ETF Analyst Eric Balchunas, these outflows are mainly caused by GBTC's high fees when compared with the other nine spot bitcoin ETFs currently on the market.
What Will Grayscale's Mini Bitcoin ETF Offer?
Grayscale wants to offer a new spot bitcoin ETF called the Bitcoin Mini Trust (BTC), with as-yet-undisclosed but certainly lower fees than the 1.5% currently charged by the existing GBTC fund.
In a first for commodity ETFs, Grayscale also plans for the new fund to be a "spinoff" of GBTC, meaning that it some of the bitcoin backing the existing fund will be used to seed the new ETF.
The asset manager says that move would be beneficial for existing GBTC investors as they will "benefit from a lower blended fee with the same exposure to Bitcoin, spanning ownership of shares of both GBTC and BTC."
Another big advantage touted by Grayscale is the ability for GBTC shareholders to acquire shares of the new ETF without a taxable event. Remember, selling your bitcoin for profit or even exchanging your bitcoin for goods or services may trigger a tax liability.
Recently, the combined assets under management (AUM) of the other nine spot bitcoin ETFs surpassed GBTC's assets. Blackrock's iShares Bitcoin Trust (IBIT) has been particularly successful, growing to a size of about $14 billion by the end of trading on Monday.
The hype surrounding spot bitcoin ETFs has brought bitcoin (BTC) itself to new all-time highs above $72,000 this week, after falling below $20,000 in the aftermath of crypto exchange FTX's collapse in November 2022.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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] |
https://www.investopedia.com/terms/p/pricetofreecashflow.asp | Price to Free Cash Flow: Definition, Uses, and Calculation | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-price-to-free-cash-flow-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 Price to Free Cash Flow Ratio? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Price to free cash flow (P/FCF) is an equity <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuation.asp">valuation</a> metric that compares a company's per-share <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market-price.asp">market price</a> to its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freecashflow.asp">free cash flow</a> (FCF). This metric is very similar to the valuation metric of price to cash flow but is considered a more exact measure because it uses free cash flow, which subtracts capital expenditures (CAPEX) from a company's total <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operatingcashflow.asp">operating cash flow</a>, thereby reflecting the actual cash flow available to fund non-asset-related growth.
</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"> Companies can use this metric to base growth decisions and maintain acceptable free cash flow levels.
</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>Price to free cash flow is an equity valuation metric that indicates a company's ability to continue operating. It is calculated by dividing its market capitalization by free cash flow values.</li><li>Relative to competitor businesses, a lower value for price to free cash flow indicates that the company is undervalued and its stock is relatively cheap.</li><li>Relative to competitor businesses, a higher value for price to free cash flow indicates a company's stock is overvalued.</li><li>The price to free cash flow ratio can be used to compare a company's stock value to its cash management practices over time.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-price-to-free-cash-flow-ratio"></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 Price to Free Cash Flow Ratio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A company's free cash flow is essential because it is a primary indicator of its ability to generate additional revenues, which is a crucial element in stock pricing.
</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 price to free cash flow metric is calculated as follows:<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <span data-value="\begin{aligned} &\text{Price to FCF} = \frac { \text{Market Capitalization} }{ \text{Free Cash Flow} } \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mtable>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<mtext>
Price to FCF
</mtext>
<mo>
=
</mo>
<mfrac>
<mtext>
Market Capitalization
</mtext>
<mtext>
Free Cash Flow
</mtext>
</mfrac>
</mrow>
</mstyle>
</mtd>
</mtr>
</mtable>
<annotation encoding="application/x-tex">
\begin{aligned} &\text{Price to FCF} = \frac { \text{Market Capitalization} }{ \text{Free Cash Flow} } \\ \end{aligned}
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Price to FCF</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">Free Cash Flow</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">Market Capitalization</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> For example, a company with $100 million in total operating cash flow and $50 million in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalexpenditure.asp">capital expenditures</a> has a free cash flow total of $50 million. If the company's market cap value is $1 billion, it has a ratio of 20, meaning its stock trades at 20 times its free cash flow - $1 billion / $50 million.
</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"> You might find a company that has more free cash flows than it does market cap or one that is very close to equal amounts of both. For example, a market cap of 102 million and free cash flows of 110 million would result in a ratio of .93. There is nothing inherently wrong with this if it is typical for the company's industry. However, suppose the company operates in an industry where comparable company market caps hover around 200 million. In that case, you may want to investigate further to determine why the business's market cap is low.<br/>
</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>Free cash flows or market caps that are non-typical for a company's size and industry should raise the flag for further investigation. The business might be in financial trouble, or it might not—it's critical to find out.</p></div></div></div>
<span class="heading-toc" id="toc-how-is-the-price-to-free-cash-flow-ratio-used"></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"> How Is the Price to Free Cash Flow Ratio Used? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Because the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/11/analyzing-price-to-cash-flow-ratio.asp">price to free cash flow ratio is a value metric</a>, lower numbers generally indicate that a company is undervalued and its stock is relatively cheap in relation to its free cash flow. Conversely, higher price to free cash flow numbers may indicate that the company's stock is somewhat overvalued in relation to its free cash flow.
</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"> Therefore, value investors tend to favor companies with low or decreasing P/FCF values that indicate high or increasing free cash flow totals and relatively low stock share prices compared to similar companies in the same industry.
</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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The price to free cash flow ratio is a comparative metric that needs to be compared to something to mean anything. Past P/FCF ratios, competitor ratios, or industry norms are comparable ratios that can be used to gauge value.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> They tend to avoid companies with high price to free cash flow values that indicate the company's share price is relatively high compared to its free cash flow. In short, the lower the price to free cash flow, the more a company's stock is considered to be a better bargain or value.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> As with any equity evaluation metric, it is most useful to compare a company's P/FCF to that of similar companies in the same industry. However, the price to free cash flow metric can also be viewed over a long-term time frame to see if the company's cash flow to share price value is generally improving or worsening.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> The Ratio Can Be Manipulated </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The price to free cash flow ratio can be manipulated by a company. For example, you might find some that preserve cash levels in a reporting period by delaying inventory purchases or their accounts payable payments until after they have published their financial statements.
</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 fact that reported numbers can be manipulated makes it essential that you analyze a company's finances entirely to achieve a larger picture of how it is doing financially. When you do this over a few reporting periods, you can see what a company is doing with its cash, how it is using it, and how other investors value the company.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-what-is-a-good-price-to-free-cash-flow-ratio"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good Price to Free Cash Flow Ratio?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A good price to free cash flow ratio is one that indicates its stock is undervalued. A company's P/FCF should be compared to the ratios of similar companies to determine whether it is under- or over-valued in the industry it operates in. Generally speaking, the lower the ratio, the cheaper the stock is.</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-is-a-high-price-to-free-cash-flow-ratio-good"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a High Price to Free Cash Flow Ratio Good?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A high ratio—one that is higher than is typical for the industry it operates in—may indicate a company's stock is overvalued.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-is-price-to-cash-flow-the-same-as-price-to-free-cash-flow"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Price to Cash Flow the Same as Price to Free Cash Flow?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Price to cash flow accounts for all cash a company has. Price to free cash flow removes capital expenditures, working capital, and dividends so that you compare the cash a company has left over after obligations to its stock price. As a result, it is a better indicator of the ability of a business to continue operating.</p></div>
</div></div> | ## What Is the Price to Free Cash Flow Ratio?
Price to free cash flow (P/FCF) is an equity [valuation](https://www.investopedia.com/terms/v/valuation.asp) metric that compares a company's per-share [market price](https://www.investopedia.com/terms/m/market-price.asp) to its [free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp) (FCF). This metric is very similar to the valuation metric of price to cash flow but is considered a more exact measure because it uses free cash flow, which subtracts capital expenditures (CAPEX) from a company's total [operating cash flow](https://www.investopedia.com/terms/o/operatingcashflow.asp), thereby reflecting the actual cash flow available to fund non-asset-related growth.
Companies can use this metric to base growth decisions and maintain acceptable free cash flow levels.
### Key Takeaways
* Price to free cash flow is an equity valuation metric that indicates a company's ability to continue operating. It is calculated by dividing its market capitalization by free cash flow values.
* Relative to competitor businesses, a lower value for price to free cash flow indicates that the company is undervalued and its stock is relatively cheap.
* Relative to competitor businesses, a higher value for price to free cash flow indicates a company's stock is overvalued.
* The price to free cash flow ratio can be used to compare a company's stock value to its cash management practices over time.
## Understanding the Price to Free Cash Flow Ratio
A company's free cash flow is essential because it is a primary indicator of its ability to generate additional revenues, which is a crucial element in stock pricing.
The price to free cash flow metric is calculated as follows:
Price to FCF
=
Market Capitalization
Free Cash Flow
\begin{aligned} &\text{Price to FCF} = \frac { \text{Market Capitalization} }{ \text{Free Cash Flow} } \\ \end{aligned}
Price to FCF=Free Cash FlowMarket Capitalization
For example, a company with $100 million in total operating cash flow and $50 million in [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) has a free cash flow total of $50 million. If the company's market cap value is $1 billion, it has a ratio of 20, meaning its stock trades at 20 times its free cash flow - $1 billion / $50 million.
You might find a company that has more free cash flows than it does market cap or one that is very close to equal amounts of both. For example, a market cap of 102 million and free cash flows of 110 million would result in a ratio of .93. There is nothing inherently wrong with this if it is typical for the company's industry. However, suppose the company operates in an industry where comparable company market caps hover around 200 million. In that case, you may want to investigate further to determine why the business's market cap is low.
###
Free cash flows or market caps that are non-typical for a company's size and industry should raise the flag for further investigation. The business might be in financial trouble, or it might not—it's critical to find out.
## How Is the Price to Free Cash Flow Ratio Used?
Because the [price to free cash flow ratio is a value metric](https://www.investopedia.com/articles/stocks/11/analyzing-price-to-cash-flow-ratio.asp), lower numbers generally indicate that a company is undervalued and its stock is relatively cheap in relation to its free cash flow. Conversely, higher price to free cash flow numbers may indicate that the company's stock is somewhat overvalued in relation to its free cash flow.
Therefore, value investors tend to favor companies with low or decreasing P/FCF values that indicate high or increasing free cash flow totals and relatively low stock share prices compared to similar companies in the same industry.
###
The price to free cash flow ratio is a comparative metric that needs to be compared to something to mean anything. Past P/FCF ratios, competitor ratios, or industry norms are comparable ratios that can be used to gauge value.
They tend to avoid companies with high price to free cash flow values that indicate the company's share price is relatively high compared to its free cash flow. In short, the lower the price to free cash flow, the more a company's stock is considered to be a better bargain or value.
As with any equity evaluation metric, it is most useful to compare a company's P/FCF to that of similar companies in the same industry. However, the price to free cash flow metric can also be viewed over a long-term time frame to see if the company's cash flow to share price value is generally improving or worsening.
### The Ratio Can Be Manipulated
The price to free cash flow ratio can be manipulated by a company. For example, you might find some that preserve cash levels in a reporting period by delaying inventory purchases or their accounts payable payments until after they have published their financial statements.
The fact that reported numbers can be manipulated makes it essential that you analyze a company's finances entirely to achieve a larger picture of how it is doing financially. When you do this over a few reporting periods, you can see what a company is doing with its cash, how it is using it, and how other investors value the company.
## What Is a Good Price to Free Cash Flow Ratio?
A good price to free cash flow ratio is one that indicates its stock is undervalued. A company's P/FCF should be compared to the ratios of similar companies to determine whether it is under- or over-valued in the industry it operates in. Generally speaking, the lower the ratio, the cheaper the stock is.
## Is a High Price to Free Cash Flow Ratio Good?
A high ratio—one that is higher than is typical for the industry it operates in—may indicate a company's stock is overvalued.
## Is Price to Cash Flow the Same as Price to Free Cash Flow?
Price to cash flow accounts for all cash a company has. Price to free cash flow removes capital expenditures, working capital, and dividends so that you compare the cash a company has left over after obligations to its stock price. As a result, it is a better indicator of the ability of a business to continue operating.
| What Is the Price to Free Cash Flow Ratio?
Price to free cash flow (P/FCF) is an equity valuation metric that compares a company's per-share market price to its free cash flow (FCF). This metric is very similar to the valuation metric of price to cash flow but is considered a more exact measure because it uses free cash flow, which subtracts capital expenditures (CAPEX) from a company's total operating cash flow, thereby reflecting the actual cash flow available to fund non-asset-related growth.
Companies can use this metric to base growth decisions and maintain acceptable free cash flow levels.
Key Takeaways
Price to free cash flow is an equity valuation metric that indicates a company's ability to continue operating. It is calculated by dividing its market capitalization by free cash flow values.Relative to competitor businesses, a lower value for price to free cash flow indicates that the company is undervalued and its stock is relatively cheap.Relative to competitor businesses, a higher value for price to free cash flow indicates a company's stock is overvalued.The price to free cash flow ratio can be used to compare a company's stock value to its cash management practices over time.
Understanding the Price to Free Cash Flow Ratio
A company's free cash flow is essential because it is a primary indicator of its ability to generate additional revenues, which is a crucial element in stock pricing.
The price to free cash flow metric is calculated as follows:
Price to FCF
=
Market Capitalization
Free Cash Flow
\begin{aligned} &\text{Price to FCF} = \frac { \text{Market Capitalization} }{ \text{Free Cash Flow} } \\ \end{aligned}
Price to FCF=Free Cash FlowMarket Capitalization
For example, a company with $100 million in total operating cash flow and $50 million in capital expenditures has a free cash flow total of $50 million. If the company's market cap value is $1 billion, it has a ratio of 20, meaning its stock trades at 20 times its free cash flow - $1 billion / $50 million.
You might find a company that has more free cash flows than it does market cap or one that is very close to equal amounts of both. For example, a market cap of 102 million and free cash flows of 110 million would result in a ratio of .93. There is nothing inherently wrong with this if it is typical for the company's industry. However, suppose the company operates in an industry where comparable company market caps hover around 200 million. In that case, you may want to investigate further to determine why the business's market cap is low.
Free cash flows or market caps that are non-typical for a company's size and industry should raise the flag for further investigation. The business might be in financial trouble, or it might not—it's critical to find out.
How Is the Price to Free Cash Flow Ratio Used?
Because the price to free cash flow ratio is a value metric, lower numbers generally indicate that a company is undervalued and its stock is relatively cheap in relation to its free cash flow. Conversely, higher price to free cash flow numbers may indicate that the company's stock is somewhat overvalued in relation to its free cash flow.
Therefore, value investors tend to favor companies with low or decreasing P/FCF values that indicate high or increasing free cash flow totals and relatively low stock share prices compared to similar companies in the same industry.
The price to free cash flow ratio is a comparative metric that needs to be compared to something to mean anything. Past P/FCF ratios, competitor ratios, or industry norms are comparable ratios that can be used to gauge value.
They tend to avoid companies with high price to free cash flow values that indicate the company's share price is relatively high compared to its free cash flow. In short, the lower the price to free cash flow, the more a company's stock is considered to be a better bargain or value.
As with any equity evaluation metric, it is most useful to compare a company's P/FCF to that of similar companies in the same industry. However, the price to free cash flow metric can also be viewed over a long-term time frame to see if the company's cash flow to share price value is generally improving or worsening.
The Ratio Can Be Manipulated
The price to free cash flow ratio can be manipulated by a company. For example, you might find some that preserve cash levels in a reporting period by delaying inventory purchases or their accounts payable payments until after they have published their financial statements.
The fact that reported numbers can be manipulated makes it essential that you analyze a company's finances entirely to achieve a larger picture of how it is doing financially. When you do this over a few reporting periods, you can see what a company is doing with its cash, how it is using it, and how other investors value the company.
What Is a Good Price to Free Cash Flow Ratio?
A good price to free cash flow ratio is one that indicates its stock is undervalued. A company's P/FCF should be compared to the ratios of similar companies to determine whether it is under- or over-valued in the industry it operates in. Generally speaking, the lower the ratio, the cheaper the stock is.
Is a High Price to Free Cash Flow Ratio Good?
A high ratio—one that is higher than is typical for the industry it operates in—may indicate a company's stock is overvalued.
Is Price to Cash Flow the Same as Price to Free Cash Flow?
Price to cash flow accounts for all cash a company has. Price to free cash flow removes capital expenditures, working capital, and dividends so that you compare the cash a company has left over after obligations to its stock price. As a result, it is a better indicator of the ability of a business to continue operating.
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[
"price to free cash flow ratio is a value metric",
"https://www.investopedia.com/articles/stocks/11/analyzing-price-to-cash-flow-ratio.asp"
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https://www.investopedia.com/articles/investing/012215/how-invest-bitcoin-exchange-futures.asp | Cryptocurrency Futures Defined and How They Work on Exchanges | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Cryptocurrency futures are contracts between two investors who bet on a cryptocurrency's future price, giving them exposure to cryptocurrencies without purchasing them. Crypto futures resemble standard <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contracts</a> because they allow you to bet on the price trajectory of an underlying asset. These contracts trade on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cme.asp">Chicago Mercantile Exchange (CME)</a> and cryptocurrency exchanges. Keep reading to learn more about crypto futures, how they work, and the benefits of trading them.<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>Cryptocurrency futures allow investors to speculate on the future price of cryptocurrencies.</li><li>You can choose from a variety of venues to trade monthly cryptocurrency futures. Some are regulated; others are not.</li><li>Cryptocurrency is known for its volatile price swings, which makes investing in cryptocurrency futures risky.</li><li>You can trade cryptocurrency futures at brokerages approved for futures and options trading.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-are-cryptocurrency-futures"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Are Cryptocurrency Futures? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Futures contracts of any underlying asset are derivatives of that asset. These contracts are bought and sold between two investors who speculate about that asset's price at a specific date in the future. These contracts have a specific number of units, pricing, marginal requirements, and settlement methods that you must meet.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The table below highlights the contract details for Bitcoin and ETH futures offered by the CME:
</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"> Below are the contract details for Bitcoin futures offered by CME:<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="52"></span><span class="ql-inline-citation" data-cite="47"></span><br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_12-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<tbody data-check="-1">
<tr>
<td></td>
<td><b>Bitcoin Futures</b></td>
<td><b>ETH Futures</b></td>
</tr>
<tr>
<td><b>Contract Unit</b></td>
<td>5 bitcoin (as defined by the CME CF Bitcoin Reference Rate)</td>
<td>50 ether (as defined by the CME CF Ether Reference Rate)</td>
</tr>
<tr>
<td><b>Price Quote</b></td>
<td>USD</td>
<td>USD</td>
</tr>
<tr>
<td><b>Trading Hours</b></td>
<td>Sunday to Friday<br/>5 p.m. to 4 p.m. CT</td>
<td>Sunday to Friday<br/>5 p.m. to 4 p.m. CT</td>
</tr>
<tr>
<td><b>Product Code</b></td>
<td>BTC</td>
<td>ETH</td>
</tr>
<tr>
<td><b>Margin Requirements</b></td>
<td>50% cash of the contract amount</td>
<td>60% cash of the contract amount</td>
</tr>
<tr>
<td><b>Listed Contracts</b></td>
<td>Contracts listed for six consecutive months and two additional Decembers</td>
<td>Contracts listed for six consecutive months and two additional Decembers</td>
</tr>
<tr>
<td><b>Settlement Method</b></td>
<td>Financially settled</td>
<td>Financially settled</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<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>The first Bitcoin futures contracts were listed on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cboe.asp">Chicago Board Options Exchange (CBOE)</a> in early December 2017 but soon discontinued them. The CME also introduced Bitcoin futures contracts in December 2017.<span class="ql-inline-citation" data-cite="60"></span><span class="ql-inline-citation" data-cite="59"></span> The contracts are traded on the Globex electronic trading platform and are settled in cash. Bitcoin and Ether futures are based on the CME CF Bitcoin Reference Rate and the CME CF Ether Reference Rate.<span class="ql-inline-citation" data-cite="66"></span></p></div></div></div>
<span class="heading-toc" id="toc-trading-on-regulated-vs-unregulated-exchanges"></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"> Trading on Regulated vs. Unregulated Exchanges </span> </h2>
<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"> Regulated Exchanges </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Consider the following example for a CME Group Bitcoin futures contract. Suppose an investor purchases two Bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin when the futures contract was purchased was $5,000 each, totaling $50,000 for both futures contracts.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The margin requirement for Bitcoin futures trading at CME is 50% of the contract amount, meaning you must deposit $25,000 as margin. You can finance the rest of the contract purchase by using leverage.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The contract's value varies based on the underlying asset's price (i.e., Bitcoin). CME uses the Bitcoin Reference Rate, which is the volume-weighted average price for Bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.<span class="ql-inline-citation" data-cite="49"></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-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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>To trade futures, you must have an account with a registered futures commission merchant or introducing broker.<span class="ql-inline-citation" data-cite="49"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Depending on Bitcoin’s price fluctuations, you can either hold onto the futures contracts or sell them to another party. At the end of your contracts’ duration, you have the option to roll them over to new ones or let them expire and collect the cash settlement due.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The steps to conduct trade in Bitcoin futures are the same as those for a regular futures contract. You begin by setting up an account with the brokerage or exchange where you plan to trade. Once your account is approved, you will need another approval from the trading service provider to start futures trading. Generally, the latter approval is a function of funding requirements and the account holder’s experience with derivatives trading. <br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The same criteria also play an essential role in determining leverage and margin amounts for your trade. Futures trading makes heavy use of leverage to execute trades. Government agencies regulate the maximum leverage amount allowed at regulated exchanges and trading venues.<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"> Unregulated Exchanges </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The story is a different one at unregulated exchanges. They have the freedom to allow excessive risk-taking for their trades. For example, Binance offered leverage of up to 125 times the trading amount when it launched futures trading on its platform in 2019.<span class="ql-inline-citation" data-cite="61"></span> That figure was revised to 20 times the trading amount in July 2021.<span class="ql-inline-citation" data-cite="33"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Remember that higher leverage amounts translate to more volatility for your trade. Thus, the promise of high profits is offset by the risk of losing significant amounts of money.<br/>
</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 amount you can trade depends on the margin amount available to you. Margin is the minimum collateral you must have in your account to execute trades. The higher the amount of the trade, the greater the margin amount required by the broker or exchange to complete the trade.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Bitcoin’s risky and volatile nature means that the margin amounts required for trading their futures are generally higher than those for other commodities and assets.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The exchange calls for a 50% margin for Bitcoin and 60% for Ether futures trading.<span class="ql-inline-citation" data-cite="47"></span><span class="ql-inline-citation" data-cite="36"></span> Brokerages offer futures products from many companies but can have different margin requirements over and above the amount the provider charges.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> For example, CME has a base margin requirement for Bitcoin futures; brokerages like TD Ameritrade, which offers CME Bitcoin futures trading as part of their product suite, can set margin rates on top of the base rate set by the exchange.<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_44-0"></div>
<span class="heading-toc" id="toc-popular-exchanges-for-cryptocurrency-futures"></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"> Popular Exchanges for Cryptocurrency Futures </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> According to data from crypto datamining site CoinGecko, the most prominent crypto derivative trading platforms on Jan. 19, 2024, were:<span class="ql-inline-citation" data-cite="55"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> <li><strong>Binance</strong>: The world’s biggest cryptocurrency exchange by trading volume also accounted for $29.44 billion of the total trading volume in Bitcoin perpetuals and futures. </li><li><strong>Deepcoin</strong>: An innovative exchange that first joined the top three of this CoinGecko list in 2023. It had a trading volume of $2.56 billion on Jan. 19, 2024.</li><li><strong>ByBit</strong>: While it may not be as well-known as Binance to U.S. audiences, ByBit ranks among the world’s biggest cryptocurrency exchanges. It had a trading volume of $2.75 billion on Jan. 19, 2024. Due to regulatory compliance reasons, ByBit is not available to U.S. customers.</li><li><strong>OKX</strong>: OKX offers 424 trading pairs in perpetuals and futures. Trading volume was $10.11 billion on Jan. 19, 2024.</li><li><strong>Bitget</strong>: Also established as a derivatives exchange initially, Bitget features 215 cryptocurrency pairs for trade, including perpetuals and futures. Trading volume on Jan. 19, 2024, was $8.43 billion.<br/></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_50-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_51-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_5-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>You can also gain exposure to cryptocurrency futures by trading cryptocurrency ETFs. There are several Bitcoin ETFs that are linked to Bitcoin futures.</p></div></div></div>
<span class="heading-toc" id="toc-benefits-of-cryptocurrency-futures-trading"></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"> Benefits of Cryptocurrency Futures Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> The main advantage of trading Bitcoin futures contracts is that they offer regulated exposure to cryptocurrencies. That is a significant point in a volatile ecosystem with wild price swings. Bitcoin futures contracts at CME are regulated by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cftc.asp">Commodity Futures Trading Commission</a> (CFTC).<span class="ql-inline-citation" data-cite="49"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> This offers a measure of confidence and recourse to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a>, who compose the majority of traders in such contracts.<br/>
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0">
<li><strong>Simplicity:</strong> Bitcoin futures also simplify the process of investing in Bitcoin. You do not need to create a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin-wallet.asp">Bitcoin wallet</a> or put money into custody solutions for storage and security while trading because there is no Bitcoin exchange.<span class="ql-inline-citation" data-cite="49"></span> An added benefit of cash-settled contracts is eliminating the risk of physical ownership of a volatile asset.<br/></li>
<li><strong>Safer Than Owning Crypto: </strong>Bitcoin futures contracts are relatively safer for dabbling in Bitcoin without getting burnt because futures contracts have positions and price limits that enable you to curtail your risk exposure to the asset class.<br/></li>
<li><strong>Position Limits:</strong> Position limits differ between exchanges. For example, CME allows a maximum of 4,000 front-month futures contracts for Bitcoin and Micro Bitcoin and 8,000 for Ether and Micro Ether. Binance, the world’s biggest cryptocurrency exchange by trading volume, has a position limit adjustment feature that enables manual reconfiguration of limits based on past trading history and margin amounts.<span class="ql-inline-citation" data-cite="49"></span><span class="ql-inline-citation" data-cite="43"></span></li>
</ul>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_59-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_60-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_6-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_6-0"><p>The further out the futures contract expiration date is, the higher the account maintenance amount will generally be.</p></div></div></div>
<span class="heading-toc" id="toc-what-to-consider-when-trading-cryptocurrency-futures"></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"> What to Consider When Trading Cryptocurrency Futures </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> The number of venues offering cryptocurrency futures trading is growing, as are the numbers of participants and trading volumes compared to other commodities. Cryptocurrency futures trading has its own set of peculiarities.<br>
</br></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"> Trading Volume </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Trading volumes in cryptocurrency futures can mimic those of its spot markets counterpart. Price fluctuations can also be high, especially during volatile stretches regarding price. During these times, cryptocurrency futures may appear to follow spot market prices or trade at a significant premium or discount to spot prices.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> This means that Bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. The SEC warned investors about the pitfalls of trading cryptocurrency futures in June 2021. "Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment."<span class="ql-inline-citation" data-cite="44"></span> <br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_69-0"> <span class="mntl-sc-block-subheading__text"> Most Exchanges Are Unregulated </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Except for select trading venues, such as CME, cryptocurrency futures trading occurs mainly on exchanges outside the purview of regulation. Among the world’s biggest platforms for Bitcoin futures, only CME is regulated by the CFTC.<span class="ql-inline-citation" data-cite="58"></span> Binance has opened U.S. subsidiaries only recently, but its U.S. offerings are limited.
</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-cryptocurrency-futures-options"></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"> Cryptocurrency Futures Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Cryptocurrency options are a relatively new development. CME introduced trading in Bitcoin options in January 2020 and Ether futures options in September 2022.<span class="ql-inline-citation" data-cite="63"></span><span class="ql-inline-citation" data-cite="62"></span> <br>
</br></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"> Cryptocurrency options work like standard <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/optionscontract.asp">options contracts</a> because they are a right, not an obligation, to buy cryptocurrency at a set price on a future date. The asset is represented by cryptocurrency futures contracts traded at the CME, with a single options contract equivalent to a single futures contract consisting of 5 BTC or 50 ETH.<span class="ql-inline-citation" data-cite="65"></span><span class="ql-inline-citation" data-cite="64"></span> Options contracts for six consecutive months are available at a time at CME. They expire monthly on set dates, with two additional December contract months.<span class="ql-inline-citation" data-cite="57"></span><br/>
</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"> Traders can buy <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/calloption.asp">call options </a>if they think the price of Bitcoin will go up. Alternatively, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put option</a> is a bearish bet that the cryptocurrency’s price will decline. The gains and losses in both cases are different. In a call option, gains may be unlimited (because the price can go up indefinitely), while the losses are limited to the premium paid for the contract. In a put option, losses may be unlimited (because the price may go down to zero), while the gains are limited to the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/option-premium.asp">premium</a> paid for the options contract. <br/>
</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"> Bitcoin’s price volatility makes it a risky asset for options trading. The implied volatility of options contracts is high, meaning that the price of a single Bitcoin option is also high. High prices can magnify trader losses.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-where-can-i-short-a-crypto-in-the-us"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Can I Short a Crypto in the U.S.?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p><br>You can short Bitcoin and Ether on the Chicago Mercantile Exchange or cryptocurrency exchanges authorized in the U.S.</br></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-are-crypto-futures-legal-in-the-us"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Crypto Futures Legal in the U.S.?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Cryptocurrency futures are legal in the U.S. and can be traded on authorized cryptocurrency exchanges or the CME using specific brokers. You can trade cryptocurrency futures options with brokers such as Interactive Brokers, Edge Clear, Ironbeam, or TradeStation.<span class="ql-inline-citation" data-cite="54"></span><span class="ql-inline-citation" data-cite="48"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_85-0"><span class="heading-toc" id="toc-what-is-futures-expiration-in-crypto"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Futures Expiration In Crypto?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Bitcoin and Ether futures expire on the last Friday of the month at 4:00 p.m. London time.<span class="ql-inline-citation" data-cite="56"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></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_87-0"> <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_88-0"> Cryptocurrency futures are contracts based on underlying cryptocurrency prices that allow traders access to price fluctuations without taking possession of cryptocurrencies. These futures reduce the risk of buying actual cryptocurrency because you're buying and selling bets on what you believe their prices are going to do.<br>
</br></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"> <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. As of the date this article was written, the author does not own cryptocurrency.</em>
</p></div> | Cryptocurrency futures are contracts between two investors who bet on a cryptocurrency's future price, giving them exposure to cryptocurrencies without purchasing them. Crypto futures resemble standard [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp) because they allow you to bet on the price trajectory of an underlying asset. These contracts trade on the [Chicago Mercantile Exchange (CME)](https://www.investopedia.com/terms/c/cme.asp) and cryptocurrency exchanges. Keep reading to learn more about crypto futures, how they work, and the benefits of trading them.
### Key Takeaways
* Cryptocurrency futures allow investors to speculate on the future price of cryptocurrencies.
* You can choose from a variety of venues to trade monthly cryptocurrency futures. Some are regulated; others are not.
* Cryptocurrency is known for its volatile price swings, which makes investing in cryptocurrency futures risky.
* You can trade cryptocurrency futures at brokerages approved for futures and options trading.
## What Are Cryptocurrency Futures?
Futures contracts of any underlying asset are derivatives of that asset. These contracts are bought and sold between two investors who speculate about that asset's price at a specific date in the future. These contracts have a specific number of units, pricing, marginal requirements, and settlement methods that you must meet.
The table below highlights the contract details for Bitcoin and ETH futures offered by the CME:
Below are the contract details for Bitcoin futures offered by CME:
| | **Bitcoin Futures** | **ETH Futures** |
| --- | --- | --- |
| **Contract Unit** | 5 bitcoin (as defined by the CME CF Bitcoin Reference Rate) | 50 ether (as defined by the CME CF Ether Reference Rate) |
| **Price Quote** | USD | USD |
| **Trading Hours** | Sunday to Friday5 p.m. to 4 p.m. CT | Sunday to Friday5 p.m. to 4 p.m. CT |
| **Product Code** | BTC | ETH |
| **Margin Requirements** | 50% cash of the contract amount | 60% cash of the contract amount |
| **Listed Contracts** | Contracts listed for six consecutive months and two additional Decembers | Contracts listed for six consecutive months and two additional Decembers |
| **Settlement Method** | Financially settled | Financially settled |
###
The first Bitcoin futures contracts were listed on the [Chicago Board Options Exchange (CBOE)](https://www.investopedia.com/terms/c/cboe.asp) in early December 2017 but soon discontinued them. The CME also introduced Bitcoin futures contracts in December 2017. The contracts are traded on the Globex electronic trading platform and are settled in cash. Bitcoin and Ether futures are based on the CME CF Bitcoin Reference Rate and the CME CF Ether Reference Rate.
## Trading on Regulated vs. Unregulated Exchanges
### Regulated Exchanges
Consider the following example for a CME Group Bitcoin futures contract. Suppose an investor purchases two Bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin when the futures contract was purchased was $5,000 each, totaling $50,000 for both futures contracts.
The margin requirement for Bitcoin futures trading at CME is 50% of the contract amount, meaning you must deposit $25,000 as margin. You can finance the rest of the contract purchase by using leverage.
The contract's value varies based on the underlying asset's price (i.e., Bitcoin). CME uses the Bitcoin Reference Rate, which is the volume-weighted average price for Bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.
###
To trade futures, you must have an account with a registered futures commission merchant or introducing broker.
Depending on Bitcoin’s price fluctuations, you can either hold onto the futures contracts or sell them to another party. At the end of your contracts’ duration, you have the option to roll them over to new ones or let them expire and collect the cash settlement due.
The steps to conduct trade in Bitcoin futures are the same as those for a regular futures contract. You begin by setting up an account with the brokerage or exchange where you plan to trade. Once your account is approved, you will need another approval from the trading service provider to start futures trading. Generally, the latter approval is a function of funding requirements and the account holder’s experience with derivatives trading.
The same criteria also play an essential role in determining leverage and margin amounts for your trade. Futures trading makes heavy use of leverage to execute trades. Government agencies regulate the maximum leverage amount allowed at regulated exchanges and trading venues.
### Unregulated Exchanges
The story is a different one at unregulated exchanges. They have the freedom to allow excessive risk-taking for their trades. For example, Binance offered leverage of up to 125 times the trading amount when it launched futures trading on its platform in 2019. That figure was revised to 20 times the trading amount in July 2021.
Remember that higher leverage amounts translate to more volatility for your trade. Thus, the promise of high profits is offset by the risk of losing significant amounts of money.
The amount you can trade depends on the margin amount available to you. Margin is the minimum collateral you must have in your account to execute trades. The higher the amount of the trade, the greater the margin amount required by the broker or exchange to complete the trade.
###
Bitcoin’s risky and volatile nature means that the margin amounts required for trading their futures are generally higher than those for other commodities and assets.
The exchange calls for a 50% margin for Bitcoin and 60% for Ether futures trading. Brokerages offer futures products from many companies but can have different margin requirements over and above the amount the provider charges.
For example, CME has a base margin requirement for Bitcoin futures; brokerages like TD Ameritrade, which offers CME Bitcoin futures trading as part of their product suite, can set margin rates on top of the base rate set by the exchange.
## Popular Exchanges for Cryptocurrency Futures
According to data from crypto datamining site CoinGecko, the most prominent crypto derivative trading platforms on Jan. 19, 2024, were:
* **Binance**: The world’s biggest cryptocurrency exchange by trading volume also accounted for $29.44 billion of the total trading volume in Bitcoin perpetuals and futures.
* **Deepcoin**: An innovative exchange that first joined the top three of this CoinGecko list in 2023. It had a trading volume of $2.56 billion on Jan. 19, 2024.
* **ByBit**: While it may not be as well-known as Binance to U.S. audiences, ByBit ranks among the world’s biggest cryptocurrency exchanges. It had a trading volume of $2.75 billion on Jan. 19, 2024. Due to regulatory compliance reasons, ByBit is not available to U.S. customers.
* **OKX**: OKX offers 424 trading pairs in perpetuals and futures. Trading volume was $10.11 billion on Jan. 19, 2024.
* **Bitget**: Also established as a derivatives exchange initially, Bitget features 215 cryptocurrency pairs for trade, including perpetuals and futures. Trading volume on Jan. 19, 2024, was $8.43 billion.
###
You can also gain exposure to cryptocurrency futures by trading cryptocurrency ETFs. There are several Bitcoin ETFs that are linked to Bitcoin futures.
## Benefits of Cryptocurrency Futures Trading
The main advantage of trading Bitcoin futures contracts is that they offer regulated exposure to cryptocurrencies. That is a significant point in a volatile ecosystem with wild price swings. Bitcoin futures contracts at CME are regulated by the [Commodity Futures Trading Commission](https://www.investopedia.com/terms/c/cftc.asp) (CFTC).
This offers a measure of confidence and recourse to [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp), who compose the majority of traders in such contracts.
* **Simplicity:** Bitcoin futures also simplify the process of investing in Bitcoin. You do not need to create a [Bitcoin wallet](https://www.investopedia.com/terms/b/bitcoin-wallet.asp) or put money into custody solutions for storage and security while trading because there is no Bitcoin exchange. An added benefit of cash-settled contracts is eliminating the risk of physical ownership of a volatile asset.
* **Safer Than Owning Crypto:** Bitcoin futures contracts are relatively safer for dabbling in Bitcoin without getting burnt because futures contracts have positions and price limits that enable you to curtail your risk exposure to the asset class.
* **Position Limits:** Position limits differ between exchanges. For example, CME allows a maximum of 4,000 front-month futures contracts for Bitcoin and Micro Bitcoin and 8,000 for Ether and Micro Ether. Binance, the world’s biggest cryptocurrency exchange by trading volume, has a position limit adjustment feature that enables manual reconfiguration of limits based on past trading history and margin amounts.
###
The further out the futures contract expiration date is, the higher the account maintenance amount will generally be.
## What to Consider When Trading Cryptocurrency Futures
The number of venues offering cryptocurrency futures trading is growing, as are the numbers of participants and trading volumes compared to other commodities. Cryptocurrency futures trading has its own set of peculiarities.
### Trading Volume
Trading volumes in cryptocurrency futures can mimic those of its spot markets counterpart. Price fluctuations can also be high, especially during volatile stretches regarding price. During these times, cryptocurrency futures may appear to follow spot market prices or trade at a significant premium or discount to spot prices.
This means that Bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. The SEC warned investors about the pitfalls of trading cryptocurrency futures in June 2021. "Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment."
### Most Exchanges Are Unregulated
Except for select trading venues, such as CME, cryptocurrency futures trading occurs mainly on exchanges outside the purview of regulation. Among the world’s biggest platforms for Bitcoin futures, only CME is regulated by the CFTC. Binance has opened U.S. subsidiaries only recently, but its U.S. offerings are limited.
## Cryptocurrency Futures Options
Cryptocurrency options are a relatively new development. CME introduced trading in Bitcoin options in January 2020 and Ether futures options in September 2022.
Cryptocurrency options work like standard [options contracts](https://www.investopedia.com/terms/o/optionscontract.asp) because they are a right, not an obligation, to buy cryptocurrency at a set price on a future date. The asset is represented by cryptocurrency futures contracts traded at the CME, with a single options contract equivalent to a single futures contract consisting of 5 BTC or 50 ETH. Options contracts for six consecutive months are available at a time at CME. They expire monthly on set dates, with two additional December contract months.
Traders can buy [call options](https://www.investopedia.com/terms/c/calloption.asp) if they think the price of Bitcoin will go up. Alternatively, a [put option](https://www.investopedia.com/terms/p/putoption.asp) is a bearish bet that the cryptocurrency’s price will decline. The gains and losses in both cases are different. In a call option, gains may be unlimited (because the price can go up indefinitely), while the losses are limited to the premium paid for the contract. In a put option, losses may be unlimited (because the price may go down to zero), while the gains are limited to the [premium](https://www.investopedia.com/terms/o/option-premium.asp) paid for the options contract.
Bitcoin’s price volatility makes it a risky asset for options trading. The implied volatility of options contracts is high, meaning that the price of a single Bitcoin option is also high. High prices can magnify trader losses.
## Where Can I Short a Crypto in the U.S.?
You can short Bitcoin and Ether on the Chicago Mercantile Exchange or cryptocurrency exchanges authorized in the U.S.
## Are Crypto Futures Legal in the U.S.?
Cryptocurrency futures are legal in the U.S. and can be traded on authorized cryptocurrency exchanges or the CME using specific brokers. You can trade cryptocurrency futures options with brokers such as Interactive Brokers, Edge Clear, Ironbeam, or TradeStation.
## What Is Futures Expiration In Crypto?
Bitcoin and Ether futures expire on the last Friday of the month at 4:00 p.m. London time.
## The Bottom Line
Cryptocurrency futures are contracts based on underlying cryptocurrency prices that allow traders access to price fluctuations without taking possession of cryptocurrencies. These futures reduce the risk of buying actual cryptocurrency because you're buying and selling bets on what you believe their prices are going to do.
*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. As of the date this article was written, the author does not own cryptocurrency.*
| Cryptocurrency futures are contracts between two investors who bet on a cryptocurrency's future price, giving them exposure to cryptocurrencies without purchasing them. Crypto futures resemble standard futures contracts because they allow you to bet on the price trajectory of an underlying asset. These contracts trade on the Chicago Mercantile Exchange (CME) and cryptocurrency exchanges. Keep reading to learn more about crypto futures, how they work, and the benefits of trading them.
Key Takeaways
Cryptocurrency futures allow investors to speculate on the future price of cryptocurrencies.You can choose from a variety of venues to trade monthly cryptocurrency futures. Some are regulated; others are not.Cryptocurrency is known for its volatile price swings, which makes investing in cryptocurrency futures risky.You can trade cryptocurrency futures at brokerages approved for futures and options trading.
What Are Cryptocurrency Futures?
Futures contracts of any underlying asset are derivatives of that asset. These contracts are bought and sold between two investors who speculate about that asset's price at a specific date in the future. These contracts have a specific number of units, pricing, marginal requirements, and settlement methods that you must meet.
The table below highlights the contract details for Bitcoin and ETH futures offered by the CME:
Below are the contract details for Bitcoin futures offered by CME:
Bitcoin Futures
ETH Futures
Contract Unit
5 bitcoin (as defined by the CME CF Bitcoin Reference Rate)
50 ether (as defined by the CME CF Ether Reference Rate)
Price Quote
USD
USD
Trading Hours
Sunday to Friday5 p.m. to 4 p.m. CT
Sunday to Friday5 p.m. to 4 p.m. CT
Product Code
BTC
ETH
Margin Requirements
50% cash of the contract amount
60% cash of the contract amount
Listed Contracts
Contracts listed for six consecutive months and two additional Decembers
Contracts listed for six consecutive months and two additional Decembers
Settlement Method
Financially settled
Financially settled
The first Bitcoin futures contracts were listed on the Chicago Board Options Exchange (CBOE) in early December 2017 but soon discontinued them. The CME also introduced Bitcoin futures contracts in December 2017. The contracts are traded on the Globex electronic trading platform and are settled in cash. Bitcoin and Ether futures are based on the CME CF Bitcoin Reference Rate and the CME CF Ether Reference Rate.
Trading on Regulated vs. Unregulated Exchanges
Regulated Exchanges
Consider the following example for a CME Group Bitcoin futures contract. Suppose an investor purchases two Bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin when the futures contract was purchased was $5,000 each, totaling $50,000 for both futures contracts.
The margin requirement for Bitcoin futures trading at CME is 50% of the contract amount, meaning you must deposit $25,000 as margin. You can finance the rest of the contract purchase by using leverage.
The contract's value varies based on the underlying asset's price (i.e., Bitcoin). CME uses the Bitcoin Reference Rate, which is the volume-weighted average price for Bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.
To trade futures, you must have an account with a registered futures commission merchant or introducing broker.
Depending on Bitcoin’s price fluctuations, you can either hold onto the futures contracts or sell them to another party. At the end of your contracts’ duration, you have the option to roll them over to new ones or let them expire and collect the cash settlement due.
The steps to conduct trade in Bitcoin futures are the same as those for a regular futures contract. You begin by setting up an account with the brokerage or exchange where you plan to trade. Once your account is approved, you will need another approval from the trading service provider to start futures trading. Generally, the latter approval is a function of funding requirements and the account holder’s experience with derivatives trading.
The same criteria also play an essential role in determining leverage and margin amounts for your trade. Futures trading makes heavy use of leverage to execute trades. Government agencies regulate the maximum leverage amount allowed at regulated exchanges and trading venues.
Unregulated Exchanges
The story is a different one at unregulated exchanges. They have the freedom to allow excessive risk-taking for their trades. For example, Binance offered leverage of up to 125 times the trading amount when it launched futures trading on its platform in 2019. That figure was revised to 20 times the trading amount in July 2021.
Remember that higher leverage amounts translate to more volatility for your trade. Thus, the promise of high profits is offset by the risk of losing significant amounts of money.
The amount you can trade depends on the margin amount available to you. Margin is the minimum collateral you must have in your account to execute trades. The higher the amount of the trade, the greater the margin amount required by the broker or exchange to complete the trade.
Bitcoin’s risky and volatile nature means that the margin amounts required for trading their futures are generally higher than those for other commodities and assets.
The exchange calls for a 50% margin for Bitcoin and 60% for Ether futures trading. Brokerages offer futures products from many companies but can have different margin requirements over and above the amount the provider charges.
For example, CME has a base margin requirement for Bitcoin futures; brokerages like TD Ameritrade, which offers CME Bitcoin futures trading as part of their product suite, can set margin rates on top of the base rate set by the exchange.
Popular Exchanges for Cryptocurrency Futures
According to data from crypto datamining site CoinGecko, the most prominent crypto derivative trading platforms on Jan. 19, 2024, were:
Binance: The world’s biggest cryptocurrency exchange by trading volume also accounted for $29.44 billion of the total trading volume in Bitcoin perpetuals and futures. Deepcoin: An innovative exchange that first joined the top three of this CoinGecko list in 2023. It had a trading volume of $2.56 billion on Jan. 19, 2024.ByBit: While it may not be as well-known as Binance to U.S. audiences, ByBit ranks among the world’s biggest cryptocurrency exchanges. It had a trading volume of $2.75 billion on Jan. 19, 2024. Due to regulatory compliance reasons, ByBit is not available to U.S. customers.OKX: OKX offers 424 trading pairs in perpetuals and futures. Trading volume was $10.11 billion on Jan. 19, 2024.Bitget: Also established as a derivatives exchange initially, Bitget features 215 cryptocurrency pairs for trade, including perpetuals and futures. Trading volume on Jan. 19, 2024, was $8.43 billion.
You can also gain exposure to cryptocurrency futures by trading cryptocurrency ETFs. There are several Bitcoin ETFs that are linked to Bitcoin futures.
Benefits of Cryptocurrency Futures Trading
The main advantage of trading Bitcoin futures contracts is that they offer regulated exposure to cryptocurrencies. That is a significant point in a volatile ecosystem with wild price swings. Bitcoin futures contracts at CME are regulated by the Commodity Futures Trading Commission (CFTC).
This offers a measure of confidence and recourse to institutional investors, who compose the majority of traders in such contracts.
Simplicity: Bitcoin futures also simplify the process of investing in Bitcoin. You do not need to create a Bitcoin wallet or put money into custody solutions for storage and security while trading because there is no Bitcoin exchange. An added benefit of cash-settled contracts is eliminating the risk of physical ownership of a volatile asset.
Safer Than Owning Crypto: Bitcoin futures contracts are relatively safer for dabbling in Bitcoin without getting burnt because futures contracts have positions and price limits that enable you to curtail your risk exposure to the asset class.
Position Limits: Position limits differ between exchanges. For example, CME allows a maximum of 4,000 front-month futures contracts for Bitcoin and Micro Bitcoin and 8,000 for Ether and Micro Ether. Binance, the world’s biggest cryptocurrency exchange by trading volume, has a position limit adjustment feature that enables manual reconfiguration of limits based on past trading history and margin amounts.
The further out the futures contract expiration date is, the higher the account maintenance amount will generally be.
What to Consider When Trading Cryptocurrency Futures
The number of venues offering cryptocurrency futures trading is growing, as are the numbers of participants and trading volumes compared to other commodities. Cryptocurrency futures trading has its own set of peculiarities.
Trading Volume
Trading volumes in cryptocurrency futures can mimic those of its spot markets counterpart. Price fluctuations can also be high, especially during volatile stretches regarding price. During these times, cryptocurrency futures may appear to follow spot market prices or trade at a significant premium or discount to spot prices.
This means that Bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. The SEC warned investors about the pitfalls of trading cryptocurrency futures in June 2021. "Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment."
Most Exchanges Are Unregulated
Except for select trading venues, such as CME, cryptocurrency futures trading occurs mainly on exchanges outside the purview of regulation. Among the world’s biggest platforms for Bitcoin futures, only CME is regulated by the CFTC. Binance has opened U.S. subsidiaries only recently, but its U.S. offerings are limited.
Cryptocurrency Futures Options
Cryptocurrency options are a relatively new development. CME introduced trading in Bitcoin options in January 2020 and Ether futures options in September 2022.
Cryptocurrency options work like standard options contracts because they are a right, not an obligation, to buy cryptocurrency at a set price on a future date. The asset is represented by cryptocurrency futures contracts traded at the CME, with a single options contract equivalent to a single futures contract consisting of 5 BTC or 50 ETH. Options contracts for six consecutive months are available at a time at CME. They expire monthly on set dates, with two additional December contract months.
Traders can buy call options if they think the price of Bitcoin will go up. Alternatively, a put option is a bearish bet that the cryptocurrency’s price will decline. The gains and losses in both cases are different. In a call option, gains may be unlimited (because the price can go up indefinitely), while the losses are limited to the premium paid for the contract. In a put option, losses may be unlimited (because the price may go down to zero), while the gains are limited to the premium paid for the options contract.
Bitcoin’s price volatility makes it a risky asset for options trading. The implied volatility of options contracts is high, meaning that the price of a single Bitcoin option is also high. High prices can magnify trader losses.
Where Can I Short a Crypto in the U.S.?
You can short Bitcoin and Ether on the Chicago Mercantile Exchange or cryptocurrency exchanges authorized in the U.S.
Are Crypto Futures Legal in the U.S.?
Cryptocurrency futures are legal in the U.S. and can be traded on authorized cryptocurrency exchanges or the CME using specific brokers. You can trade cryptocurrency futures options with brokers such as Interactive Brokers, Edge Clear, Ironbeam, or TradeStation.
What Is Futures Expiration In Crypto?
Bitcoin and Ether futures expire on the last Friday of the month at 4:00 p.m. London time.
The Bottom Line
Cryptocurrency futures are contracts based on underlying cryptocurrency prices that allow traders access to price fluctuations without taking possession of cryptocurrencies. These futures reduce the risk of buying actual cryptocurrency because you're buying and selling bets on what you believe their prices are going to do.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.
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]
] |
https://www.investopedia.com/what-to-look-for-in-a-student-credit-card-5191392 | What to Look for in a Student Credit Card | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Discover... Chase... Bank of America... Capital One. If you're in the market for a student credit card, you have a lot of choices. To find the right card for you, you'll want to check each card's fees, annual percentage rate (APR), eligibility requirements, and rewards. By reviewing this student credit card information, you can make a smart decision.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Many major card issuers—including Bank of America, Chase, and Discover—offer student credit cards.</li><li>Easier to get than other credit cards, a student credit card can help you establish your credit while still in school.</li><li>Some student credit cards also offer added benefits like rewards or travel insurance.</li><li>Student credit cards often have high annual percentage rates (APRs) and fees.</li><li>Eligibility requirements vary by card issuer.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-student-credit-cards-work"></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 Student Credit Cards Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Designed specifically for young adults who are currently in college and working toward a degree, student credit cards function like traditional credit cards. However, they are usually easier to qualify for, making them a practical option when you're a student and just starting to build your credit.
</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-student-credit-card-information-to-consider"></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 Student Credit Card Information to Consider </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> There are many different student credit cards on the market today. When comparing your options, it helps to consider the following factors:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-subheading__text"> 1. Annual Percentage Rate (APR) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Unfortunately, the <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>, or APR, on some student credit cards can be quite high; rates well into the double digits are common. If you don't pay your balance in full each month, a higher APR will cause more interest to accrue, making it more difficult to pay down your debt.
</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"> So if you think you may carry a balance, because of a major upcoming expense, for example, look for a card with a lower APR.
</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"> 2. Fees </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Some student credit cards charge additional fees, such as annual fees or account setup fees. There are many no-fee cards on the market, so there's no need to waste money on one that charges added fees, especially when you're a college student on a budget. For instance, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/deserve-edu-mastercard-for-students-review-4799611">Deserve EDU Mastercard for Students</a> card doesn't have an annual fee, setup fee, or monthly maintenance fees.<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>
<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"> 3. Applicant Requirements </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Applicant requirements vary by card issuer. In general, you must be at least 18, have a Social Security number, and have either your own income or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_sign.asp">cosigner</a> with a reliable income to qualify.
</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"> Most card issuers require applicants to be current college students. They may ask you for proof of enrollment, including your expected graduation date. However, not all issuers have that requirement. For example, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/journey-student-credit-card-from-capital-one-review-4798875">Journey Student Credit Card</a> from Capital One does not ask for proof of enrollment, so you could qualify even if you aren't in college.
</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"> 4. Rewards </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> With <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/are-student-credit-cards-only-for-students-5192525">some student credit cards</a>, you can earn rewards on select purchases. For example, you'd earn 1.5 points for every $1 you spend with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bank-of-america-travel-rewards-for-students-review-4796399">Bank of America Travel Rewards for Students</a> credit card. You can redeem your points for statement credits that you can use to pay for flights, hotel stays, rental cars, or baggage fees.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The most common forms of credit card rewards are cash back, points, and airline miles. If you're interested in a card with rewards, look for one that offers rewards you'll actually use; for example, a card that gives cash back might be more useful than one that offers airline miles. You could use your cash back to pay for textbooks and other school expenses.
</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"> 5. Spending Categories for Rewards </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> While some cards provide rewards on every purchase, others offer them only in certain spending categories, such as gas, groceries, or meals at restaurants. If rewards are important to you, make sure you can earn them on the kinds of purchases you routinely make. Otherwise, it may be better to look for a card that offers a flat rewards rate on everything.
</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"> One option is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-freedom-student-credit-card-review-4799596">Chase Freedom Student Credit Card</a>. It pays 1% cash back on all purchases, and there is no cap on how much you can earn.<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_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"> 6. Eligibility for Cards After Graduation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> What happens to your account when you graduate varies by card issuer. Some card issuers will require you to submit a new application for another credit card, while others will immediately transfer your student account to a standard card.
</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"> For the simplest transition, look for a card that will graduate with you. With the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-it-student-cash-back-credit-card-review-4795893">Discover it Student Cash Back Credit Card</a>, for example, after graduation cardholders will have the Discover it® Cash Back credit card.<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_38-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>If you're unable to qualify for a student credit card, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securedcard.asp">secured credit card</a> could be another option.</p></div></div></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> There are many student credit cards on the market, so it's worth spending some time researching the available options and thinking about how you plan to use the card. By focusing on your spending habits and budget, you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-a-student-credit-card-5191330">find the student credit card</a> that's the best match for you.
</p></div> | Discover... Chase... Bank of America... Capital One. If you're in the market for a student credit card, you have a lot of choices. To find the right card for you, you'll want to check each card's fees, annual percentage rate (APR), eligibility requirements, and rewards. By reviewing this student credit card information, you can make a smart decision.
### Key Takeaways
* Many major card issuers—including Bank of America, Chase, and Discover—offer student credit cards.
* Easier to get than other credit cards, a student credit card can help you establish your credit while still in school.
* Some student credit cards also offer added benefits like rewards or travel insurance.
* Student credit cards often have high annual percentage rates (APRs) and fees.
* Eligibility requirements vary by card issuer.
## How Student Credit Cards Work
Designed specifically for young adults who are currently in college and working toward a degree, student credit cards function like traditional credit cards. However, they are usually easier to qualify for, making them a practical option when you're a student and just starting to build your credit.
## What Student Credit Card Information to Consider
There are many different student credit cards on the market today. When comparing your options, it helps to consider the following factors:
### 1. Annual Percentage Rate (APR)
Unfortunately, the [annual percentage rate](https://www.investopedia.com/terms/a/apr.asp), or APR, on some student credit cards can be quite high; rates well into the double digits are common. If you don't pay your balance in full each month, a higher APR will cause more interest to accrue, making it more difficult to pay down your debt.
So if you think you may carry a balance, because of a major upcoming expense, for example, look for a card with a lower APR.
### 2. Fees
Some student credit cards charge additional fees, such as annual fees or account setup fees. There are many no-fee cards on the market, so there's no need to waste money on one that charges added fees, especially when you're a college student on a budget. For instance, the [Deserve EDU Mastercard for Students](https://www.investopedia.com/deserve-edu-mastercard-for-students-review-4799611) card doesn't have an annual fee, setup fee, or monthly maintenance fees.
### 3. Applicant Requirements
Applicant requirements vary by card issuer. In general, you must be at least 18, have a Social Security number, and have either your own income or a [cosigner](https://www.investopedia.com/terms/c/co_sign.asp) with a reliable income to qualify.
Most card issuers require applicants to be current college students. They may ask you for proof of enrollment, including your expected graduation date. However, not all issuers have that requirement. For example, the [Journey Student Credit Card](https://www.investopedia.com/journey-student-credit-card-from-capital-one-review-4798875) from Capital One does not ask for proof of enrollment, so you could qualify even if you aren't in college.
### 4. Rewards
With [some student credit cards](https://www.investopedia.com/are-student-credit-cards-only-for-students-5192525), you can earn rewards on select purchases. For example, you'd earn 1.5 points for every $1 you spend with the [Bank of America Travel Rewards for Students](https://www.investopedia.com/bank-of-america-travel-rewards-for-students-review-4796399) credit card. You can redeem your points for statement credits that you can use to pay for flights, hotel stays, rental cars, or baggage fees.
The most common forms of credit card rewards are cash back, points, and airline miles. If you're interested in a card with rewards, look for one that offers rewards you'll actually use; for example, a card that gives cash back might be more useful than one that offers airline miles. You could use your cash back to pay for textbooks and other school expenses.
### 5. Spending Categories for Rewards
While some cards provide rewards on every purchase, others offer them only in certain spending categories, such as gas, groceries, or meals at restaurants. If rewards are important to you, make sure you can earn them on the kinds of purchases you routinely make. Otherwise, it may be better to look for a card that offers a flat rewards rate on everything.
One option is the [Chase Freedom Student Credit Card](https://www.investopedia.com/chase-freedom-student-credit-card-review-4799596). It pays 1% cash back on all purchases, and there is no cap on how much you can earn.
### 6. Eligibility for Cards After Graduation
What happens to your account when you graduate varies by card issuer. Some card issuers will require you to submit a new application for another credit card, while others will immediately transfer your student account to a standard card.
For the simplest transition, look for a card that will graduate with you. With the [Discover it Student Cash Back Credit Card](https://www.investopedia.com/discover-it-student-cash-back-credit-card-review-4795893), for example, after graduation cardholders will have the Discover it® Cash Back credit card.
### Note
If you're unable to qualify for a student credit card, a [secured credit card](https://www.investopedia.com/terms/s/securedcard.asp) could be another option.
## The Bottom Line
There are many student credit cards on the market, so it's worth spending some time researching the available options and thinking about how you plan to use the card. By focusing on your spending habits and budget, you can [find the student credit card](https://www.investopedia.com/how-to-get-a-student-credit-card-5191330) that's the best match for you.
| Discover... Chase... Bank of America... Capital One. If you're in the market for a student credit card, you have a lot of choices. To find the right card for you, you'll want to check each card's fees, annual percentage rate (APR), eligibility requirements, and rewards. By reviewing this student credit card information, you can make a smart decision.
Key Takeaways
Many major card issuers—including Bank of America, Chase, and Discover—offer student credit cards.Easier to get than other credit cards, a student credit card can help you establish your credit while still in school.Some student credit cards also offer added benefits like rewards or travel insurance.Student credit cards often have high annual percentage rates (APRs) and fees.Eligibility requirements vary by card issuer.
How Student Credit Cards Work
Designed specifically for young adults who are currently in college and working toward a degree, student credit cards function like traditional credit cards. However, they are usually easier to qualify for, making them a practical option when you're a student and just starting to build your credit.
What Student Credit Card Information to Consider
There are many different student credit cards on the market today. When comparing your options, it helps to consider the following factors:
1. Annual Percentage Rate (APR)
Unfortunately, the annual percentage rate, or APR, on some student credit cards can be quite high; rates well into the double digits are common. If you don't pay your balance in full each month, a higher APR will cause more interest to accrue, making it more difficult to pay down your debt.
So if you think you may carry a balance, because of a major upcoming expense, for example, look for a card with a lower APR.
2. Fees
Some student credit cards charge additional fees, such as annual fees or account setup fees. There are many no-fee cards on the market, so there's no need to waste money on one that charges added fees, especially when you're a college student on a budget. For instance, the Deserve EDU Mastercard for Students card doesn't have an annual fee, setup fee, or monthly maintenance fees.
3. Applicant Requirements
Applicant requirements vary by card issuer. In general, you must be at least 18, have a Social Security number, and have either your own income or a cosigner with a reliable income to qualify.
Most card issuers require applicants to be current college students. They may ask you for proof of enrollment, including your expected graduation date. However, not all issuers have that requirement. For example, the Journey Student Credit Card from Capital One does not ask for proof of enrollment, so you could qualify even if you aren't in college.
4. Rewards
With some student credit cards, you can earn rewards on select purchases. For example, you'd earn 1.5 points for every $1 you spend with the Bank of America Travel Rewards for Students credit card. You can redeem your points for statement credits that you can use to pay for flights, hotel stays, rental cars, or baggage fees.
The most common forms of credit card rewards are cash back, points, and airline miles. If you're interested in a card with rewards, look for one that offers rewards you'll actually use; for example, a card that gives cash back might be more useful than one that offers airline miles. You could use your cash back to pay for textbooks and other school expenses.
5. Spending Categories for Rewards
While some cards provide rewards on every purchase, others offer them only in certain spending categories, such as gas, groceries, or meals at restaurants. If rewards are important to you, make sure you can earn them on the kinds of purchases you routinely make. Otherwise, it may be better to look for a card that offers a flat rewards rate on everything.
One option is the Chase Freedom Student Credit Card. It pays 1% cash back on all purchases, and there is no cap on how much you can earn.
6. Eligibility for Cards After Graduation
What happens to your account when you graduate varies by card issuer. Some card issuers will require you to submit a new application for another credit card, while others will immediately transfer your student account to a standard card.
For the simplest transition, look for a card that will graduate with you. With the Discover it Student Cash Back Credit Card, for example, after graduation cardholders will have the Discover it® Cash Back credit card.
Note
If you're unable to qualify for a student credit card, a secured credit card could be another option.
The Bottom Line
There are many student credit cards on the market, so it's worth spending some time researching the available options and thinking about how you plan to use the card. By focusing on your spending habits and budget, you can find the student credit card that's the best match for you.
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https://www.investopedia.com/personal-finance/how-use-mint-app/ | How to Use Mint: Budget Simply | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Mint is a free personal finance tool that lets you see your working budget at a glance.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> In an increasingly online world, Mint’s technology is hailed for its easy-to-use programs and simple-but-informative graphics of an individual’s financial picture. The money management features help consumers pay their bills on time, save for big-ticket items, and monitor their credit scores in one stop.
</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"> Using Mint is simple and straightforward. Like many apps and programs, Mint initially requires extra steps signing on and connecting your accounts. Syncing accounts like checking, credit cards, and bills are key because this is how Mint works—by curating your finances and providing an overall picture at a glance.
</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>Mint.com is an online personal finance tool that allows you to track your spending and helps you make a budget. </li><li>Mint is a free service. </li><li>If you want to use Mint, you must sync all of your financial accounts, or at least the ones you want to utilize via Mint. </li><li>Mint allows you to track your spending and your credit score, and you can sign-up to receive notifications on a daily, weekly, or monthly basis.</li></ul></div></div></div>
<span class="heading-toc" id="toc-linking-your-accounts"></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"> Linking Your Accounts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Start by using your email to register on its website or on the app and create a password. Then follow the prompts to sync your accounts. You’ll see Mint already has connections with most banks and provides a dropdown search feature for them.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_13-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Mint also tracks the performance of investments and sends alerts on any suspicious activity.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> You can connect your mortgages, credit cards, PayPal, and as many bank accounts as you’d like, among other accounts. Mint protects its users' account information with security features that are on par with those of a bank.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> When you have all of your accounts connected, Mint will provide you an overview of your finances. The next step is to develop a budget. Based on your finances, Mint will offer a proposed budget for you, but you can adjust that. You can increase or decrease a budget item like “Auto & Transport: Gas & Fuel.”
</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-how-to-create-a-budget-using-mint"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> How to Create a Budget Using Mint </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> You can use Mint to view your spending trends and monitor progress on your budget. Over time, you can analyze your money habits and identify ways to improve your finances. Here are three ways to use Mint to help you stay on track with your budget and credit.
</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"> Purchase Categories </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> While Mint’s simplicity has drawn over 25 million users, according to its website, it also has more advanced features. Among its many tricks, Mint allows users to divide up purchases into multiple categories for a more accurate financial portrait.
</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"> Splitting Up Transactions </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> For example, consumers buying multiple products at Target may want to split their transactions into different categories like “home improvement” and “groceries.” To divide your purchases, click on "edit details" and then the “split transaction” button on the right side. Enter the amount you want in each category for a more accurate snapshot of your finances.
</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"> Entering your transactions manually allows users to track their cash spend. For this trick, make sure the drop-down menu says “cash” and Mint will automatically deduct the amount from your last ATM withdrawal so it is not deducted from your cash balance twice.
</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"> Customize Notifications </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Mint users can customize an array of notifications to meet their needs. You can set daily, weekly, or monthly notices when you go over budget when your credit score changes or when you incur an unusual amount of fees. You can also set the notices so they send to another person as well, such as a spouse.
</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"> Aside from categories, a tags feature allows users to see their finances organized in another way. For example, you can layer another label like “fixed expenses” onto the categories to see what percentage you are allotting to fixed expenses like monthly bills.
</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-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"> Mint provides multiple ways for you to create and manage a budget. It’s noted for its simplicity and informative overview of your finances, and it is free to try.
</p></div> | Mint is a free personal finance tool that lets you see your working budget at a glance.
In an increasingly online world, Mint’s technology is hailed for its easy-to-use programs and simple-but-informative graphics of an individual’s financial picture. The money management features help consumers pay their bills on time, save for big-ticket items, and monitor their credit scores in one stop.
Using Mint is simple and straightforward. Like many apps and programs, Mint initially requires extra steps signing on and connecting your accounts. Syncing accounts like checking, credit cards, and bills are key because this is how Mint works—by curating your finances and providing an overall picture at a glance.
### Key Takeaways
* Mint.com is an online personal finance tool that allows you to track your spending and helps you make a budget.
* Mint is a free service.
* If you want to use Mint, you must sync all of your financial accounts, or at least the ones you want to utilize via Mint.
* Mint allows you to track your spending and your credit score, and you can sign-up to receive notifications on a daily, weekly, or monthly basis.
## Linking Your Accounts
Start by using your email to register on its website or on the app and create a password. Then follow the prompts to sync your accounts. You’ll see Mint already has connections with most banks and provides a dropdown search feature for them.
###
Mint also tracks the performance of investments and sends alerts on any suspicious activity.
You can connect your mortgages, credit cards, PayPal, and as many bank accounts as you’d like, among other accounts. Mint protects its users' account information with security features that are on par with those of a bank.
When you have all of your accounts connected, Mint will provide you an overview of your finances. The next step is to develop a budget. Based on your finances, Mint will offer a proposed budget for you, but you can adjust that. You can increase or decrease a budget item like “Auto & Transport: Gas & Fuel.”
## How to Create a Budget Using Mint
You can use Mint to view your spending trends and monitor progress on your budget. Over time, you can analyze your money habits and identify ways to improve your finances. Here are three ways to use Mint to help you stay on track with your budget and credit.
### Purchase Categories
While Mint’s simplicity has drawn over 25 million users, according to its website, it also has more advanced features. Among its many tricks, Mint allows users to divide up purchases into multiple categories for a more accurate financial portrait.
### Splitting Up Transactions
For example, consumers buying multiple products at Target may want to split their transactions into different categories like “home improvement” and “groceries.” To divide your purchases, click on "edit details" and then the “split transaction” button on the right side. Enter the amount you want in each category for a more accurate snapshot of your finances.
Entering your transactions manually allows users to track their cash spend. For this trick, make sure the drop-down menu says “cash” and Mint will automatically deduct the amount from your last ATM withdrawal so it is not deducted from your cash balance twice.
### Customize Notifications
Mint users can customize an array of notifications to meet their needs. You can set daily, weekly, or monthly notices when you go over budget when your credit score changes or when you incur an unusual amount of fees. You can also set the notices so they send to another person as well, such as a spouse.
Aside from categories, a tags feature allows users to see their finances organized in another way. For example, you can layer another label like “fixed expenses” onto the categories to see what percentage you are allotting to fixed expenses like monthly bills.
## The Bottom Line
Mint provides multiple ways for you to create and manage a budget. It’s noted for its simplicity and informative overview of your finances, and it is free to try.
| Mint is a free personal finance tool that lets you see your working budget at a glance.
In an increasingly online world, Mint’s technology is hailed for its easy-to-use programs and simple-but-informative graphics of an individual’s financial picture. The money management features help consumers pay their bills on time, save for big-ticket items, and monitor their credit scores in one stop.
Using Mint is simple and straightforward. Like many apps and programs, Mint initially requires extra steps signing on and connecting your accounts. Syncing accounts like checking, credit cards, and bills are key because this is how Mint works—by curating your finances and providing an overall picture at a glance.
Key Takeaways
Mint.com is an online personal finance tool that allows you to track your spending and helps you make a budget. Mint is a free service. If you want to use Mint, you must sync all of your financial accounts, or at least the ones you want to utilize via Mint. Mint allows you to track your spending and your credit score, and you can sign-up to receive notifications on a daily, weekly, or monthly basis.
Linking Your Accounts
Start by using your email to register on its website or on the app and create a password. Then follow the prompts to sync your accounts. You’ll see Mint already has connections with most banks and provides a dropdown search feature for them.
Mint also tracks the performance of investments and sends alerts on any suspicious activity.
You can connect your mortgages, credit cards, PayPal, and as many bank accounts as you’d like, among other accounts. Mint protects its users' account information with security features that are on par with those of a bank.
When you have all of your accounts connected, Mint will provide you an overview of your finances. The next step is to develop a budget. Based on your finances, Mint will offer a proposed budget for you, but you can adjust that. You can increase or decrease a budget item like “Auto & Transport: Gas & Fuel.”
How to Create a Budget Using Mint
You can use Mint to view your spending trends and monitor progress on your budget. Over time, you can analyze your money habits and identify ways to improve your finances. Here are three ways to use Mint to help you stay on track with your budget and credit.
Purchase Categories
While Mint’s simplicity has drawn over 25 million users, according to its website, it also has more advanced features. Among its many tricks, Mint allows users to divide up purchases into multiple categories for a more accurate financial portrait.
Splitting Up Transactions
For example, consumers buying multiple products at Target may want to split their transactions into different categories like “home improvement” and “groceries.” To divide your purchases, click on "edit details" and then the “split transaction” button on the right side. Enter the amount you want in each category for a more accurate snapshot of your finances.
Entering your transactions manually allows users to track their cash spend. For this trick, make sure the drop-down menu says “cash” and Mint will automatically deduct the amount from your last ATM withdrawal so it is not deducted from your cash balance twice.
Customize Notifications
Mint users can customize an array of notifications to meet their needs. You can set daily, weekly, or monthly notices when you go over budget when your credit score changes or when you incur an unusual amount of fees. You can also set the notices so they send to another person as well, such as a spouse.
Aside from categories, a tags feature allows users to see their finances organized in another way. For example, you can layer another label like “fixed expenses” onto the categories to see what percentage you are allotting to fixed expenses like monthly bills.
The Bottom Line
Mint provides multiple ways for you to create and manage a budget. It’s noted for its simplicity and informative overview of your finances, and it is free to try.
| [] |
https://www.investopedia.com/how-to-buy-stocks-on-etoro-7503394 | How to Buy Stocks on eToro | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> This broker may have started a quiet revolution. Now, when you search for a ticker symbol on X (formerly Twitter), with a single click you can begin the process of buying shares on eToro. Of course, you can just as well download the eToro app, research analysts and investors, and even copy traders there. However, the X agreement brings a new level of reach to the concept of social investing and it reduces the time between getting an idea and taking action.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> This isn’t the only way eToro is reducing the barriers to entry for new traders and investors. The eToro platform has been innovating in this area since its founding.
</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-how-to-buy-stocks-on-etoro"></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 Buy Stocks on eToro </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Recent platform enhancements now allow users to go from zero to stock ownership in mere minutes with eToro. Once you have access to the program, you have the ability to research or connect with millions of users, and even duplicate their investing selections. Can investors truly benefit from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wisdom-crowds.asp">wisdom of crowds</a>?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Before you can find out for yourself, you’ll need to register for an account. Here’s a quick look at the first steps an investor takes with eToro.
</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"> <strong>Step 1:</strong> <strong>Open an eToro account.</strong> Opening the account happens quickly with the help of your smartphone and sign-in management from Apple, Facebook, or Google. Once you’ve verified your identity with two-factor authentication, you can login to the platform. But even if you choose not to expedite the first-time sign up procedure, it takes very little time to get to the point where you are ready to trade.
</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"> <strong>Step 2:</strong> <strong>Log in to your eToro account. </strong>eToro manages to speed up access to the platform in part because it separates the login procedure from account verification. That allows the company to identify the new customer and give them access to the platform right away. They will still have to verify the account through email or text before they fund the account, but a new user can log in to their account in seconds.
</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"> <strong>Step 3: Verify your account. </strong>Whether you first login via smartphone or a web browser interface, eToro will try to verify you via text message to a smartphone if you have one. Once this step is complete, you can complete questionnaires about your trading knowledge, your purpose for trading, and your risk tolerance.
</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"> <strong>Step 4: Fund your account. </strong>Once your account is verified, you can add money for trading by first linking a bank account to transfer from. The fastest way to do this is to use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://med.etoro.com/B19500_A113056_TClick.aspx" rel="sponsored nofollow">Plaid service</a> for securely linking bank accounts. You can transfer as little as $10 in the U.S. or U.K., while other countries may require that you deposit at least $50. Transferring through Plaid can help you be ready to trade in a matter of minutes.
</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"> <strong>Step 5: Research and select a stock to trade. </strong>The platform features several resources for researching stocks, including price charts, company stats, analyst ratings, and a social media feed for user commentary. Using these resources can help you build a preference for the stock you want to trade. It can also help you strategize about how to enter and exit the trade. Once you’ve identified a suitable stock to add to your portfolio, you are ready to place an order.
</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>Step 6: Place an order. </strong>Once you select the “Trade” button, a dialog box appears that allows you to specify everything you need to initiate a trade. You can specify your trade size by identifying a dollar amount, or by specifying the number of shares. It is at this point where you might specify that you want ownership of fractional shares.
</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"> You can also specify whether you want to use available leverage, the price for your stop loss, and the price for your take profit orders. Carefully considering each of the options on the dialog can help you better strategize the trade. Once you have completed the dialog and selected the “Open Trade” button, your order is sent into the market and filled as soon as possible. Market orders are usually filled in a matter of seconds. Limit orders may take a moment longer, depending on the amount specified.
</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"> Alternatively you can initiate a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://med.etoro.com/B19500_A113056_TClick.aspx" rel="sponsored nofollow">CopyTrader</a> trade where the platform allows you to allocate a certain amount of money for use in following another trader and duplicating their trades. This form of trading may not be right for every investor, so be certain to thoroughly research it before you try it.
</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>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<tbody data-check="-1">
<tr>
<td></td>
<td>Minimum Deposit</td>
<td>Stock Trade Fee</td>
<td>Available Stock Screener</td>
<td>Customer Support Methods</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://med.etoro.com/B12690_A113056_TClick.aspx" rel="sponsored nofollow">eToro</a></td>
<td>$10</td>
<td>$0</td>
<td> Yes</td>
<td>Email, FAQ</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.webull.com/activity?source=Investopedia-Per" rel="sponsored nofollow">Webull</a></td>
<td> $0</td>
<td>$0</td>
<td> Yes</td>
<td>Email, Live Chat, Phone, FAQ, Live Broker</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://robinhood.c3me6x.net/c/328256/1149283/10402?subid1=4587919&subid2=n6f637fdeb6c144a5a84f6f7223781b8f17" rel="sponsored nofollow">Robinhood</a></td>
<td> $0</td>
<td>$0</td>
<td> No</td>
<td>Email, FAQ, Phone (no incoming calls, app-based return call system only)</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>
<span class="heading-toc" id="toc-what-you-need-to-open-an-etoro-brokerage-account"></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 You Need to Open an eToro Brokerage Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The procedure for opening an account with eToro is quite straightforward. However, you can help expedite the effort by having some personal and financial information available before you begin.
</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"> Personal Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> As part of signing up and verifying your account, you will be asked to provide the following.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> <li>Name</li><li>Address </li><li>Place of birth </li><li>Citizenship </li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> It is also useful to have the number of your government issued ID or passport available.
</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"> Financial Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> As part of the process of opening an account, you will be asked to provide financial details including the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> <li>Trading knowledge</li><li>Preferred frequency of trading</li><li>Purpose for trading</li><li>Risk tolerance</li><li>Bank account information</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></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_43-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:56.5%;">
<img alt="eToro" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/EFK_Tis4erI4Iyt4ysD20MkPyZg=/920x0/filters:no_upscale():max_bytes(150000):strip_icc()/etoro-827fd5a96b904b7e9abc06b52920b67a.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/xK4dpzEPV_TwJJeAy5RpK0UzrzA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/etoro-827fd5a96b904b7e9abc06b52920b67a.jpg" data-srcset="https://www.investopedia.com/thmb/gk3kQTX4cynZIGefSE_k7fimA2M=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/etoro-827fd5a96b904b7e9abc06b52920b67a.jpg 750w" data-tracking-container="true" height="520" id="mntl-sc-block-image_1-0" width="920"/>
<noscript>
<img alt="eToro" class="img--noscript universal-image__image" height="520" sizes="750px" src="https://www.investopedia.com/thmb/xK4dpzEPV_TwJJeAy5RpK0UzrzA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/etoro-827fd5a96b904b7e9abc06b52920b67a.jpg" srcset="https://www.investopedia.com/thmb/gk3kQTX4cynZIGefSE_k7fimA2M=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/etoro-827fd5a96b904b7e9abc06b52920b67a.jpg 750w" width="920"/>
</noscript>
</div> </div>
</figure>
<span class="heading-toc" id="toc-the-benefits-of-trading-on-etoro"></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 Benefits of Trading on eToro </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> One key benefit is eToro’s established, global platform. The company has successfully designed it for ease of use and users have found it to be appealing. This is important because social trading necessarily requires input and participation from a larger number of people.
</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 input from other traders and investors helps improve the value of your information feed. Perhaps even more important, the input from CopyTraders lets you quickly leverage expertise from other investors. Further, you can evaluate traders based on user feedback and past performance to ensure you’re following a trading strategy that aligns with your goals.
</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"> Additionally, eToro’s support for fractional shares is a key benefit. This feature allows any investor to access any security regardless of the price of the security or the available capital of the investor. Fractional share purchases can be made for any amount above the $10 minimum deposit.
</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"> Lastly, eToro’s cash management features can help you keep your money working to grow, or tucked away in safer assets. The platform offers access to stocks, options, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contractfordifferences.asp">CFDs</a>, cryptocurrencies, and more.
</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-what-are-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Stock shares represent ownership in a company. When an investor buys a share of a company's stock, they are buying a piece of the company. This may entitle the shareholder to a portion of the company's profits, in the form of dividends, as well as the right to vote in elections for the board of directors.</p><p>The value of a company's stock is determined by the ongoing order flow that happens on an exchange. Market participants use an exchange as an ongoing real-time auction and the last traded price represents the current price at any given instant. </p><p>Investors justify paying a given price for stocks through a variety of factors, including the company’s current financial performance, future prospects, industry trends, and overall investor sentiment. </p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_55-0"><span class="heading-toc" id="toc-what-is-etoro"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is eToro?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>eToro is an innovative trading platform that provides a social trading experience. With eToro’s social trading network, users can explore and copy the trades of more experienced investors for crypto, stock, and ETF assets. </p><p>The platform’s intuitive design helps investors more easily discover trading ideas or traders they'd like to follow so they can quickly place their own trades on the platform. The broker operates in more than 140 countries which demonstrates its appeal to a diverse range of users.</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-can-you-trade-after-hours-on-etoro"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Trade After Hours on eToro?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>eToro offers extended-hours trading of stocks for shares that trade during a post-market session from 4 p.m. to 8 p.m. ET. Pre-market trading is also available in the two hours leading up to the opening bell. Other assets such as commodities or cryptocurrencies can be traded around the clock where applicable.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-can-you-buy-tesla-stock-on-etoro"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Buy Tesla Stock on eToro?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes. To do so, an investor must first open an account and verify their identity. Once the account is open, investors can use eToro's research tools to conduct a fundamental and technical analysis of TSLA's stock. The platform provides detailed information on the company's financial performance, as well as real-time market data and analysis.</p><p>To place a trade for TSLA on eToro, investors can navigate to a menu of stocks. From there, they can select or search for "TSLA" and click on the ticker symbol to view the chart and other relevant information. To buy shares of TSLA, investors can then select the "Trade" button and specify the characteristics of the order. As with any investment or trade, it is important to practice proper risk management and conduct thorough research before making a trade on eToro.</p></div>
</div></div> | This broker may have started a quiet revolution. Now, when you search for a ticker symbol on X (formerly Twitter), with a single click you can begin the process of buying shares on eToro. Of course, you can just as well download the eToro app, research analysts and investors, and even copy traders there. However, the X agreement brings a new level of reach to the concept of social investing and it reduces the time between getting an idea and taking action.
This isn’t the only way eToro is reducing the barriers to entry for new traders and investors. The eToro platform has been innovating in this area since its founding.
## How to Buy Stocks on eToro
Recent platform enhancements now allow users to go from zero to stock ownership in mere minutes with eToro. Once you have access to the program, you have the ability to research or connect with millions of users, and even duplicate their investing selections. Can investors truly benefit from the [wisdom of crowds](https://www.investopedia.com/terms/w/wisdom-crowds.asp)?
Before you can find out for yourself, you’ll need to register for an account. Here’s a quick look at the first steps an investor takes with eToro.
**Step 1:** **Open an eToro account.** Opening the account happens quickly with the help of your smartphone and sign-in management from Apple, Facebook, or Google. Once you’ve verified your identity with two-factor authentication, you can login to the platform. But even if you choose not to expedite the first-time sign up procedure, it takes very little time to get to the point where you are ready to trade.
**Step 2:** **Log in to your eToro account.** eToro manages to speed up access to the platform in part because it separates the login procedure from account verification. That allows the company to identify the new customer and give them access to the platform right away. They will still have to verify the account through email or text before they fund the account, but a new user can log in to their account in seconds.
**Step 3: Verify your account.** Whether you first login via smartphone or a web browser interface, eToro will try to verify you via text message to a smartphone if you have one. Once this step is complete, you can complete questionnaires about your trading knowledge, your purpose for trading, and your risk tolerance.
**Step 4: Fund your account.** Once your account is verified, you can add money for trading by first linking a bank account to transfer from. The fastest way to do this is to use the [Plaid service](https://med.etoro.com/B19500_A113056_TClick.aspx) for securely linking bank accounts. You can transfer as little as $10 in the U.S. or U.K., while other countries may require that you deposit at least $50. Transferring through Plaid can help you be ready to trade in a matter of minutes.
**Step 5: Research and select a stock to trade.** The platform features several resources for researching stocks, including price charts, company stats, analyst ratings, and a social media feed for user commentary. Using these resources can help you build a preference for the stock you want to trade. It can also help you strategize about how to enter and exit the trade. Once you’ve identified a suitable stock to add to your portfolio, you are ready to place an order.
**Step 6: Place an order.** Once you select the “Trade” button, a dialog box appears that allows you to specify everything you need to initiate a trade. You can specify your trade size by identifying a dollar amount, or by specifying the number of shares. It is at this point where you might specify that you want ownership of fractional shares.
You can also specify whether you want to use available leverage, the price for your stop loss, and the price for your take profit orders. Carefully considering each of the options on the dialog can help you better strategize the trade. Once you have completed the dialog and selected the “Open Trade” button, your order is sent into the market and filled as soon as possible. Market orders are usually filled in a matter of seconds. Limit orders may take a moment longer, depending on the amount specified.
Alternatively you can initiate a [CopyTrader](https://med.etoro.com/B19500_A113056_TClick.aspx) trade where the platform allows you to allocate a certain amount of money for use in following another trader and duplicating their trades. This form of trading may not be right for every investor, so be certain to thoroughly research it before you try it.
| | Minimum Deposit | Stock Trade Fee | Available Stock Screener | Customer Support Methods |
| --- | --- | --- | --- | --- |
| [eToro](https://med.etoro.com/B12690_A113056_TClick.aspx) | $10 | $0 | Yes | Email, FAQ |
| [Webull](https://www.webull.com/activity?source=Investopedia-Per) | $0 | $0 | Yes | Email, Live Chat, Phone, FAQ, Live Broker |
| [Robinhood](https://robinhood.c3me6x.net/c/328256/1149283/10402?subid1=4587919&subid2=n6f637fdeb6c144a5a84f6f7223781b8f17) | $0 | $0 | No | Email, FAQ, Phone (no incoming calls, app-based return call system only) |
## What You Need to Open an eToro Brokerage Account
The procedure for opening an account with eToro is quite straightforward. However, you can help expedite the effort by having some personal and financial information available before you begin.
### Personal Information
As part of signing up and verifying your account, you will be asked to provide the following.
* Name
* Address
* Place of birth
* Citizenship
It is also useful to have the number of your government issued ID or passport available.
### Financial Information
As part of the process of opening an account, you will be asked to provide financial details including the following:
* Trading knowledge
* Preferred frequency of trading
* Purpose for trading
* Risk tolerance
* Bank account information
![eToro]()
:max_bytes(150000):strip_icc()/etoro-827fd5a96b904b7e9abc06b52920b67a.jpg)
## The Benefits of Trading on eToro
One key benefit is eToro’s established, global platform. The company has successfully designed it for ease of use and users have found it to be appealing. This is important because social trading necessarily requires input and participation from a larger number of people.
The input from other traders and investors helps improve the value of your information feed. Perhaps even more important, the input from CopyTraders lets you quickly leverage expertise from other investors. Further, you can evaluate traders based on user feedback and past performance to ensure you’re following a trading strategy that aligns with your goals.
Additionally, eToro’s support for fractional shares is a key benefit. This feature allows any investor to access any security regardless of the price of the security or the available capital of the investor. Fractional share purchases can be made for any amount above the $10 minimum deposit.
Lastly, eToro’s cash management features can help you keep your money working to grow, or tucked away in safer assets. The platform offers access to stocks, options, [CFDs](https://www.investopedia.com/terms/c/contractfordifferences.asp), cryptocurrencies, and more.
## What Are Stocks?
Stock shares represent ownership in a company. When an investor buys a share of a company's stock, they are buying a piece of the company. This may entitle the shareholder to a portion of the company's profits, in the form of dividends, as well as the right to vote in elections for the board of directors.
The value of a company's stock is determined by the ongoing order flow that happens on an exchange. Market participants use an exchange as an ongoing real-time auction and the last traded price represents the current price at any given instant.
Investors justify paying a given price for stocks through a variety of factors, including the company’s current financial performance, future prospects, industry trends, and overall investor sentiment.
## What Is eToro?
eToro is an innovative trading platform that provides a social trading experience. With eToro’s social trading network, users can explore and copy the trades of more experienced investors for crypto, stock, and ETF assets.
The platform’s intuitive design helps investors more easily discover trading ideas or traders they'd like to follow so they can quickly place their own trades on the platform. The broker operates in more than 140 countries which demonstrates its appeal to a diverse range of users.
## Can You Trade After Hours on eToro?
eToro offers extended-hours trading of stocks for shares that trade during a post-market session from 4 p.m. to 8 p.m. ET. Pre-market trading is also available in the two hours leading up to the opening bell. Other assets such as commodities or cryptocurrencies can be traded around the clock where applicable.
## Can You Buy Tesla Stock on eToro?
Yes. To do so, an investor must first open an account and verify their identity. Once the account is open, investors can use eToro's research tools to conduct a fundamental and technical analysis of TSLA's stock. The platform provides detailed information on the company's financial performance, as well as real-time market data and analysis.
To place a trade for TSLA on eToro, investors can navigate to a menu of stocks. From there, they can select or search for "TSLA" and click on the ticker symbol to view the chart and other relevant information. To buy shares of TSLA, investors can then select the "Trade" button and specify the characteristics of the order. As with any investment or trade, it is important to practice proper risk management and conduct thorough research before making a trade on eToro.
| This broker may have started a quiet revolution. Now, when you search for a ticker symbol on X (formerly Twitter), with a single click you can begin the process of buying shares on eToro. Of course, you can just as well download the eToro app, research analysts and investors, and even copy traders there. However, the X agreement brings a new level of reach to the concept of social investing and it reduces the time between getting an idea and taking action.
This isn’t the only way eToro is reducing the barriers to entry for new traders and investors. The eToro platform has been innovating in this area since its founding.
How to Buy Stocks on eToro
Recent platform enhancements now allow users to go from zero to stock ownership in mere minutes with eToro. Once you have access to the program, you have the ability to research or connect with millions of users, and even duplicate their investing selections. Can investors truly benefit from the wisdom of crowds?
Before you can find out for yourself, you’ll need to register for an account. Here’s a quick look at the first steps an investor takes with eToro.
Step 1: Open an eToro account. Opening the account happens quickly with the help of your smartphone and sign-in management from Apple, Facebook, or Google. Once you’ve verified your identity with two-factor authentication, you can login to the platform. But even if you choose not to expedite the first-time sign up procedure, it takes very little time to get to the point where you are ready to trade.
Step 2: Log in to your eToro account. eToro manages to speed up access to the platform in part because it separates the login procedure from account verification. That allows the company to identify the new customer and give them access to the platform right away. They will still have to verify the account through email or text before they fund the account, but a new user can log in to their account in seconds.
Step 3: Verify your account. Whether you first login via smartphone or a web browser interface, eToro will try to verify you via text message to a smartphone if you have one. Once this step is complete, you can complete questionnaires about your trading knowledge, your purpose for trading, and your risk tolerance.
Step 4: Fund your account. Once your account is verified, you can add money for trading by first linking a bank account to transfer from. The fastest way to do this is to use the Plaid service for securely linking bank accounts. You can transfer as little as $10 in the U.S. or U.K., while other countries may require that you deposit at least $50. Transferring through Plaid can help you be ready to trade in a matter of minutes.
Step 5: Research and select a stock to trade. The platform features several resources for researching stocks, including price charts, company stats, analyst ratings, and a social media feed for user commentary. Using these resources can help you build a preference for the stock you want to trade. It can also help you strategize about how to enter and exit the trade. Once you’ve identified a suitable stock to add to your portfolio, you are ready to place an order.
Step 6: Place an order. Once you select the “Trade” button, a dialog box appears that allows you to specify everything you need to initiate a trade. You can specify your trade size by identifying a dollar amount, or by specifying the number of shares. It is at this point where you might specify that you want ownership of fractional shares.
You can also specify whether you want to use available leverage, the price for your stop loss, and the price for your take profit orders. Carefully considering each of the options on the dialog can help you better strategize the trade. Once you have completed the dialog and selected the “Open Trade” button, your order is sent into the market and filled as soon as possible. Market orders are usually filled in a matter of seconds. Limit orders may take a moment longer, depending on the amount specified.
Alternatively you can initiate a CopyTrader trade where the platform allows you to allocate a certain amount of money for use in following another trader and duplicating their trades. This form of trading may not be right for every investor, so be certain to thoroughly research it before you try it.
Minimum Deposit
Stock Trade Fee
Available Stock Screener
Customer Support Methods
eToro
$10
$0
Yes
Email, FAQ
Webull
$0
$0
Yes
Email, Live Chat, Phone, FAQ, Live Broker
Robinhood
$0
$0
No
Email, FAQ, Phone (no incoming calls, app-based return call system only)
What You Need to Open an eToro Brokerage Account
The procedure for opening an account with eToro is quite straightforward. However, you can help expedite the effort by having some personal and financial information available before you begin.
Personal Information
As part of signing up and verifying your account, you will be asked to provide the following.
NameAddress Place of birth Citizenship
It is also useful to have the number of your government issued ID or passport available.
Financial Information
As part of the process of opening an account, you will be asked to provide financial details including the following:
Trading knowledgePreferred frequency of tradingPurpose for tradingRisk toleranceBank account information
The Benefits of Trading on eToro
One key benefit is eToro’s established, global platform. The company has successfully designed it for ease of use and users have found it to be appealing. This is important because social trading necessarily requires input and participation from a larger number of people.
The input from other traders and investors helps improve the value of your information feed. Perhaps even more important, the input from CopyTraders lets you quickly leverage expertise from other investors. Further, you can evaluate traders based on user feedback and past performance to ensure you’re following a trading strategy that aligns with your goals.
Additionally, eToro’s support for fractional shares is a key benefit. This feature allows any investor to access any security regardless of the price of the security or the available capital of the investor. Fractional share purchases can be made for any amount above the $10 minimum deposit.
Lastly, eToro’s cash management features can help you keep your money working to grow, or tucked away in safer assets. The platform offers access to stocks, options, CFDs, cryptocurrencies, and more.
What Are Stocks?
Stock shares represent ownership in a company. When an investor buys a share of a company's stock, they are buying a piece of the company. This may entitle the shareholder to a portion of the company's profits, in the form of dividends, as well as the right to vote in elections for the board of directors.The value of a company's stock is determined by the ongoing order flow that happens on an exchange. Market participants use an exchange as an ongoing real-time auction and the last traded price represents the current price at any given instant. Investors justify paying a given price for stocks through a variety of factors, including the company’s current financial performance, future prospects, industry trends, and overall investor sentiment.
What Is eToro?
eToro is an innovative trading platform that provides a social trading experience. With eToro’s social trading network, users can explore and copy the trades of more experienced investors for crypto, stock, and ETF assets. The platform’s intuitive design helps investors more easily discover trading ideas or traders they'd like to follow so they can quickly place their own trades on the platform. The broker operates in more than 140 countries which demonstrates its appeal to a diverse range of users.
Can You Trade After Hours on eToro?
eToro offers extended-hours trading of stocks for shares that trade during a post-market session from 4 p.m. to 8 p.m. ET. Pre-market trading is also available in the two hours leading up to the opening bell. Other assets such as commodities or cryptocurrencies can be traded around the clock where applicable.
Can You Buy Tesla Stock on eToro?
Yes. To do so, an investor must first open an account and verify their identity. Once the account is open, investors can use eToro's research tools to conduct a fundamental and technical analysis of TSLA's stock. The platform provides detailed information on the company's financial performance, as well as real-time market data and analysis.To place a trade for TSLA on eToro, investors can navigate to a menu of stocks. From there, they can select or search for "TSLA" and click on the ticker symbol to view the chart and other relevant information. To buy shares of TSLA, investors can then select the "Trade" button and specify the characteristics of the order. As with any investment or trade, it is important to practice proper risk management and conduct thorough research before making a trade on eToro.
| [
[
"wisdom of crowds",
"https://www.investopedia.com/terms/w/wisdom-crowds.asp"
],
[
"Plaid service",
"https://med.etoro.com/B19500_A113056_TClick.aspx"
],
[
"CopyTrader",
"https://med.etoro.com/B19500_A113056_TClick.aspx"
],
[
"eToro",
"https://med.etoro.com/B12690_A113056_TClick.aspx"
],
[
"Webull",
"https://www.webull.com/activity?source=Investopedia-Per"
],
[
"Robinhood",
"https://robinhood.c3me6x.net/c/328256/1149283/10402?subid1=4587919&subid2=n6f637fdeb6c144a5a84f6f7223781b8f17"
],
[
"eToro",
"https://www.investopedia.com/thmb/xK4dpzEPV_TwJJeAy5RpK0UzrzA=/1500x0/filters:no_upscale("
],
[
"CFDs",
"https://www.investopedia.com/terms/c/contractfordifferences.asp"
]
] |
https://www.investopedia.com/best-stock-trading-apps-4587996 | 3 Best Investment Apps for May 2024 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="24" data-sc-ad-track-spacing="100" data-sc-breakpoint="50em" data-sc-content-positions="[300,600,900,1200,1500,1800,2100]" data-sc-load-immediate="1" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="60" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> An investment app is an application that users can download and use on their smartphone. These apps allow investors to not only keep track of their investments but also place trades and transfer funds in and out of their accounts as needed. Investors will find that not all investment apps are created equal or optimized for mobile usage, which is why choosing the best app is essential to fit your style of investing.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> According to our research, Wealthfront is the best automated investment app due to its excellent account services, best-in-class usability, and comprehensive money management features. Day traders seeking a platform that caters to all their needs will find Interactive Brokers' trading technology, tools, and other key features to be awe-inspiring, while tastytrade's options-focused content, pricing, and tools are all optimized to help traders harness the many factors that affect this increasingly popular form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/10/derivatives-101.asp">derivatives trading</a>.
</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-investing-apps"></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 Investing Apps </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0">
<li><a data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://wealthfront.4fq8.net/c/328256/1343541/3104" rel="sponsored nofollow"><strong>Wealthfront</strong></a>: Best Automated Investing App</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" rel="sponsored nofollow"><strong>Interactive Brokers</strong></a>: Best App for Active Traders</li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1" rel="sponsored nofollow"><strong>tastytrade</strong></a>: Best App for Options Traders</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<span class="heading-toc" id="toc-wealthfront-best-automated-investing-app"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Wealthfront: Best Automated Investing App </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-review mntl-sc-block-review" id="mntl-sc-block_9-0"> <div class="mntl-sc-block__header-link mntl-sc-block-review__header-link">
<a href="https://www.investopedia.com/wealthfront-review-4587933" rel="nocaes" target="_blank"><img height="0" src="https://www.investopedia.com/thmb/j3lnUfqsRqhLVmFKH5xkgxIOiGE=/1719x0/filters:no_upscale():max_bytes(150000):strip_icc()/Wealthfront-79d83bb8f678494bb87519607f1c1c95.jpg" width="1719"/></a> </div>
<div class="loc entity-link"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-tracking-container="true" href="https://wealthfront.4fq8.net/c/328256/1343541/3104" 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>: $500
</li>
<li class="mntl-sc-block__quick-list__item mntl-sc-block-review__quick-list__item">
<strong>Fees</strong>: 0.25% for most accounts; no trading commission or fees for withdrawals, minimums, or transfers
</li>
</ul>
<div class="loc article-link"><a class="mntl-sc-block-review__article-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/wealthfront-review-4587933" id="mntl-sc-block-review__article-link_1-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Read full review</span></a>
</div> </div>
<div class="loc entity-link mntl-sc-block__trailing-links mntl-sc-block-review__trailing-links"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-tracking-container="true" href="https://wealthfront.4fq8.net/c/328256/1343541/3104" 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_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-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_13-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>Fund your first taxable Investment Account and get a $50 bonus.</p></div></div></div>
<span class="heading-toc" id="toc-why-we-chose-it"></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"> Why We Chose It </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Wealthfront delivers a powerful, digital-only investment experience that gives users access to comprehensive money management features through an elegant, sleek design. You’ll find the financial guidance, account aggregation, goal setting, investing, and banking options, including debit cards, to be both user-friendly and seamless to navigate. Wealthfront’s Self-Driving Money allows you to further automate your finances by using a rules-based approach to move money between your accounts while optimizing for your goals, giving you more control of your financial journey.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The mobile apps for Android and iOS platforms are both superb and are on par with the desktop experience in terms of features, functionality, and ease of navigation. The app is thoughtfully designed to minimize unnecessary data inputs or typing, opting instead to leverage more user-friendly sliders, drop-down menus, and auto-fill functionality. You’ll still have to input user IDs and passwords when linking external accounts, but generally, the workflows are intuitive and consistent.
</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"> Overall, while E*TRADE’s Core Portfolio robo-advisor offering won our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-robo-advisors-4693125">Best Robo-Advisor for Mobile Experience</a> category, Wealthfront was our best overall robo-advisor, and its platform provides a polished, smart user experience with exposure to a significantly greater range of comprehensive money management tools.
</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"> Originally founded by Andy Rachleff and Dan Carroll in 2008, Wealthfront Inc. is based in Palo Alto, California.
</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-pros--cons"></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"> Pros & Cons </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_25-0"> <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>Comprehensive financial planning tools</p></li>
<li><p>The digital-only financial guidance through "Path," Wealthfront's financial planning software, is best in class</p></li>
<li><p>Thoughtful mobile experience designed to reduce errors and optimize functionality</p></li>
<li><p>Self-Driving Money provides seamless financial management through your smartphone</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>External account syncing can be inconsistent</p></li>
<li><p>No discounts for larger balances</p></li>
<li><p>No human financial advisors</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_27-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_28-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">In the News</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>On Nov. 3, 2023, Wealthfront increased the APY on its Cash Account from 4.80% to 5.00%.<span class="ql-inline-citation" data-cite="15"></span></p></div></div></div>
<span class="heading-toc" id="toc-interactive-brokers-best-app-for-day-traders"></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"> Interactive Brokers: Best App for Day Traders </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-review mntl-sc-block-review" id="mntl-sc-block_30-0"> <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_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> $0.00
</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_3-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Read full review</span></a>
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<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_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_32-0"></div>
<span class="heading-toc" id="toc-why-we-chose-it"></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"> Why We Chose It </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Interactive Brokers (IBKR) edges out the competition for our best app for day traders category. Sophisticated traders will find an immediate fit as the mobile experience carries over all the core features from the desktop Traders Workstation (TWS) functionality, which is one of the most comprehensive trading platforms in existence.<span class="ql-inline-citation" data-cite="5"></span> Users will also have access to every available asset class, including cryptocurrency for direct coin trading, to go alongside unmatched research, analysis, and strategy tools.
</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 overall mobile experience generally flows smoothly for experienced traders who already know TWS. The mobile app provides synchronized functionality with watchlists created on the app also being visible on the desktop offering.
</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"> While the core features of the IBKR app maintain nearly all the functionality of the desktop version, there are some reasonable constraints given the depth and breadth of the full TWS platform. The desktop option has a lot more options for analysis and trading strategies. Despite these constraints, the Interactive Brokers app stands above the rest as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-day-trading-4587880">top platform for day traders</a> because of the range of assets and markets it puts into your hands.<br/>
</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"> Founded in 1977 by current chairman Thomas Peterffy, Interactive Brokers is headquartered in Greenwich, Connecticut.
</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-pros--cons"></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"> Pros & Cons </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_43-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_44-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Mobile experience successfully mimics core functionality of the comprehensive desktop version</p></li>
<li><p>App-based stock screeners and option strategies match web offering</p></li>
<li><p>Mobile charts are detailed, intuitive, and provide useful indicators</p></li>
<li><p>Outstanding order execution</p></li>
<li><p>Attractive, low margin interest rates</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>No fixed income screener on mobile</p></li>
<li><p>Expansive platform capabilities may have a learning curve</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_46-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_47-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">In the News</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>On Dec. 15, 2023, Interactive Brokers announced a number of enhancements to its IBKR Mobile platform that offer an upgraded experience with an innovative design, new and improved features, and quick access to learning resources<em>.</em><span class="ql-inline-citation" data-cite="16"></span><br/></p><p><br/></p></div></div></div>
<span class="heading-toc" id="toc-tastytrade-best-app-for-options-traders"></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"> tastytrade: Best App for Options Traders </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-review mntl-sc-block-review" id="mntl-sc-block_49-0"> <div class="mntl-sc-block__header-link mntl-sc-block-review__header-link">
<a href="https://www.investopedia.com/tastytrade-review-4587986" rel="nocaes" target="_blank"><img height="0" src="https://www.investopedia.com/thmb/L8ZECxl7jcuDMm1z8B_fgCakK_g=/640x0/filters:no_upscale():max_bytes(150000):strip_icc()/tastytradelogo-454669c3e9e543468182244f6f493b38.png" width="640"/></a> </div>
<div class="loc entity-link"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-tracking-container="true" href="https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1" id="mntl-sc-block-review__entity-link_5-0" 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</strong> <strong>Minimum</strong>: $0
</li>
<li class="mntl-sc-block__quick-list__item mntl-sc-block-review__quick-list__item">
<strong>Fees & Commissions</strong>: $0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close
</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/tastytrade-review-4587986" id="mntl-sc-block-review__article-link_5-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Read full review</span></a>
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</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-why-we-chose-it"></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"> Why We Chose It </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Tastytrade specializes in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/option.asp">options</a> trading with a focus on intuitive tools, education, and seamless design. This relentless focus on options trading—and nothing but—has tastytrade taking our top spot in the best app for options traders category.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> The workflow is built with seamless options order management in mind, which results in an effective and quick trading experience. The mobile app has order types, asset classes, and quote streaming capabilities that mirror the desktop version.<span class="ql-inline-citation" data-cite="10"></span> While tastytrade's option workflow optimization makes it stand out in this category, there are some notable mobile constraints such as the inability to rotate graphs on the mobile platform.
</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"> Simply put, tastytrade is a great broker for options traders and the majority of those traders will be using the desktop whenever possible. That said, the tastytrade mobile app is singularly focused on trading options, whereas other brokerage mobile apps have to balance options features against more heavily used asset classes.<br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Launched in 2017, tastytrade is headquartered in Chicago, Illinois.
</p>
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<span class="heading-toc" id="toc-pros--cons"></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"> Pros & Cons </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_62-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_63-0"> <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>Mobile user flow is optimized for full options trading</p></li>
<li><p>Easily edit multi-leg options trades</p></li>
<li><p>Outstanding blend of tools and pricing compared to competition</p></li>
<li><p>Full offering of asset classes beyond options</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>Account opening isn’t supported on mobile devices</p></li>
<li><p>Price alerts and order notifications aren’t available</p></li>
<li><p>Heavy options traders won’t find the mobile experience a suitable desktop replacement</p></li>
<li><p>App isn’t optimized for trading anything outside of options</p></li>
</ul>
</div>
</div></div>
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<span class="heading-toc" id="toc-compare-the-best-investment-apps"></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"> Compare the Best Investment Apps </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_66-0"> <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><b>Company</b></td>
<td><b> Fees</b></td>
<td><b>Account Minimum</b></td>
<td><b>Mobile App</b></td>
</tr>
<tr>
<td> Wealthfront</td>
<td>0.25% for most accounts, no trading commission or fees for withdrawals, minimum balance requirements, or transfers.<span data-cite="12"></span></td>
<td>$500</td>
<td>Android, iOS</td>
</tr>
<tr>
<td>Interactive Brokers</td>
<td>Maximum $0.005 per share for Pro platform up to 1% of trade value, $0 for IBKR Lite.<span data-cite="13"></span></td>
<td>$0</td>
<td>Android, iOS</td>
</tr>
<tr>
<td> tastytrade</td>
<td>$0.00 stock trades, starting at $1.00 to open options trades $0.00 to close.<span data-cite="14"></span></td>
<td>$0 </td>
<td> Android, iOS</td>
</tr>
</tbody>
</table>
</div></figure>
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<span class="heading-toc" id="toc-why-you-should-trust-us"></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"> Why You Should Trust Us </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Investopedia collected and analyzed several key data points from over 43 online brokerage and digital wealth management companies to identify the most important factors for readers choosing the right investment app to fit their needs. We used this data to review each company for their pricing, account services, usability, technology, and other features to provide unbiased, comprehensive reviews to ensure our readers make the right decision for their needs. Investopedia launched in 1999, and has been helping readers find the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">best online brokerage</a> and digital wealth management platforms since 2019.
</p>
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<div class="comp mntl-sc-block finance-sc-block-inlinevideo mntl-sc-block-inlinevideo mntl-block has-details inline-video" id="mntl-sc-block_71-0"><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>
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<span class="heading-toc" id="toc-how-to-choose-an-investment-app"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> How to Choose an Investment App </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Now that you know the best investment apps, the next step is choosing the best investment app for you. However, everyone has different financial goals and needs that they alone must consider. Below are some key considerations you will need to factor in when choosing an investment app:
</p>
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> <li><strong>Your investing style</strong>: Are you the type of trader who wants to utilize sophisticated indicators and trading strategies? If that's your objective, an app like Wealthfront wouldn't be a good fit. In this case, you would be better off going with an app like Interactive Brokers or tastytrade. However, if you are the type of investor who wants an app to do all the work for you, then Wealthfront is the clear winner. </li><li><strong>Fees and costs: </strong>The investment app you choose should be cost-effective for your financial needs. For instance, Wealthfront is an excellent service. However, its 0.25% annual fee, although small in the grand scheme of things, does add up the longer you have the account and the more it compounds in size. Investors who want to pay $0 in stock trades with low costs for options trades may want to consider Interactive Brokers or tastytrade.</li><li><strong>Investment options</strong>: When choosing an investment app, you will want to easily fund your account and buy and sell stocks, ETFs, mutual funds, cryptocurrency, options, and futures smoothly and seamlessly. </li>
</ol>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Choosing the right investment app that fits your needs is critical to you reaching your financial goals. Cost, functionality, and your particular trading style are all important considerations when making your decision.<br/>
</p>
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<span class="heading-toc" id="toc-how-to-get-started-with-investing-apps"></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"> How to Get Started With Investing Apps </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Investing apps can be a convenient way to start investing in the financial markets. Luckily, getting started on this journey is as easy as following these key steps:
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> <strong>1. Define your investment goals:</strong> Clearly define your financial objectives and risk tolerance. Whether you aim for long-term growth, short-term gains, or a mix, understanding your goals is crucial to establishing a strong foundation for choosing the right platform to fit your needs.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <strong>2. Research and choose an investment app:</strong> When researching the various investment apps that are available, consider factors like the user interface, fees, available investment options, investing tools, and customer service.
</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"> <strong>3. Download and install the app: </strong>Once you've identified the right app that aligns with your investment goals, download and install the app.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> <strong>4. Account setup: </strong>Open the app and begin the account creation process. Provide necessary personal information, including your name, address, and Social Security number. Verify your identity by submitting required documents.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> <strong>5. Fund you account: </strong>Connect your investment app to your bank account. This enables you to transfer funds seamlessly for investing purposes.<br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> <strong>6. Explore investment options: </strong>Familiarize yourself with the various investment products available. Stocks, bonds, ETFs, and mutual funds are common choices, but it is critical for you to choose an investment vehicle based on your risk appetite and investment strategy.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> <strong>7. Start small: </strong>Begin with a small investment to get comfortable with the app's functionality. You should also learn by using the paper trading function that many of the top platforms now offer. From there, as your confidence and experience start to build, begin to increase your investments gradually.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> <strong>8. Monitor your investments: </strong>Regularly check your investment portfolio within the app. Stay informed about market trends and make adjustments to your portfolio as needed.<br/>
</p>
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<span class="heading-toc" id="toc-pros-and-cons-of-using-investment-apps"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_99-0"> <span class="mntl-sc-block-heading__text"> Pros and Cons of Using Investment Apps </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Investment apps are sophisticated software systems that allow investors to conduct their trading on a mobile platform right in the palm of their hand. Although there are many pros to using investment apps to secure your financial future, there are also cons that investors need to note before using these platforms.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_102-0"> <span class="mntl-sc-block-subheading__text"> Pros </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> <li><strong>Convenience</strong>: Investment apps allow investors to easily log in to their financial account and make necessary adjustments anywhere in the world. </li><li><strong>Beginner Friendly</strong>: Most investment apps are much easier to use and require a lower learning curve than the desktop versions. Generally, investors won’t be inundated with a complex layout or weighed down by many options to handle their finances.</li><li><strong>Low Fees and Entry Requirements: </strong>Investment apps typically have lower costs and more affordable entry requirements than other investing software on desktops. Many investment apps are free or have a $0 minimum to open an account. Wealthfront is an exception, as it requires $500 to open an account and charges fees upward of 0.25%. However, it also offers one of the best hands-off services in the robo-advisor industry, which, to many investors, may be well worth the cost.</li>
</ul>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_105-0"> <span class="mntl-sc-block-subheading__text"> Cons </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> <li><strong>Limited Functionality: </strong>Investment apps will operate differently from their desktop counterparts. The investing app may exclude charts, tools, and investing resources essential to the trader's success. However, limitations are specific to each platform and differ in what they offer. When choosing an investing app, ensure it coincides with your trading style.</li><li><strong>Limited Customization</strong>: Most desktop-based investing platforms allow investors to fully customize their layout to improve their focus on what matters most to them when they invest. Investing apps may allow some sort of customizability, but in most cases, there are very few options to get it how the investor may want it. Investors are usually limited to the layout provided by the investing app and cannot customize it according to their preferences.</li><li><strong>Limited Customer Service</strong>: Investing apps may limit customer service resources, and customers may be encouraged to find solutions on their own within the app's resources, such as its FAQs or an online forum. If the investing app does provide customer service, it may not offer ideal solutions to the investor's issues. If customer support is an important feature for you, then Wealthfront, Interactive Brokers, and tastytrade will be an ideal fit.</li>
</ul>
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<span class="heading-toc" id="toc-how-much-money-do-you-need-to-invest-through-an-investment-app"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_108-0"> <span class="mntl-sc-block-heading__text"> How Much Money Do You Need to Invest Through an Investment App? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_109-0"> The funding requirements for an investment app will differ with every platform. For instance, Wealthfront is the only investment app covered here that requires a $500 minimum investment to open an account. If you are interested in the robo-advisor sector but find the account minimum too steep, then robo-advisors like Betterment may be a better fit as it requires only $10 to start investing. When it comes to online brokers, top platforms like Interactive Brokers and tastytrade do not require any account minimum. However, investors will need to conduct their due diligence to ensure they can meet all requirements before opening an account.
</p>
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<span class="heading-toc" id="toc-desktop-vs-mobile-experiences"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_111-0"> <span class="mntl-sc-block-heading__text"> Desktop vs. Mobile Experiences </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_112-0"> Desktop trading platforms still have a strong customer base because of the superior trading experience they provide. Thanks to the growth of app-only retail investors, however, brokers can’t focus solely on the desktop experience. Mobile-first and mobile-only brokerages already exist, and established brokers are having to simultaneously develop their desktop and mobile platforms to keep up.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> To do this, many brokerages have changed their product approach to focus on creating a consistent experience across multiple devices. This means you can usually find similar workflows and key tools regardless of which platform you are on. This comes with a trader-specific caveat, as many desktop platforms intended for active traders have to cut out a lot more when transitioning to mobile when compared to brokerages with platforms aimed at average investors.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> The extent of this feature reduction has been lessened as the smartphone technology running these trading apps has improved, however, and more brokers are aligning and synchronizing key features across both the mobile and desktop workflows such as analysis, research, screening tools, money movement, and charting. More recently, complex trading strategies originally reserved for desktop experiences like multi-leg options trades and contingent orders have been enabled on apps as well.
</p>
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<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_118-0"> <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_119-0"><span class="heading-toc" id="toc-what-is-the-best-investment-app"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Best Investment App?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Determining the best investment app depends on individual preferences and investing goals. Our research has determined that Wealthfront is the best automated investment app among its competitors, because of its excellent account services, best-in-class usability, and comprehensive money management features. Ultimately, however, the app you choose should align with your investment strategy, risk tolerance, and financial objectives.</p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_121-0"><span class="heading-toc" id="toc-what-are-the-advantages-of-using-investing-apps-to-trade-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Advantages of Using Investing Apps to Trade Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The key advantage of using an investing app to trade stocks is accessibility. Investing apps have leveraged rapid mobile technological advancements to make it easier than ever to invest and trade stocks. Like most people now, you probably carry your mobile device with you all the time, allowing you to react to market movements and monitor your short and long term investments in places where it just wasn’t practical before.</p><p>The convenience of mobile trading has also made the market more accessible to users of all backgrounds, interests, and experience levels. You don’t need a trading terminal with four monitors anymore. Increased competition among brokers and innovation in the form of new apps and platforms has reduced barriers to entry such as cost and education. With a supercomputer in your pocket, you have access to the same real-time market data on the go and can trade accordingly.</p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_123-0"><span class="heading-toc" id="toc-what-are-the-disadvantages-of-using-an-investing-app-to-trade-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Disadvantages of Using an Investing App to Trade Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While investment apps are moving closer to full feature parity with the desktop versions, there are still some functionality gaps that impact certain types of investors. The gaps vary by investment platform and investor preferences, but generally, you can expect there to be some product differences between desktop and mobile trade experiences in terms of the charting and analysis tools.</p><p>Some investing apps also omit asset types or market exchanges that are available through the desktop version. Another disadvantage to app-based trading is the size limitations on mobile devices compared to full computer monitors. These factors tend to affect active traders the most, but they can be a downside for any investor depending on your preferences and trading strategies.</p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_125-0"><span class="heading-toc" id="toc-what-should-i-consider-before-using-a-stock-trading-app"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Should I Consider Before Using a Stock Trading App?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>App-based trading gives you access to financial markets right at your fingertips, wherever you are located. When considering investing through a mobile app it’s helpful to identify your goals, preferences, and investment strategy. Being aware of your personal investment experience and educational opportunities can also help match you to the right trading platform. It is also important to evaluate the broker as a whole, rather than just by the mobile app. A slick app can’t make up for the impact of higher-than-average trading fees and poor execution, for example. </p><p>As you decide between different apps, you may find some platforms provide paper-based accounts that let you experiment with trades without risking your personal capital. Testing out more than one app-based investment offering can also give you more insight to properly compare and contrast features that match your preferences. All these factors can help determine which app will be the right fit for you.</p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_127-0"><span class="heading-toc" id="toc-whats-the-difference-between-finance-apps-and-investing-apps"></span> <h2 class="mntl-sc-block-questionandanswer__question">What's the Difference Between Finance Apps and Investing Apps?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In this review, we are focused on investing apps rather than finance apps. Investing apps allow you to actually buy and sell assets and, in practical terms, are the apps provided by brokerages to trade in your account with them. There is a wider universe of financial apps out there, and some brokerages also offer finance app functions through their investment apps (i.e. external account syncing with financial analysis on your total holdings).</p><p>The key difference with a finance app is that you cannot trade stocks or assets through those apps even though you may be able to sync your brokerage accounts to the app. In contrast, investment apps enable you to research investments, check positions, and place new orders, all without having to leave the app. Finance apps generally stop at being able to display your brokerage account balance as part of your overall financial picture. Some of the most popular financial apps are budgeting apps, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">we review these separately</a> from our investment app reviews.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_129-0"><span class="heading-toc" id="toc-are-investment-apps-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Investment Apps Safe?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Generally speaking, all investment apps built by major financial institutions are safe to use. Not only do these companies implement high-security standards and carry <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sipc.asp">SIPC</a> insurance to safeguard the accounts of those using their mobile application, but marketplaces such as the App Store for iOS and Google Play for the Android operating systems also have strong security protocols that each app must pass to be authorized for their apps marketplace. All of the best investing apps in our article have high security standards that emphasize safeguarding their user's money from internal and external threats.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_131-0"><span class="heading-toc" id="toc-what-is-robinhood"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Robinhood?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Robinhood is a user-friendly investing and trading app where users can easily trade stocks, exchange traded funds (ETFs), options, and cryptocurrencies on the platform. A pioneer in offering commission-free trading, Robinhood remains popular among newer investors. However, the platform lacks more sophisticated financial tools, asset categories, and research capabilities that advanced traders look for in a broker.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_133-0"><span class="heading-toc" id="toc-which-is-better-robinhood-or-webull"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Is Better: Robinhood or Webull?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Robinhood and Webull are often thought of as being similar investing platforms. However, our research has uncovered several differences between the two. For instance, Webull's platform offers a far more robust trading experience that includes advanced technical charting capabilities, available quantitative studies, deep market news, fundamental comparison tools, excellent customization, and broad options trading features. Robinhood, on the other hand, delivers a more basic trading experience that is best suited for new and beginner investors. The company's Learn vertical stands out as a plus in this regard. In addition, Robinhood's 1% match should appeal to investors looking to open a retirement account. Ultimately, our research found that Webull is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-options-trading-4587876">best app offered for low-cost options trading</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-day-trading-4587880">low-cost day trading</a>, in addition to being the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-low-costs-4587874">best low cost options broker</a>.</p><p><br/></p></div>
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<span class="heading-toc" id="toc-how-we-picked-the-best-investment-apps"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_135-0"> <span class="mntl-sc-block-heading__text"> How We Picked the Best Investment Apps </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_136-0"> Investopedia is dedicated to providing investors with unbiased, comprehensive reviews and ratings of online brokers. Our reviews are the result of months of evaluating all aspects of an online broker’s platform, including the user experience, the quality of trade executions, the products available on its platforms, costs and fees, security, the mobile experience, and customer service. We established a rating scale based on our criteria, collecting thousands of data points that we weighed into our star-scoring system.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_138-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/broker-ranking-methodology-4587135">Read our full methodology</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_140-0"> <em>Dotdash Meredith receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. Dotdash Meredith is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.</em>
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</div></div> | An investment app is an application that users can download and use on their smartphone. These apps allow investors to not only keep track of their investments but also place trades and transfer funds in and out of their accounts as needed. Investors will find that not all investment apps are created equal or optimized for mobile usage, which is why choosing the best app is essential to fit your style of investing.
According to our research, Wealthfront is the best automated investment app due to its excellent account services, best-in-class usability, and comprehensive money management features. Day traders seeking a platform that caters to all their needs will find Interactive Brokers' trading technology, tools, and other key features to be awe-inspiring, while tastytrade's options-focused content, pricing, and tools are all optimized to help traders harness the many factors that affect this increasingly popular form of [derivatives trading](https://www.investopedia.com/articles/optioninvestor/10/derivatives-101.asp).
## Best Investing Apps
* [**Wealthfront**](https://wealthfront.4fq8.net/c/328256/1343541/3104): Best Automated Investing App
* [**Interactive Brokers**](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php): Best App for Active Traders
* [**tastytrade**](https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1): Best App for Options Traders
## Wealthfront: Best Automated Investing App
[:max_bytes(150000):strip_icc()/Wealthfront-79d83bb8f678494bb87519607f1c1c95.jpg)](https://www.investopedia.com/wealthfront-review-4587933)
[Open an Account](https://wealthfront.4fq8.net/c/328256/1343541/3104)
* **Account Minimum**: $500
* **Fees**: 0.25% for most accounts; no trading commission or fees for withdrawals, minimums, or transfers
[Read full review](https://www.investopedia.com/wealthfront-review-4587933)
[Open an Account](https://wealthfront.4fq8.net/c/328256/1343541/3104)
###
Fund your first taxable Investment Account and get a $50 bonus.
## Why We Chose It
Wealthfront delivers a powerful, digital-only investment experience that gives users access to comprehensive money management features through an elegant, sleek design. You’ll find the financial guidance, account aggregation, goal setting, investing, and banking options, including debit cards, to be both user-friendly and seamless to navigate. Wealthfront’s Self-Driving Money allows you to further automate your finances by using a rules-based approach to move money between your accounts while optimizing for your goals, giving you more control of your financial journey.
The mobile apps for Android and iOS platforms are both superb and are on par with the desktop experience in terms of features, functionality, and ease of navigation. The app is thoughtfully designed to minimize unnecessary data inputs or typing, opting instead to leverage more user-friendly sliders, drop-down menus, and auto-fill functionality. You’ll still have to input user IDs and passwords when linking external accounts, but generally, the workflows are intuitive and consistent.
Overall, while E\*TRADE’s Core Portfolio robo-advisor offering won our [Best Robo-Advisor for Mobile Experience](https://www.investopedia.com/best-robo-advisors-4693125) category, Wealthfront was our best overall robo-advisor, and its platform provides a polished, smart user experience with exposure to a significantly greater range of comprehensive money management tools.
Originally founded by Andy Rachleff and Dan Carroll in 2008, Wealthfront Inc. is based in Palo Alto, California.
## Pros & Cons
Pros
* Comprehensive financial planning tools
* The digital-only financial guidance through "Path," Wealthfront's financial planning software, is best in class
* Thoughtful mobile experience designed to reduce errors and optimize functionality
* Self-Driving Money provides seamless financial management through your smartphone
Cons
* External account syncing can be inconsistent
* No discounts for larger balances
* No human financial advisors
### In the News
On Nov. 3, 2023, Wealthfront increased the APY on its Cash Account from 4.80% to 5.00%.
## Interactive Brokers: Best App for Day Traders
[: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)
## Why We Chose It
Interactive Brokers (IBKR) edges out the competition for our best app for day traders category. Sophisticated traders will find an immediate fit as the mobile experience carries over all the core features from the desktop Traders Workstation (TWS) functionality, which is one of the most comprehensive trading platforms in existence. Users will also have access to every available asset class, including cryptocurrency for direct coin trading, to go alongside unmatched research, analysis, and strategy tools.
The overall mobile experience generally flows smoothly for experienced traders who already know TWS. The mobile app provides synchronized functionality with watchlists created on the app also being visible on the desktop offering.
While the core features of the IBKR app maintain nearly all the functionality of the desktop version, there are some reasonable constraints given the depth and breadth of the full TWS platform. The desktop option has a lot more options for analysis and trading strategies. Despite these constraints, the Interactive Brokers app stands above the rest as the [top platform for day traders](https://www.investopedia.com/best-brokers-for-day-trading-4587880) because of the range of assets and markets it puts into your hands.
Founded in 1977 by current chairman Thomas Peterffy, Interactive Brokers is headquartered in Greenwich, Connecticut.
## Pros & Cons
Pros
* Mobile experience successfully mimics core functionality of the comprehensive desktop version
* App-based stock screeners and option strategies match web offering
* Mobile charts are detailed, intuitive, and provide useful indicators
* Outstanding order execution
* Attractive, low margin interest rates
Cons
* No fixed income screener on mobile
* Expansive platform capabilities may have a learning curve
### In the News
On Dec. 15, 2023, Interactive Brokers announced a number of enhancements to its IBKR Mobile platform that offer an upgraded experience with an innovative design, new and improved features, and quick access to learning resources*.*
## tastytrade: Best App for Options Traders
[:max_bytes(150000):strip_icc()/tastytradelogo-454669c3e9e543468182244f6f493b38.png)](https://www.investopedia.com/tastytrade-review-4587986)
[Open an Account](https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1)
* **Account** **Minimum**: $0
* **Fees & Commissions**: $0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close
[Read full review](https://www.investopedia.com/tastytrade-review-4587986)
[Open an Account](https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1)
## Why We Chose It
Tastytrade specializes in [options](https://www.investopedia.com/terms/o/option.asp) trading with a focus on intuitive tools, education, and seamless design. This relentless focus on options trading—and nothing but—has tastytrade taking our top spot in the best app for options traders category.
The workflow is built with seamless options order management in mind, which results in an effective and quick trading experience. The mobile app has order types, asset classes, and quote streaming capabilities that mirror the desktop version. While tastytrade's option workflow optimization makes it stand out in this category, there are some notable mobile constraints such as the inability to rotate graphs on the mobile platform.
Simply put, tastytrade is a great broker for options traders and the majority of those traders will be using the desktop whenever possible. That said, the tastytrade mobile app is singularly focused on trading options, whereas other brokerage mobile apps have to balance options features against more heavily used asset classes.
Launched in 2017, tastytrade is headquartered in Chicago, Illinois.
## Pros & Cons
Pros
* Mobile user flow is optimized for full options trading
* Easily edit multi-leg options trades
* Outstanding blend of tools and pricing compared to competition
* Full offering of asset classes beyond options
Cons
* Account opening isn’t supported on mobile devices
* Price alerts and order notifications aren’t available
* Heavy options traders won’t find the mobile experience a suitable desktop replacement
* App isn’t optimized for trading anything outside of options
## Compare the Best Investment Apps
| **Company** | **Fees** | **Account Minimum** | **Mobile App** |
| --- | --- | --- | --- |
| Wealthfront | 0.25% for most accounts, no trading commission or fees for withdrawals, minimum balance requirements, or transfers. | $500 | Android, iOS |
| Interactive Brokers | Maximum $0.005 per share for Pro platform up to 1% of trade value, $0 for IBKR Lite. | $0 | Android, iOS |
| tastytrade | $0.00 stock trades, starting at $1.00 to open options trades $0.00 to close. | $0 | Android, iOS |
## Why You Should Trust Us
Investopedia collected and analyzed several key data points from over 43 online brokerage and digital wealth management companies to identify the most important factors for readers choosing the right investment app to fit their needs. We used this data to review each company for their pricing, account services, usability, technology, and other features to provide unbiased, comprehensive reviews to ensure our readers make the right decision for their needs. Investopedia launched in 1999, and has been helping readers find the [best online brokerage](https://www.investopedia.com/best-online-brokers-4587872) and digital wealth management platforms since 2019.
#### Everything You Need to Know About Brokerage Accounts
## How to Choose an Investment App
Now that you know the best investment apps, the next step is choosing the best investment app for you. However, everyone has different financial goals and needs that they alone must consider. Below are some key considerations you will need to factor in when choosing an investment app:
1. **Your investing style**: Are you the type of trader who wants to utilize sophisticated indicators and trading strategies? If that's your objective, an app like Wealthfront wouldn't be a good fit. In this case, you would be better off going with an app like Interactive Brokers or tastytrade. However, if you are the type of investor who wants an app to do all the work for you, then Wealthfront is the clear winner.
2. **Fees and costs:** The investment app you choose should be cost-effective for your financial needs. For instance, Wealthfront is an excellent service. However, its 0.25% annual fee, although small in the grand scheme of things, does add up the longer you have the account and the more it compounds in size. Investors who want to pay $0 in stock trades with low costs for options trades may want to consider Interactive Brokers or tastytrade.
3. **Investment options**: When choosing an investment app, you will want to easily fund your account and buy and sell stocks, ETFs, mutual funds, cryptocurrency, options, and futures smoothly and seamlessly.
Choosing the right investment app that fits your needs is critical to you reaching your financial goals. Cost, functionality, and your particular trading style are all important considerations when making your decision.
## How to Get Started With Investing Apps
Investing apps can be a convenient way to start investing in the financial markets. Luckily, getting started on this journey is as easy as following these key steps:
**1. Define your investment goals:** Clearly define your financial objectives and risk tolerance. Whether you aim for long-term growth, short-term gains, or a mix, understanding your goals is crucial to establishing a strong foundation for choosing the right platform to fit your needs.
**2. Research and choose an investment app:** When researching the various investment apps that are available, consider factors like the user interface, fees, available investment options, investing tools, and customer service.
**3. Download and install the app:** Once you've identified the right app that aligns with your investment goals, download and install the app.
**4. Account setup:** Open the app and begin the account creation process. Provide necessary personal information, including your name, address, and Social Security number. Verify your identity by submitting required documents.
**5. Fund you account:** Connect your investment app to your bank account. This enables you to transfer funds seamlessly for investing purposes.
**6. Explore investment options:** Familiarize yourself with the various investment products available. Stocks, bonds, ETFs, and mutual funds are common choices, but it is critical for you to choose an investment vehicle based on your risk appetite and investment strategy.
**7. Start small:** Begin with a small investment to get comfortable with the app's functionality. You should also learn by using the paper trading function that many of the top platforms now offer. From there, as your confidence and experience start to build, begin to increase your investments gradually.
**8. Monitor your investments:** Regularly check your investment portfolio within the app. Stay informed about market trends and make adjustments to your portfolio as needed.
## Pros and Cons of Using Investment Apps
Investment apps are sophisticated software systems that allow investors to conduct their trading on a mobile platform right in the palm of their hand. Although there are many pros to using investment apps to secure your financial future, there are also cons that investors need to note before using these platforms.
### Pros
* **Convenience**: Investment apps allow investors to easily log in to their financial account and make necessary adjustments anywhere in the world.
* **Beginner Friendly**: Most investment apps are much easier to use and require a lower learning curve than the desktop versions. Generally, investors won’t be inundated with a complex layout or weighed down by many options to handle their finances.
* **Low Fees and Entry Requirements:** Investment apps typically have lower costs and more affordable entry requirements than other investing software on desktops. Many investment apps are free or have a $0 minimum to open an account. Wealthfront is an exception, as it requires $500 to open an account and charges fees upward of 0.25%. However, it also offers one of the best hands-off services in the robo-advisor industry, which, to many investors, may be well worth the cost.
### Cons
* **Limited Functionality:** Investment apps will operate differently from their desktop counterparts. The investing app may exclude charts, tools, and investing resources essential to the trader's success. However, limitations are specific to each platform and differ in what they offer. When choosing an investing app, ensure it coincides with your trading style.
* **Limited Customization**: Most desktop-based investing platforms allow investors to fully customize their layout to improve their focus on what matters most to them when they invest. Investing apps may allow some sort of customizability, but in most cases, there are very few options to get it how the investor may want it. Investors are usually limited to the layout provided by the investing app and cannot customize it according to their preferences.
* **Limited Customer Service**: Investing apps may limit customer service resources, and customers may be encouraged to find solutions on their own within the app's resources, such as its FAQs or an online forum. If the investing app does provide customer service, it may not offer ideal solutions to the investor's issues. If customer support is an important feature for you, then Wealthfront, Interactive Brokers, and tastytrade will be an ideal fit.
## How Much Money Do You Need to Invest Through an Investment App?
The funding requirements for an investment app will differ with every platform. For instance, Wealthfront is the only investment app covered here that requires a $500 minimum investment to open an account. If you are interested in the robo-advisor sector but find the account minimum too steep, then robo-advisors like Betterment may be a better fit as it requires only $10 to start investing. When it comes to online brokers, top platforms like Interactive Brokers and tastytrade do not require any account minimum. However, investors will need to conduct their due diligence to ensure they can meet all requirements before opening an account.
## Desktop vs. Mobile Experiences
Desktop trading platforms still have a strong customer base because of the superior trading experience they provide. Thanks to the growth of app-only retail investors, however, brokers can’t focus solely on the desktop experience. Mobile-first and mobile-only brokerages already exist, and established brokers are having to simultaneously develop their desktop and mobile platforms to keep up.
To do this, many brokerages have changed their product approach to focus on creating a consistent experience across multiple devices. This means you can usually find similar workflows and key tools regardless of which platform you are on. This comes with a trader-specific caveat, as many desktop platforms intended for active traders have to cut out a lot more when transitioning to mobile when compared to brokerages with platforms aimed at average investors.
The extent of this feature reduction has been lessened as the smartphone technology running these trading apps has improved, however, and more brokers are aligning and synchronizing key features across both the mobile and desktop workflows such as analysis, research, screening tools, money movement, and charting. More recently, complex trading strategies originally reserved for desktop experiences like multi-leg options trades and contingent orders have been enabled on apps as well.
## Frequently Asked Questions
## What Is the Best Investment App?
Determining the best investment app depends on individual preferences and investing goals. Our research has determined that Wealthfront is the best automated investment app among its competitors, because of its excellent account services, best-in-class usability, and comprehensive money management features. Ultimately, however, the app you choose should align with your investment strategy, risk tolerance, and financial objectives.
## What Are the Advantages of Using Investing Apps to Trade Stocks?
The key advantage of using an investing app to trade stocks is accessibility. Investing apps have leveraged rapid mobile technological advancements to make it easier than ever to invest and trade stocks. Like most people now, you probably carry your mobile device with you all the time, allowing you to react to market movements and monitor your short and long term investments in places where it just wasn’t practical before.
The convenience of mobile trading has also made the market more accessible to users of all backgrounds, interests, and experience levels. You don’t need a trading terminal with four monitors anymore. Increased competition among brokers and innovation in the form of new apps and platforms has reduced barriers to entry such as cost and education. With a supercomputer in your pocket, you have access to the same real-time market data on the go and can trade accordingly.
## What Are the Disadvantages of Using an Investing App to Trade Stocks?
While investment apps are moving closer to full feature parity with the desktop versions, there are still some functionality gaps that impact certain types of investors. The gaps vary by investment platform and investor preferences, but generally, you can expect there to be some product differences between desktop and mobile trade experiences in terms of the charting and analysis tools.
Some investing apps also omit asset types or market exchanges that are available through the desktop version. Another disadvantage to app-based trading is the size limitations on mobile devices compared to full computer monitors. These factors tend to affect active traders the most, but they can be a downside for any investor depending on your preferences and trading strategies.
## What Should I Consider Before Using a Stock Trading App?
App-based trading gives you access to financial markets right at your fingertips, wherever you are located. When considering investing through a mobile app it’s helpful to identify your goals, preferences, and investment strategy. Being aware of your personal investment experience and educational opportunities can also help match you to the right trading platform. It is also important to evaluate the broker as a whole, rather than just by the mobile app. A slick app can’t make up for the impact of higher-than-average trading fees and poor execution, for example.
As you decide between different apps, you may find some platforms provide paper-based accounts that let you experiment with trades without risking your personal capital. Testing out more than one app-based investment offering can also give you more insight to properly compare and contrast features that match your preferences. All these factors can help determine which app will be the right fit for you.
## What's the Difference Between Finance Apps and Investing Apps?
In this review, we are focused on investing apps rather than finance apps. Investing apps allow you to actually buy and sell assets and, in practical terms, are the apps provided by brokerages to trade in your account with them. There is a wider universe of financial apps out there, and some brokerages also offer finance app functions through their investment apps (i.e. external account syncing with financial analysis on your total holdings).
The key difference with a finance app is that you cannot trade stocks or assets through those apps even though you may be able to sync your brokerage accounts to the app. In contrast, investment apps enable you to research investments, check positions, and place new orders, all without having to leave the app. Finance apps generally stop at being able to display your brokerage account balance as part of your overall financial picture. Some of the most popular financial apps are budgeting apps, and [we review these separately](https://www.investopedia.com/best-budgeting-apps-5085405) from our investment app reviews.
## Are Investment Apps Safe?
Generally speaking, all investment apps built by major financial institutions are safe to use. Not only do these companies implement high-security standards and carry [SIPC](https://www.investopedia.com/terms/s/sipc.asp) insurance to safeguard the accounts of those using their mobile application, but marketplaces such as the App Store for iOS and Google Play for the Android operating systems also have strong security protocols that each app must pass to be authorized for their apps marketplace. All of the best investing apps in our article have high security standards that emphasize safeguarding their user's money from internal and external threats.
## What Is Robinhood?
Robinhood is a user-friendly investing and trading app where users can easily trade stocks, exchange traded funds (ETFs), options, and cryptocurrencies on the platform. A pioneer in offering commission-free trading, Robinhood remains popular among newer investors. However, the platform lacks more sophisticated financial tools, asset categories, and research capabilities that advanced traders look for in a broker.
## Which Is Better: Robinhood or Webull?
Robinhood and Webull are often thought of as being similar investing platforms. However, our research has uncovered several differences between the two. For instance, Webull's platform offers a far more robust trading experience that includes advanced technical charting capabilities, available quantitative studies, deep market news, fundamental comparison tools, excellent customization, and broad options trading features. Robinhood, on the other hand, delivers a more basic trading experience that is best suited for new and beginner investors. The company's Learn vertical stands out as a plus in this regard. In addition, Robinhood's 1% match should appeal to investors looking to open a retirement account. Ultimately, our research found that Webull is the [best app offered for low-cost options trading](https://www.investopedia.com/best-brokers-for-options-trading-4587876) and [low-cost day trading](https://www.investopedia.com/best-brokers-for-day-trading-4587880), in addition to being the [best low cost options broker](https://www.investopedia.com/best-brokers-for-low-costs-4587874).
## How We Picked the Best Investment Apps
Investopedia is dedicated to providing investors with unbiased, comprehensive reviews and ratings of online brokers. Our reviews are the result of months of evaluating all aspects of an online broker’s platform, including the user experience, the quality of trade executions, the products available on its platforms, costs and fees, security, the mobile experience, and customer service. We established a rating scale based on our criteria, collecting thousands of data points that we weighed into our star-scoring system.
[Read our full methodology](https://www.investopedia.com/broker-ranking-methodology-4587135).
*Dotdash Meredith receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. Dotdash Meredith is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.*
| An investment app is an application that users can download and use on their smartphone. These apps allow investors to not only keep track of their investments but also place trades and transfer funds in and out of their accounts as needed. Investors will find that not all investment apps are created equal or optimized for mobile usage, which is why choosing the best app is essential to fit your style of investing.
According to our research, Wealthfront is the best automated investment app due to its excellent account services, best-in-class usability, and comprehensive money management features. Day traders seeking a platform that caters to all their needs will find Interactive Brokers' trading technology, tools, and other key features to be awe-inspiring, while tastytrade's options-focused content, pricing, and tools are all optimized to help traders harness the many factors that affect this increasingly popular form of derivatives trading.
Best Investing Apps
Wealthfront: Best Automated Investing App
Interactive Brokers: Best App for Active Traders
tastytrade: Best App for Options Traders
Wealthfront: Best Automated Investing App
Open an Account
Account Minimum: $500
Fees: 0.25% for most accounts; no trading commission or fees for withdrawals, minimums, or transfers
Read full review
Open an Account
Fund your first taxable Investment Account and get a $50 bonus.
Why We Chose It
Wealthfront delivers a powerful, digital-only investment experience that gives users access to comprehensive money management features through an elegant, sleek design. You’ll find the financial guidance, account aggregation, goal setting, investing, and banking options, including debit cards, to be both user-friendly and seamless to navigate. Wealthfront’s Self-Driving Money allows you to further automate your finances by using a rules-based approach to move money between your accounts while optimizing for your goals, giving you more control of your financial journey.
The mobile apps for Android and iOS platforms are both superb and are on par with the desktop experience in terms of features, functionality, and ease of navigation. The app is thoughtfully designed to minimize unnecessary data inputs or typing, opting instead to leverage more user-friendly sliders, drop-down menus, and auto-fill functionality. You’ll still have to input user IDs and passwords when linking external accounts, but generally, the workflows are intuitive and consistent.
Overall, while E*TRADE’s Core Portfolio robo-advisor offering won our Best Robo-Advisor for Mobile Experience category, Wealthfront was our best overall robo-advisor, and its platform provides a polished, smart user experience with exposure to a significantly greater range of comprehensive money management tools.
Originally founded by Andy Rachleff and Dan Carroll in 2008, Wealthfront Inc. is based in Palo Alto, California.
Pros & Cons
Pros
Comprehensive financial planning tools
The digital-only financial guidance through "Path," Wealthfront's financial planning software, is best in class
Thoughtful mobile experience designed to reduce errors and optimize functionality
Self-Driving Money provides seamless financial management through your smartphone
Cons
External account syncing can be inconsistent
No discounts for larger balances
No human financial advisors
In the News
On Nov. 3, 2023, Wealthfront increased the APY on its Cash Account from 4.80% to 5.00%.
Interactive Brokers: Best App for Day Traders
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
Why We Chose It
Interactive Brokers (IBKR) edges out the competition for our best app for day traders category. Sophisticated traders will find an immediate fit as the mobile experience carries over all the core features from the desktop Traders Workstation (TWS) functionality, which is one of the most comprehensive trading platforms in existence. Users will also have access to every available asset class, including cryptocurrency for direct coin trading, to go alongside unmatched research, analysis, and strategy tools.
The overall mobile experience generally flows smoothly for experienced traders who already know TWS. The mobile app provides synchronized functionality with watchlists created on the app also being visible on the desktop offering.
While the core features of the IBKR app maintain nearly all the functionality of the desktop version, there are some reasonable constraints given the depth and breadth of the full TWS platform. The desktop option has a lot more options for analysis and trading strategies. Despite these constraints, the Interactive Brokers app stands above the rest as the top platform for day traders because of the range of assets and markets it puts into your hands.
Founded in 1977 by current chairman Thomas Peterffy, Interactive Brokers is headquartered in Greenwich, Connecticut.
Pros & Cons
Pros
Mobile experience successfully mimics core functionality of the comprehensive desktop version
App-based stock screeners and option strategies match web offering
Mobile charts are detailed, intuitive, and provide useful indicators
Outstanding order execution
Attractive, low margin interest rates
Cons
No fixed income screener on mobile
Expansive platform capabilities may have a learning curve
In the News
On Dec. 15, 2023, Interactive Brokers announced a number of enhancements to its IBKR Mobile platform that offer an upgraded experience with an innovative design, new and improved features, and quick access to learning resources.
tastytrade: Best App for Options Traders
Open an Account
Account Minimum: $0
Fees & Commissions: $0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close
Read full review
Open an Account
Why We Chose It
Tastytrade specializes in options trading with a focus on intuitive tools, education, and seamless design. This relentless focus on options trading—and nothing but—has tastytrade taking our top spot in the best app for options traders category.
The workflow is built with seamless options order management in mind, which results in an effective and quick trading experience. The mobile app has order types, asset classes, and quote streaming capabilities that mirror the desktop version. While tastytrade's option workflow optimization makes it stand out in this category, there are some notable mobile constraints such as the inability to rotate graphs on the mobile platform.
Simply put, tastytrade is a great broker for options traders and the majority of those traders will be using the desktop whenever possible. That said, the tastytrade mobile app is singularly focused on trading options, whereas other brokerage mobile apps have to balance options features against more heavily used asset classes.
Launched in 2017, tastytrade is headquartered in Chicago, Illinois.
Pros & Cons
Pros
Mobile user flow is optimized for full options trading
Easily edit multi-leg options trades
Outstanding blend of tools and pricing compared to competition
Full offering of asset classes beyond options
Cons
Account opening isn’t supported on mobile devices
Price alerts and order notifications aren’t available
Heavy options traders won’t find the mobile experience a suitable desktop replacement
App isn’t optimized for trading anything outside of options
Compare the Best Investment Apps
Company
Fees
Account Minimum
Mobile App
Wealthfront
0.25% for most accounts, no trading commission or fees for withdrawals, minimum balance requirements, or transfers.
$500
Android, iOS
Interactive Brokers
Maximum $0.005 per share for Pro platform up to 1% of trade value, $0 for IBKR Lite.
$0
Android, iOS
tastytrade
$0.00 stock trades, starting at $1.00 to open options trades $0.00 to close.
$0
Android, iOS
Why You Should Trust Us
Investopedia collected and analyzed several key data points from over 43 online brokerage and digital wealth management companies to identify the most important factors for readers choosing the right investment app to fit their needs. We used this data to review each company for their pricing, account services, usability, technology, and other features to provide unbiased, comprehensive reviews to ensure our readers make the right decision for their needs. Investopedia launched in 1999, and has been helping readers find the best online brokerage and digital wealth management platforms since 2019.
Everything You Need to Know About Brokerage Accounts
How to Choose an Investment App
Now that you know the best investment apps, the next step is choosing the best investment app for you. However, everyone has different financial goals and needs that they alone must consider. Below are some key considerations you will need to factor in when choosing an investment app:
Your investing style: Are you the type of trader who wants to utilize sophisticated indicators and trading strategies? If that's your objective, an app like Wealthfront wouldn't be a good fit. In this case, you would be better off going with an app like Interactive Brokers or tastytrade. However, if you are the type of investor who wants an app to do all the work for you, then Wealthfront is the clear winner. Fees and costs: The investment app you choose should be cost-effective for your financial needs. For instance, Wealthfront is an excellent service. However, its 0.25% annual fee, although small in the grand scheme of things, does add up the longer you have the account and the more it compounds in size. Investors who want to pay $0 in stock trades with low costs for options trades may want to consider Interactive Brokers or tastytrade.Investment options: When choosing an investment app, you will want to easily fund your account and buy and sell stocks, ETFs, mutual funds, cryptocurrency, options, and futures smoothly and seamlessly.
Choosing the right investment app that fits your needs is critical to you reaching your financial goals. Cost, functionality, and your particular trading style are all important considerations when making your decision.
How to Get Started With Investing Apps
Investing apps can be a convenient way to start investing in the financial markets. Luckily, getting started on this journey is as easy as following these key steps:
1. Define your investment goals: Clearly define your financial objectives and risk tolerance. Whether you aim for long-term growth, short-term gains, or a mix, understanding your goals is crucial to establishing a strong foundation for choosing the right platform to fit your needs.
2. Research and choose an investment app: When researching the various investment apps that are available, consider factors like the user interface, fees, available investment options, investing tools, and customer service.
3. Download and install the app: Once you've identified the right app that aligns with your investment goals, download and install the app.
4. Account setup: Open the app and begin the account creation process. Provide necessary personal information, including your name, address, and Social Security number. Verify your identity by submitting required documents.
5. Fund you account: Connect your investment app to your bank account. This enables you to transfer funds seamlessly for investing purposes.
6. Explore investment options: Familiarize yourself with the various investment products available. Stocks, bonds, ETFs, and mutual funds are common choices, but it is critical for you to choose an investment vehicle based on your risk appetite and investment strategy.
7. Start small: Begin with a small investment to get comfortable with the app's functionality. You should also learn by using the paper trading function that many of the top platforms now offer. From there, as your confidence and experience start to build, begin to increase your investments gradually.
8. Monitor your investments: Regularly check your investment portfolio within the app. Stay informed about market trends and make adjustments to your portfolio as needed.
Pros and Cons of Using Investment Apps
Investment apps are sophisticated software systems that allow investors to conduct their trading on a mobile platform right in the palm of their hand. Although there are many pros to using investment apps to secure your financial future, there are also cons that investors need to note before using these platforms.
Pros
Convenience: Investment apps allow investors to easily log in to their financial account and make necessary adjustments anywhere in the world. Beginner Friendly: Most investment apps are much easier to use and require a lower learning curve than the desktop versions. Generally, investors won’t be inundated with a complex layout or weighed down by many options to handle their finances.Low Fees and Entry Requirements: Investment apps typically have lower costs and more affordable entry requirements than other investing software on desktops. Many investment apps are free or have a $0 minimum to open an account. Wealthfront is an exception, as it requires $500 to open an account and charges fees upward of 0.25%. However, it also offers one of the best hands-off services in the robo-advisor industry, which, to many investors, may be well worth the cost.
Cons
Limited Functionality: Investment apps will operate differently from their desktop counterparts. The investing app may exclude charts, tools, and investing resources essential to the trader's success. However, limitations are specific to each platform and differ in what they offer. When choosing an investing app, ensure it coincides with your trading style.Limited Customization: Most desktop-based investing platforms allow investors to fully customize their layout to improve their focus on what matters most to them when they invest. Investing apps may allow some sort of customizability, but in most cases, there are very few options to get it how the investor may want it. Investors are usually limited to the layout provided by the investing app and cannot customize it according to their preferences.Limited Customer Service: Investing apps may limit customer service resources, and customers may be encouraged to find solutions on their own within the app's resources, such as its FAQs or an online forum. If the investing app does provide customer service, it may not offer ideal solutions to the investor's issues. If customer support is an important feature for you, then Wealthfront, Interactive Brokers, and tastytrade will be an ideal fit.
How Much Money Do You Need to Invest Through an Investment App?
The funding requirements for an investment app will differ with every platform. For instance, Wealthfront is the only investment app covered here that requires a $500 minimum investment to open an account. If you are interested in the robo-advisor sector but find the account minimum too steep, then robo-advisors like Betterment may be a better fit as it requires only $10 to start investing. When it comes to online brokers, top platforms like Interactive Brokers and tastytrade do not require any account minimum. However, investors will need to conduct their due diligence to ensure they can meet all requirements before opening an account.
Desktop vs. Mobile Experiences
Desktop trading platforms still have a strong customer base because of the superior trading experience they provide. Thanks to the growth of app-only retail investors, however, brokers can’t focus solely on the desktop experience. Mobile-first and mobile-only brokerages already exist, and established brokers are having to simultaneously develop their desktop and mobile platforms to keep up.
To do this, many brokerages have changed their product approach to focus on creating a consistent experience across multiple devices. This means you can usually find similar workflows and key tools regardless of which platform you are on. This comes with a trader-specific caveat, as many desktop platforms intended for active traders have to cut out a lot more when transitioning to mobile when compared to brokerages with platforms aimed at average investors.
The extent of this feature reduction has been lessened as the smartphone technology running these trading apps has improved, however, and more brokers are aligning and synchronizing key features across both the mobile and desktop workflows such as analysis, research, screening tools, money movement, and charting. More recently, complex trading strategies originally reserved for desktop experiences like multi-leg options trades and contingent orders have been enabled on apps as well.
Frequently Asked Questions
What Is the Best Investment App?
Determining the best investment app depends on individual preferences and investing goals. Our research has determined that Wealthfront is the best automated investment app among its competitors, because of its excellent account services, best-in-class usability, and comprehensive money management features. Ultimately, however, the app you choose should align with your investment strategy, risk tolerance, and financial objectives.
What Are the Advantages of Using Investing Apps to Trade Stocks?
The key advantage of using an investing app to trade stocks is accessibility. Investing apps have leveraged rapid mobile technological advancements to make it easier than ever to invest and trade stocks. Like most people now, you probably carry your mobile device with you all the time, allowing you to react to market movements and monitor your short and long term investments in places where it just wasn’t practical before.The convenience of mobile trading has also made the market more accessible to users of all backgrounds, interests, and experience levels. You don’t need a trading terminal with four monitors anymore. Increased competition among brokers and innovation in the form of new apps and platforms has reduced barriers to entry such as cost and education. With a supercomputer in your pocket, you have access to the same real-time market data on the go and can trade accordingly.
What Are the Disadvantages of Using an Investing App to Trade Stocks?
While investment apps are moving closer to full feature parity with the desktop versions, there are still some functionality gaps that impact certain types of investors. The gaps vary by investment platform and investor preferences, but generally, you can expect there to be some product differences between desktop and mobile trade experiences in terms of the charting and analysis tools.Some investing apps also omit asset types or market exchanges that are available through the desktop version. Another disadvantage to app-based trading is the size limitations on mobile devices compared to full computer monitors. These factors tend to affect active traders the most, but they can be a downside for any investor depending on your preferences and trading strategies.
What Should I Consider Before Using a Stock Trading App?
App-based trading gives you access to financial markets right at your fingertips, wherever you are located. When considering investing through a mobile app it’s helpful to identify your goals, preferences, and investment strategy. Being aware of your personal investment experience and educational opportunities can also help match you to the right trading platform. It is also important to evaluate the broker as a whole, rather than just by the mobile app. A slick app can’t make up for the impact of higher-than-average trading fees and poor execution, for example. As you decide between different apps, you may find some platforms provide paper-based accounts that let you experiment with trades without risking your personal capital. Testing out more than one app-based investment offering can also give you more insight to properly compare and contrast features that match your preferences. All these factors can help determine which app will be the right fit for you.
What's the Difference Between Finance Apps and Investing Apps?
In this review, we are focused on investing apps rather than finance apps. Investing apps allow you to actually buy and sell assets and, in practical terms, are the apps provided by brokerages to trade in your account with them. There is a wider universe of financial apps out there, and some brokerages also offer finance app functions through their investment apps (i.e. external account syncing with financial analysis on your total holdings).The key difference with a finance app is that you cannot trade stocks or assets through those apps even though you may be able to sync your brokerage accounts to the app. In contrast, investment apps enable you to research investments, check positions, and place new orders, all without having to leave the app. Finance apps generally stop at being able to display your brokerage account balance as part of your overall financial picture. Some of the most popular financial apps are budgeting apps, and we review these separately from our investment app reviews.
Are Investment Apps Safe?
Generally speaking, all investment apps built by major financial institutions are safe to use. Not only do these companies implement high-security standards and carry SIPC insurance to safeguard the accounts of those using their mobile application, but marketplaces such as the App Store for iOS and Google Play for the Android operating systems also have strong security protocols that each app must pass to be authorized for their apps marketplace. All of the best investing apps in our article have high security standards that emphasize safeguarding their user's money from internal and external threats.
What Is Robinhood?
Robinhood is a user-friendly investing and trading app where users can easily trade stocks, exchange traded funds (ETFs), options, and cryptocurrencies on the platform. A pioneer in offering commission-free trading, Robinhood remains popular among newer investors. However, the platform lacks more sophisticated financial tools, asset categories, and research capabilities that advanced traders look for in a broker.
Which Is Better: Robinhood or Webull?
Robinhood and Webull are often thought of as being similar investing platforms. However, our research has uncovered several differences between the two. For instance, Webull's platform offers a far more robust trading experience that includes advanced technical charting capabilities, available quantitative studies, deep market news, fundamental comparison tools, excellent customization, and broad options trading features. Robinhood, on the other hand, delivers a more basic trading experience that is best suited for new and beginner investors. The company's Learn vertical stands out as a plus in this regard. In addition, Robinhood's 1% match should appeal to investors looking to open a retirement account. Ultimately, our research found that Webull is the best app offered for low-cost options trading and low-cost day trading, in addition to being the best low cost options broker.
How We Picked the Best Investment Apps
Investopedia is dedicated to providing investors with unbiased, comprehensive reviews and ratings of online brokers. Our reviews are the result of months of evaluating all aspects of an online broker’s platform, including the user experience, the quality of trade executions, the products available on its platforms, costs and fees, security, the mobile experience, and customer service. We established a rating scale based on our criteria, collecting thousands of data points that we weighed into our star-scoring system.
Read our full methodology.
Dotdash Meredith receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. Dotdash Meredith is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.
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https://www.investopedia.com/us-economy-news-today-april-22-8636924 | US Economy News Today: Policy Uncertainty Could Be Growing Risk to US Financial Stability | <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, the Federal Reserve looks at risks to U.S. financial stability. We also look ahead to a measure of economic growth and additional data on inflation coming later this week.
</p></div>
<div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-04-22t211623212z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p><strong>Policy Uncertainty Is Leading Risk to Financial System, Fed Report Shows</strong></p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">April 22, 2024 05:16 PM EDT</div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Uncertainty is becoming one of the biggest risks to the financial system, overtaking worries about commercial real estate, according to a semi-annual Federal Reserve report assessing the stability of the financial sector.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Nearly three-quarters of finance professionals surveyed by the Federal Reserve viewed persistent inflation and high interest rates as the top risk, just as they did in the previous edition of the survey.<span class="ql-inline-citation" data-cite="1"></span> However, the latest survey showed professionals think “policy uncertainty” is now the next-biggest threat, jumping ahead of commercial and residential real estate risks.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> "Contacts noted several areas of uncertainty including trade policy and other foreign policy issues possibly related to escalating geopolitical tensions," the report said. "They also noted policy uncertainty associated with the U.S. elections in November."
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In addition to the survey results, the report also reviewed other vulnerabilities in the financial system. Another major risk the report identified was elevated valuations of some assets. The report pointed to stocks with price-to-earnings ratios that were near historical highs, while residential real estate pricing was also above fundamental levels.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> “Valuations rose further to levels that were high relative to fundamentals across major asset classes. Equity prices grew faster than expected earnings, pushing the forward price-to-earnings ratio to the upper end of its historical distribution,” the report said.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> However, other areas of the financial sector appeared in good shape. Borrowing by businesses and households was in line with expectations, and domestic banks were sound, with sufficient levels of funding, the report said.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <em>-Terry Lane</em>
</p></div>
<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div></div></div></div>
<div class="comp textnote-placeholder mntl-block" id="textnote-placeholder_1-0"></div>
<div class="comp textnote mm-ads-gpt-adunit gpt textnote" id="textnote_1-0">
<div class="wrapper" id="textnote"></div>
</div>
</div> |
Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you.
Today, the Federal Reserve looks at risks to U.S. financial stability. We also look ahead to a measure of economic growth and additional data on inflation coming later this week.
## **Policy Uncertainty Is Leading Risk to Financial System, Fed Report Shows**
April 22, 2024 05:16 PM EDT
Uncertainty is becoming one of the biggest risks to the financial system, overtaking worries about commercial real estate, according to a semi-annual Federal Reserve report assessing the stability of the financial sector.
Nearly three-quarters of finance professionals surveyed by the Federal Reserve viewed persistent inflation and high interest rates as the top risk, just as they did in the previous edition of the survey. However, the latest survey showed professionals think “policy uncertainty” is now the next-biggest threat, jumping ahead of commercial and residential real estate risks.
"Contacts noted several areas of uncertainty including trade policy and other foreign policy issues possibly related to escalating geopolitical tensions," the report said. "They also noted policy uncertainty associated with the U.S. elections in November."
In addition to the survey results, the report also reviewed other vulnerabilities in the financial system. Another major risk the report identified was elevated valuations of some assets. The report pointed to stocks with price-to-earnings ratios that were near historical highs, while residential real estate pricing was also above fundamental levels.
“Valuations rose further to levels that were high relative to fundamentals across major asset classes. Equity prices grew faster than expected earnings, pushing the forward price-to-earnings ratio to the upper end of its historical distribution,” the report said.
However, other areas of the financial sector appeared in good shape. Borrowing by businesses and households was in line with expectations, and domestic banks were sound, with sufficient levels of funding, the report 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, the Federal Reserve looks at risks to U.S. financial stability. We also look ahead to a measure of economic growth and additional data on inflation coming later this week.
Policy Uncertainty Is Leading Risk to Financial System, Fed Report Shows
April 22, 2024 05:16 PM EDT
Uncertainty is becoming one of the biggest risks to the financial system, overtaking worries about commercial real estate, according to a semi-annual Federal Reserve report assessing the stability of the financial sector.
Nearly three-quarters of finance professionals surveyed by the Federal Reserve viewed persistent inflation and high interest rates as the top risk, just as they did in the previous edition of the survey. However, the latest survey showed professionals think “policy uncertainty” is now the next-biggest threat, jumping ahead of commercial and residential real estate risks.
"Contacts noted several areas of uncertainty including trade policy and other foreign policy issues possibly related to escalating geopolitical tensions," the report said. "They also noted policy uncertainty associated with the U.S. elections in November."
In addition to the survey results, the report also reviewed other vulnerabilities in the financial system. Another major risk the report identified was elevated valuations of some assets. The report pointed to stocks with price-to-earnings ratios that were near historical highs, while residential real estate pricing was also above fundamental levels.
“Valuations rose further to levels that were high relative to fundamentals across major asset classes. Equity prices grew faster than expected earnings, pushing the forward price-to-earnings ratio to the upper end of its historical distribution,” the report said.
However, other areas of the financial sector appeared in good shape. Borrowing by businesses and households was in line with expectations, and domestic banks were sound, with sufficient levels of funding, the report said.
-Terry Lane
| [] |
https://www.investopedia.com/terms/a/abnormalreturn.asp | Abnormal Return: Definition, Causes, Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-abnormal-return"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Abnormal Return? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An abnormal return describes the unusually large profits or losses generated by a given investment or portfolio over a specified period. The performance diverges from the investments' <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expectedreturn.asp">expected</a>, or anticipated, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rate of return</a> (RoR)—the estimated risk-adjusted return based on an asset pricing model, or using a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/longrun.asp">long-run</a> historical average or multiple valuation techniques.
</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"> Returns that are abnormal may simply be anomalous or they may point to something more nefarious such as fraud or manipulation. Abnormal returns should not be confused with "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alpha.asp">alpha</a>" or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/excessreturn.asp">excess returns</a> earned by actively managed investments.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>An abnormal return is one that deviates from an investment's expected return.</li><li>The presence of abnormal returns, which can be either positive or negative in direction, helps investors determine risk-adjusted performance.</li><li>Abnormal returns can be produced by chance, due to some external or unforeseen event, or as the result of bad actors.</li><li>A cumulative abnormal return (CAR) is the sum total of all abnormal returns and can be used to measure the effect lawsuits, buyouts, and other events have on stock prices.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-abnormal-returns"></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 Abnormal Returns </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Abnormal returns are essential in determining a security or portfolio's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskadjustedreturn.asp">risk-adjusted performance</a> when compared to the overall market or a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark index</a>. Abnormal returns could help to identify a portfolio manager's skill on a risk-adjusted basis. It will also illustrate whether investors received adequate compensation for the amount of investment risk assumed.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> An abnormal return can be either positive or negative. The figure is merely a summary of how the actual returns differ from the predicted yield. For example, earning 30% in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual fund</a> that is expected to average 10% per year would create a positive abnormal return of 20%. If, on the other hand, in this same example, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/actualreturn.asp">actual return</a> was 5%, this would generate a negative abnormal return of 5%.
</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>The abnormal return is calculated by subtracting the expected return from the realized return and may be positive or negative.</p></div></div></div>
<span class="heading-toc" id="toc-cumulative-abnormal-return-car"></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"> Cumulative Abnormal Return (CAR) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Cumulative abnormal return (CAR) is the total of all abnormal returns. Usually, the calculation of cumulative abnormal return happens over a small window of time, often only days. This short duration is because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://pdfs.semanticscholar.org/302a/a5b66054c0d8b954f71f7d0dcf5061fe03b7.pdf">evidence has shown</a> that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a> daily abnormal returns can create bias in the results.
</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"> Cumulative abnormal return (CAR) is used to measure the effect lawsuits, buyouts, and other events have on stock prices and is also useful for determining the accuracy of asset pricing models in predicting the expected performance.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM) is a framework used to calculate a security or portfolio's expected return based on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-freerate.asp">risk-free rate of return</a>, beta, and the expected market return. After the calculation of a security or portfolio's expected return, the estimate for the abnormal return is calculated by subtracting the expected return from the realized return.
</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-abnormal-returns"></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 Abnormal Returns </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> An investor holds a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> of securities and wishes to calculate the portfolio's abnormal return during the previous year. Assume that the risk-free rate of return is 2% and the benchmark index has an expected return of 15%.
</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 investor's portfolio returned 25% and had a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">beta</a> of 1.25 when measured against the benchmark index. Therefore, given the amount of risk assumed, the portfolio should have returned 18.25%, or (2% + 1.25 x (15% - 2%)). Consequently, the abnormal return during the previous year was 6.75% or 25 - 18.25%.
</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 same calculations can be helpful for a stock holding. For example, stock ABC returned 9% and had a beta of 2, when measured against its benchmark index. Consider that the risk-free rate of return is 5% and the benchmark index has an expected return of 12%. Based on the CAPM, stock ABC has an expected return of 19%. Therefore, stock ABC had an abnormal return of -10% and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underperform.asp">underperformed</a> the market during this period.
</p></div> | ## What Is an Abnormal Return?
An abnormal return describes the unusually large profits or losses generated by a given investment or portfolio over a specified period. The performance diverges from the investments' [expected](https://www.investopedia.com/terms/e/expectedreturn.asp), or anticipated, [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) (RoR)—the estimated risk-adjusted return based on an asset pricing model, or using a [long-run](https://www.investopedia.com/terms/l/longrun.asp) historical average or multiple valuation techniques.
Returns that are abnormal may simply be anomalous or they may point to something more nefarious such as fraud or manipulation. Abnormal returns should not be confused with "[alpha](https://www.investopedia.com/terms/a/alpha.asp)" or [excess returns](https://www.investopedia.com/terms/e/excessreturn.asp) earned by actively managed investments.
### Key Takeaways
* An abnormal return is one that deviates from an investment's expected return.
* The presence of abnormal returns, which can be either positive or negative in direction, helps investors determine risk-adjusted performance.
* Abnormal returns can be produced by chance, due to some external or unforeseen event, or as the result of bad actors.
* A cumulative abnormal return (CAR) is the sum total of all abnormal returns and can be used to measure the effect lawsuits, buyouts, and other events have on stock prices.
## Understanding Abnormal Returns
Abnormal returns are essential in determining a security or portfolio's [risk-adjusted performance](https://www.investopedia.com/terms/r/riskadjustedreturn.asp) when compared to the overall market or a [benchmark index](https://www.investopedia.com/terms/b/benchmark.asp). Abnormal returns could help to identify a portfolio manager's skill on a risk-adjusted basis. It will also illustrate whether investors received adequate compensation for the amount of investment risk assumed.
An abnormal return can be either positive or negative. The figure is merely a summary of how the actual returns differ from the predicted yield. For example, earning 30% in a [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) that is expected to average 10% per year would create a positive abnormal return of 20%. If, on the other hand, in this same example, the [actual return](https://www.investopedia.com/terms/a/actualreturn.asp) was 5%, this would generate a negative abnormal return of 5%.
###
The abnormal return is calculated by subtracting the expected return from the realized return and may be positive or negative.
## Cumulative Abnormal Return (CAR)
Cumulative abnormal return (CAR) is the total of all abnormal returns. Usually, the calculation of cumulative abnormal return happens over a small window of time, often only days. This short duration is because [evidence has shown](https://pdfs.semanticscholar.org/302a/a5b66054c0d8b954f71f7d0dcf5061fe03b7.pdf) that [compounding](https://www.investopedia.com/terms/c/compounding.asp) daily abnormal returns can create bias in the results.
Cumulative abnormal return (CAR) is used to measure the effect lawsuits, buyouts, and other events have on stock prices and is also useful for determining the accuracy of asset pricing models in predicting the expected performance.
The [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM) is a framework used to calculate a security or portfolio's expected return based on the [risk-free rate of return](https://www.investopedia.com/terms/r/risk-freerate.asp), beta, and the expected market return. After the calculation of a security or portfolio's expected return, the estimate for the abnormal return is calculated by subtracting the expected return from the realized return.
## Example of Abnormal Returns
An investor holds a [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) of securities and wishes to calculate the portfolio's abnormal return during the previous year. Assume that the risk-free rate of return is 2% and the benchmark index has an expected return of 15%.
The investor's portfolio returned 25% and had a [beta](https://www.investopedia.com/terms/b/beta.asp) of 1.25 when measured against the benchmark index. Therefore, given the amount of risk assumed, the portfolio should have returned 18.25%, or (2% + 1.25 x (15% - 2%)). Consequently, the abnormal return during the previous year was 6.75% or 25 - 18.25%.
The same calculations can be helpful for a stock holding. For example, stock ABC returned 9% and had a beta of 2, when measured against its benchmark index. Consider that the risk-free rate of return is 5% and the benchmark index has an expected return of 12%. Based on the CAPM, stock ABC has an expected return of 19%. Therefore, stock ABC had an abnormal return of -10% and [underperformed](https://www.investopedia.com/terms/u/underperform.asp) the market during this period.
| What Is an Abnormal Return?
An abnormal return describes the unusually large profits or losses generated by a given investment or portfolio over a specified period. The performance diverges from the investments' expected, or anticipated, rate of return (RoR)—the estimated risk-adjusted return based on an asset pricing model, or using a long-run historical average or multiple valuation techniques.
Returns that are abnormal may simply be anomalous or they may point to something more nefarious such as fraud or manipulation. Abnormal returns should not be confused with "alpha" or excess returns earned by actively managed investments.
Key Takeaways
An abnormal return is one that deviates from an investment's expected return.The presence of abnormal returns, which can be either positive or negative in direction, helps investors determine risk-adjusted performance.Abnormal returns can be produced by chance, due to some external or unforeseen event, or as the result of bad actors.A cumulative abnormal return (CAR) is the sum total of all abnormal returns and can be used to measure the effect lawsuits, buyouts, and other events have on stock prices.
Understanding Abnormal Returns
Abnormal returns are essential in determining a security or portfolio's risk-adjusted performance when compared to the overall market or a benchmark index. Abnormal returns could help to identify a portfolio manager's skill on a risk-adjusted basis. It will also illustrate whether investors received adequate compensation for the amount of investment risk assumed.
An abnormal return can be either positive or negative. The figure is merely a summary of how the actual returns differ from the predicted yield. For example, earning 30% in a mutual fund that is expected to average 10% per year would create a positive abnormal return of 20%. If, on the other hand, in this same example, the actual return was 5%, this would generate a negative abnormal return of 5%.
The abnormal return is calculated by subtracting the expected return from the realized return and may be positive or negative.
Cumulative Abnormal Return (CAR)
Cumulative abnormal return (CAR) is the total of all abnormal returns. Usually, the calculation of cumulative abnormal return happens over a small window of time, often only days. This short duration is because evidence has shown that compounding daily abnormal returns can create bias in the results.
Cumulative abnormal return (CAR) is used to measure the effect lawsuits, buyouts, and other events have on stock prices and is also useful for determining the accuracy of asset pricing models in predicting the expected performance.
The capital asset pricing model (CAPM) is a framework used to calculate a security or portfolio's expected return based on the risk-free rate of return, beta, and the expected market return. After the calculation of a security or portfolio's expected return, the estimate for the abnormal return is calculated by subtracting the expected return from the realized return.
Example of Abnormal Returns
An investor holds a portfolio of securities and wishes to calculate the portfolio's abnormal return during the previous year. Assume that the risk-free rate of return is 2% and the benchmark index has an expected return of 15%.
The investor's portfolio returned 25% and had a beta of 1.25 when measured against the benchmark index. Therefore, given the amount of risk assumed, the portfolio should have returned 18.25%, or (2% + 1.25 x (15% - 2%)). Consequently, the abnormal return during the previous year was 6.75% or 25 - 18.25%.
The same calculations can be helpful for a stock holding. For example, stock ABC returned 9% and had a beta of 2, when measured against its benchmark index. Consider that the risk-free rate of return is 5% and the benchmark index has an expected return of 12%. Based on the CAPM, stock ABC has an expected return of 19%. Therefore, stock ABC had an abnormal return of -10% and underperformed the market during this period.
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] |
https://www.investopedia.com/reddit-stock-soars-after-company-inks-partnership-with-chatgpt-owner-openai-8649996 | Reddit Stock Soars After Company Inks Partnership With ChatGPT Owner OpenAI | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Reddit shares soared nearly 12% in extended trading on Thursday after the social media company announced a partnership with ChatGPT owner OpenAI.</li><li>Under the partnership, Reddit will give OpenAI access to its API to train AI models in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators.</li><li>The deal indicates Reddit is continuing its efforts to diversify revenue outside its traditional advertising business.</li><li>A volume-backed breakout in Reddit shares above their record high at $74.90 opens the door for the stock to test higher price levels.</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"> Reddit (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt">RDDT</a>) shares soared nearly 12% in extended-hours trading Thursday after the company announced a partnership with OpenAI that allows the ChatGPT owner to train its <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> models using the news aggregation social network’s content.<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"> Reddit will give OpenAI access to its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/application-programming-interface.asp">application programming interface (API)</a>, which provides access to its real-time, structured, and unique content, in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators. In addition, Reddit will also add OpenAI as an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/050815/trends-and-growth-digital-advertising-industry.asp#:~:text=Digital%20advertising%20is%20a%20sales,consumers%20to%20buy%20a%20product.">advertising partner</a>.
</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"> “Reddit has become one of the internet’s largest open archives of authentic, relevant, and always-up-to-date human conversations about anything and everything,” Reddit CEO Steve Huffman said in a statement released late Thursday. “Including it in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-apple-nvidia-and-others-could-benefit-from-openai-new-ai-model-gpt-4o-8648151">ChatGPT</a> upholds our belief in a connected internet, helps people find more or what they’re looking for, and helps new audiences find community on Reddit,” he added.<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"> Reddit struck a similar deal with Google earlier this year in which it allowed the internet search giant’s AI models, such as Gemini, to make its content available for training via the platform’s API.<span class="ql-inline-citation" data-cite="2"></span> Investors reacted warmly to the latest licensing partnership announced Thursday as it indicates the social media company continues to diversify <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-the-implications-of-a-partnership-between-openai-and-apple-would-be-8647392">revenue</a> outside its traditional advertising business.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> OpenAI co-founder and CEO Sam Altman is no stranger to Reddit. In 2014, he led the social media company’s $50 million <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/series-b-financing.asp">Series B</a> funding round, while investing an additional $60 million over two <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp">financing rounds</a> at the height of the pandemic-era tech rally. Altman also sat on the company’s board until 2022 and has a major shareholding in the stock valued at around $750 million after Thursday’s post market jump.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="2"></span>
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<span class="heading-toc" id="toc-monitor-this-key-price-level-amid-news-driven-buying"></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"> Monitor This Key Price Level Amid News-Driven Buying </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Reddit shares jumped out of the gate after listing in late March but quickly ran into selling pressure after more than doubling from their $34 <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> price. From mid-April, the stock started to make a V-shaped recovery after forming a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullishengulfingpattern.asp">bullish engulfing pattern</a> in the high $30s/low $40s.
</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"> Amid further upside after the OpenAI partnership, investors should keep a close eye on the stock’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/record_high.asp#:~:text=A%20record%20high%20is%20the,last%20record%20high%20is%20exceeded.">record high</a> at $74.90. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/02/010702.asp">volume</a>-backed breakout above this closely watched chart area opens the door for the shares to move into uncharted waters and test higher price levels.
</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"> Reddit rose 11.7% to $63.00 in after-hours trading.
</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"> <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_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <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
* Reddit shares soared nearly 12% in extended trading on Thursday after the social media company announced a partnership with ChatGPT owner OpenAI.
* Under the partnership, Reddit will give OpenAI access to its API to train AI models in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators.
* The deal indicates Reddit is continuing its efforts to diversify revenue outside its traditional advertising business.
* A volume-backed breakout in Reddit shares above their record high at $74.90 opens the door for the stock to test higher price levels.
Reddit ([RDDT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt)) shares soared nearly 12% in extended-hours trading Thursday after the company announced a partnership with OpenAI that allows the ChatGPT owner to train its [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) models using the news aggregation social network’s content.
Reddit will give OpenAI access to its [application programming interface (API)](https://www.investopedia.com/terms/a/application-programming-interface.asp), which provides access to its real-time, structured, and unique content, in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators. In addition, Reddit will also add OpenAI as an [advertising partner](https://www.investopedia.com/articles/investing/050815/trends-and-growth-digital-advertising-industry.asp#:~:text=Digital%20advertising%20is%20a%20sales,consumers%20to%20buy%20a%20product.).
“Reddit has become one of the internet’s largest open archives of authentic, relevant, and always-up-to-date human conversations about anything and everything,” Reddit CEO Steve Huffman said in a statement released late Thursday. “Including it in [ChatGPT](https://www.investopedia.com/how-apple-nvidia-and-others-could-benefit-from-openai-new-ai-model-gpt-4o-8648151) upholds our belief in a connected internet, helps people find more or what they’re looking for, and helps new audiences find community on Reddit,” he added.
Reddit struck a similar deal with Google earlier this year in which it allowed the internet search giant’s AI models, such as Gemini, to make its content available for training via the platform’s API. Investors reacted warmly to the latest licensing partnership announced Thursday as it indicates the social media company continues to diversify [revenue](https://www.investopedia.com/what-the-implications-of-a-partnership-between-openai-and-apple-would-be-8647392) outside its traditional advertising business.
OpenAI co-founder and CEO Sam Altman is no stranger to Reddit. In 2014, he led the social media company’s $50 million [Series B](https://www.investopedia.com/terms/s/series-b-financing.asp) funding round, while investing an additional $60 million over two [financing rounds](https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp) at the height of the pandemic-era tech rally. Altman also sat on the company’s board until 2022 and has a major shareholding in the stock valued at around $750 million after Thursday’s post market jump.
## Monitor This Key Price Level Amid News-Driven Buying
Reddit shares jumped out of the gate after listing in late March but quickly ran into selling pressure after more than doubling from their $34 [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) price. From mid-April, the stock started to make a V-shaped recovery after forming a [bullish engulfing pattern](https://www.investopedia.com/terms/b/bullishengulfingpattern.asp) in the high $30s/low $40s.
Amid further upside after the OpenAI partnership, investors should keep a close eye on the stock’s [record high](https://www.investopedia.com/terms/r/record_high.asp#:~:text=A%20record%20high%20is%20the,last%20record%20high%20is%20exceeded.) at $74.90. A [volume](https://www.investopedia.com/articles/technical/02/010702.asp)-backed breakout above this closely watched chart area opens the door for the shares to move into uncharted waters and test higher price levels.
Reddit rose 11.7% to $63.00 in after-hours trading.
*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
Reddit shares soared nearly 12% in extended trading on Thursday after the social media company announced a partnership with ChatGPT owner OpenAI.Under the partnership, Reddit will give OpenAI access to its API to train AI models in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators.The deal indicates Reddit is continuing its efforts to diversify revenue outside its traditional advertising business.A volume-backed breakout in Reddit shares above their record high at $74.90 opens the door for the stock to test higher price levels.
Reddit (RDDT) shares soared nearly 12% in extended-hours trading Thursday after the company announced a partnership with OpenAI that allows the ChatGPT owner to train its artificial intelligence (AI) models using the news aggregation social network’s content.
Reddit will give OpenAI access to its application programming interface (API), which provides access to its real-time, structured, and unique content, in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators. In addition, Reddit will also add OpenAI as an advertising partner.
“Reddit has become one of the internet’s largest open archives of authentic, relevant, and always-up-to-date human conversations about anything and everything,” Reddit CEO Steve Huffman said in a statement released late Thursday. “Including it in ChatGPT upholds our belief in a connected internet, helps people find more or what they’re looking for, and helps new audiences find community on Reddit,” he added.
Reddit struck a similar deal with Google earlier this year in which it allowed the internet search giant’s AI models, such as Gemini, to make its content available for training via the platform’s API. Investors reacted warmly to the latest licensing partnership announced Thursday as it indicates the social media company continues to diversify revenue outside its traditional advertising business.
OpenAI co-founder and CEO Sam Altman is no stranger to Reddit. In 2014, he led the social media company’s $50 million Series B funding round, while investing an additional $60 million over two financing rounds at the height of the pandemic-era tech rally. Altman also sat on the company’s board until 2022 and has a major shareholding in the stock valued at around $750 million after Thursday’s post market jump.
Monitor This Key Price Level Amid News-Driven Buying
Reddit shares jumped out of the gate after listing in late March but quickly ran into selling pressure after more than doubling from their $34 initial public offering (IPO) price. From mid-April, the stock started to make a V-shaped recovery after forming a bullish engulfing pattern in the high $30s/low $40s.
Amid further upside after the OpenAI partnership, investors should keep a close eye on the stock’s record high at $74.90. A volume-backed breakout above this closely watched chart area opens the door for the shares to move into uncharted waters and test higher price levels.
Reddit rose 11.7% to $63.00 in after-hours trading.
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? Please email us at
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https://www.investopedia.com/chipotle-stock-jumps-after-announcing-stock-split-8611493 | Chipotle Stock Jumps After Announcing 50-for-1 Stock Split—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>Chipotle Mexican Grill shares were sharply higher in premarket trading Wednesday after the restaurant chain operator announced a 50-for-1 stock split.</li><li>The company said it will seek shareholder approval for the split at its annual meeting on June 6.</li><li>Chipotle also plans to offer a special one-time equity grant for restaurant general managers and employees with more than 20 years of service.</li><li>The Chipotle Mexican Grill share price may find support from buy-the-dip investors near a five-month trendline.</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"> Chipotle Mexican Grill (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=cmg">CMG</a>) jumped in premarket trading Wednesday after the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/020515/fast-food-versus-fast-casual.asp">fast casual</a> restaurant chain operator announced that its board has approved a 50-for-1 <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stocksplit.asp">stock split</a> to make its shares more accessible to staff and a broader range of investors.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The Newport Beach, California-based company said late Tuesday it will seek <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/03/070303.asp">shareholder</a> approval for the split, the first in the Mexican restaurant chain’s 30-year history, at its annual meeting slated for June 6.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> If successful, shareholders will receive an additional 49 share for each Chipotle share held as of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recorddate.asp">record date</a> June 18, with the extra shares distributed after the closing bell on June 25. Shares are slated to begin trading on a post-split basis the following day.
</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"> Based on the stock’s Tuesday closing price of $2,797.56, the split would place the shares around $55.95 each. Chipotle shares, which have gained about 75% over the past 12 months, were up 6.7% at $2,985.00 three hours before Wednesday's opening bell.
</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 addition to the split, the company said it plans to offer a special one-time equity grant—a type of incentivized <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equity-compensation.asp">stock compensation</a>—for restaurant general managers and employees with more than 20 years of service.
</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"> “(T)his will make our stock more accessible to employees as well as a broader range of investors,” Chipotle <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfo.asp">Chief Financial Officer (CFO)</a> Jack Hartung said in a press release. "This split comes at a time when our stock is experiencing an all-time high driven by record revenues, profits, and growth," he added.<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"> In the fourth quarter, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chipotle-stock-surges-to-a-fresh-record-as-higher-prices-and-foot-traffic-boost-earnings-8563840">Chipotle reported</a> a 15.4% jump in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a> from a year earlier while its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20equals%20profits%2C%20increases,the%20sale%20of%20an%20asset.">adjusted profit</a> in the period grew 25%, boosted by strong demand for its burrito and rice bowl menu options.<span class="ql-inline-citation" data-cite="2"></span> For 2024, Chipotle anticipates <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/samestoresales.asp">same-store sales</a> percentage growth in the mid-single digits.
</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"> Since a retracement to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/013015/why-200-simple-moving-average-sma-so-common-traders-and-analysts.asp">200-day moving average</a>, the Chipotle share price has trended sharply higher, with today’s projected opening price placing the stock at a new <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/record_high.asp#:~:text=A%20record%20high%20is%20the,last%20record%20high%20is%20exceeded.">record high</a>. If the shares continue to climb, look for the price to keep making higher highs and higher lows to confirm the upward momentum. During periods of profit taking, monitor a trendline extending back to the mid-October low last year as a potential area on the chart where investors may look for <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buy-the-dips.asp">buy-the-dip</a> opportunities.<br/>
</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"> <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_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <em>As of the date this article was written, the author does not own any of the above securities.</em><br>
</br></p>
<div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div>
<a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div> | ### Key Takeaways
* Chipotle Mexican Grill shares were sharply higher in premarket trading Wednesday after the restaurant chain operator announced a 50-for-1 stock split.
* The company said it will seek shareholder approval for the split at its annual meeting on June 6.
* Chipotle also plans to offer a special one-time equity grant for restaurant general managers and employees with more than 20 years of service.
* The Chipotle Mexican Grill share price may find support from buy-the-dip investors near a five-month trendline.
Chipotle Mexican Grill ([CMG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=cmg)) jumped in premarket trading Wednesday after the [fast casual](https://www.investopedia.com/articles/investing/020515/fast-food-versus-fast-casual.asp) restaurant chain operator announced that its board has approved a 50-for-1 [stock split](https://www.investopedia.com/terms/s/stocksplit.asp) to make its shares more accessible to staff and a broader range of investors.
The Newport Beach, California-based company said late Tuesday it will seek [shareholder](https://www.investopedia.com/ask/answers/03/070303.asp) approval for the split, the first in the Mexican restaurant chain’s 30-year history, at its annual meeting slated for June 6.
If successful, shareholders will receive an additional 49 share for each Chipotle share held as of [record date](https://www.investopedia.com/terms/r/recorddate.asp) June 18, with the extra shares distributed after the closing bell on June 25. Shares are slated to begin trading on a post-split basis the following day.
Based on the stock’s Tuesday closing price of $2,797.56, the split would place the shares around $55.95 each. Chipotle shares, which have gained about 75% over the past 12 months, were up 6.7% at $2,985.00 three hours before Wednesday's opening bell.
In addition to the split, the company said it plans to offer a special one-time equity grant—a type of incentivized [stock compensation](https://www.investopedia.com/terms/e/equity-compensation.asp)—for restaurant general managers and employees with more than 20 years of service.
“(T)his will make our stock more accessible to employees as well as a broader range of investors,” Chipotle [Chief Financial Officer (CFO)](https://www.investopedia.com/terms/c/cfo.asp) Jack Hartung said in a press release. "This split comes at a time when our stock is experiencing an all-time high driven by record revenues, profits, and growth," he added.
In the fourth quarter, [Chipotle reported](https://www.investopedia.com/chipotle-stock-surges-to-a-fresh-record-as-higher-prices-and-foot-traffic-boost-earnings-8563840) a 15.4% jump in [revenue](https://www.investopedia.com/terms/r/revenue.asp) from a year earlier while its [adjusted profit](https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20equals%20profits%2C%20increases,the%20sale%20of%20an%20asset.) in the period grew 25%, boosted by strong demand for its burrito and rice bowl menu options. For 2024, Chipotle anticipates [same-store sales](https://www.investopedia.com/terms/s/samestoresales.asp) percentage growth in the mid-single digits.
Since a retracement to the [200-day moving average](https://www.investopedia.com/ask/answers/013015/why-200-simple-moving-average-sma-so-common-traders-and-analysts.asp), the Chipotle share price has trended sharply higher, with today’s projected opening price placing the stock at a new [record high](https://www.investopedia.com/terms/r/record_high.asp#:~:text=A%20record%20high%20is%20the,last%20record%20high%20is%20exceeded.). If the shares continue to climb, look for the price to keep making higher highs and higher lows to confirm the upward momentum. During periods of profit taking, monitor a trendline extending back to the mid-October low last year as a potential area on the chart where investors may look for [buy-the-dip](https://www.investopedia.com/terms/b/buy-the-dips.asp) opportunities.
*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
Chipotle Mexican Grill shares were sharply higher in premarket trading Wednesday after the restaurant chain operator announced a 50-for-1 stock split.The company said it will seek shareholder approval for the split at its annual meeting on June 6.Chipotle also plans to offer a special one-time equity grant for restaurant general managers and employees with more than 20 years of service.The Chipotle Mexican Grill share price may find support from buy-the-dip investors near a five-month trendline.
Chipotle Mexican Grill (CMG) jumped in premarket trading Wednesday after the fast casual restaurant chain operator announced that its board has approved a 50-for-1 stock split to make its shares more accessible to staff and a broader range of investors.
The Newport Beach, California-based company said late Tuesday it will seek shareholder approval for the split, the first in the Mexican restaurant chain’s 30-year history, at its annual meeting slated for June 6.
If successful, shareholders will receive an additional 49 share for each Chipotle share held as of record date June 18, with the extra shares distributed after the closing bell on June 25. Shares are slated to begin trading on a post-split basis the following day.
Based on the stock’s Tuesday closing price of $2,797.56, the split would place the shares around $55.95 each. Chipotle shares, which have gained about 75% over the past 12 months, were up 6.7% at $2,985.00 three hours before Wednesday's opening bell.
In addition to the split, the company said it plans to offer a special one-time equity grant—a type of incentivized stock compensation—for restaurant general managers and employees with more than 20 years of service.
“(T)his will make our stock more accessible to employees as well as a broader range of investors,” Chipotle Chief Financial Officer (CFO) Jack Hartung said in a press release. "This split comes at a time when our stock is experiencing an all-time high driven by record revenues, profits, and growth," he added.
In the fourth quarter, Chipotle reported a 15.4% jump in revenue from a year earlier while its adjusted profit in the period grew 25%, boosted by strong demand for its burrito and rice bowl menu options. For 2024, Chipotle anticipates same-store sales percentage growth in the mid-single digits.
Since a retracement to the 200-day moving average, the Chipotle share price has trended sharply higher, with today’s projected opening price placing the stock at a new record high. If the shares continue to climb, look for the price to keep making higher highs and higher lows to confirm the upward momentum. During periods of profit taking, monitor a trendline extending back to the mid-October low last year as a potential area on the chart where investors may look for buy-the-dip opportunities.
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? Please email us at
[email protected] | [
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https://www.investopedia.com/meta-salesforce-and-booking-help-drive-usd16b-rise-in-us-dividend-payouts-in-q1-8623804 | Meta, Salesforce, and Booking Help Drive $16B Rise in US Dividend Payouts in Q1 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Dividend payouts in the U.S. rose by a net $16 billion in the first quarter of 2024, S&P Dow Jones Indices reported.</li><li>Nearly one-third (31.6%) of the $16 billion increase was driven by three large-caps, Meta, Salesforce, and Booking Holdings.</li><li>S&P Dow Jones Indices said "large caps appear to be weathering uncertainty and volatility better," amid concerns about the economy and interest rates.<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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">Dividend</a> payouts rose by a net $16 billion in the first quarter of 2024, boosted by Meta (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=META">META</a>), Salesforce (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CRM">CRM</a>), and Booking Holdings (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BKNG">BKNG</a>) initiating multi-billion dollar dividend payouts, S&P Dow Jones Indices reported.<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"> There were $22.7 billion worth of dividend hikes in the first quarter, up from $17.5 billion the quarter prior. Those gains more than offset dividend decreases of $6.7 billion in the first quarter, after $3.9 billion in reductions in the fourth quarter of 2023.
</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"> Much of the dividend growth was driven by a few <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/large-cap.asp">large-caps</a> as Meta, Salesforce, and Booking Holdings initiated their first dividends. Together, the three companies' dividends accounted for nearly one-third (31.6%) of the $16 billion increase in the first quarter of 2024.
</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"> "S&P 500 large caps appear to be weathering uncertainty and volatility better," S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt said, noting that concerns about the economy and interest rates could hold back the size of dividend hikes through the rest of the year.
</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"> While the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve</a> has <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-keeps-interest-rate-unchanged-at-22-year-high-but-signals-cuts-next-year-8414895">signaled</a> there could be interest rate cuts in 2024, policymakers also suggested more reports showing cooling inflation <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/latest-inflation-data-leaves-fed-in-wait-and-see-mode-powell-says-8622304">would be needed</a> before they would cut rates.
</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"> S&P Dow Jones Indices said it expects the S&P 500 index could post a 6% increase in dividend payments for 2024, up from a 5.1% gain in 2023, but down from the 10.8% rise seen in 2022.<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
* Dividend payouts in the U.S. rose by a net $16 billion in the first quarter of 2024, S&P Dow Jones Indices reported.
* Nearly one-third (31.6%) of the $16 billion increase was driven by three large-caps, Meta, Salesforce, and Booking Holdings.
* S&P Dow Jones Indices said "large caps appear to be weathering uncertainty and volatility better," amid concerns about the economy and interest rates.
[Dividend](https://www.investopedia.com/terms/d/dividend.asp) payouts rose by a net $16 billion in the first quarter of 2024, boosted by Meta ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META)), Salesforce ([CRM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CRM)), and Booking Holdings ([BKNG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BKNG)) initiating multi-billion dollar dividend payouts, S&P Dow Jones Indices reported.
There were $22.7 billion worth of dividend hikes in the first quarter, up from $17.5 billion the quarter prior. Those gains more than offset dividend decreases of $6.7 billion in the first quarter, after $3.9 billion in reductions in the fourth quarter of 2023.
Much of the dividend growth was driven by a few [large-caps](https://www.investopedia.com/terms/l/large-cap.asp) as Meta, Salesforce, and Booking Holdings initiated their first dividends. Together, the three companies' dividends accounted for nearly one-third (31.6%) of the $16 billion increase in the first quarter of 2024.
"S&P 500 large caps appear to be weathering uncertainty and volatility better," S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt said, noting that concerns about the economy and interest rates could hold back the size of dividend hikes through the rest of the year.
While the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) has [signaled](https://www.investopedia.com/fed-keeps-interest-rate-unchanged-at-22-year-high-but-signals-cuts-next-year-8414895) there could be interest rate cuts in 2024, policymakers also suggested more reports showing cooling inflation [would be needed](https://www.investopedia.com/latest-inflation-data-leaves-fed-in-wait-and-see-mode-powell-says-8622304) before they would cut rates.
S&P Dow Jones Indices said it expects the S&P 500 index could post a 6% increase in dividend payments for 2024, up from a 5.1% gain in 2023, but down from the 10.8% rise seen in 2022.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Dividend payouts in the U.S. rose by a net $16 billion in the first quarter of 2024, S&P Dow Jones Indices reported.Nearly one-third (31.6%) of the $16 billion increase was driven by three large-caps, Meta, Salesforce, and Booking Holdings.S&P Dow Jones Indices said "large caps appear to be weathering uncertainty and volatility better," amid concerns about the economy and interest rates.
Dividend payouts rose by a net $16 billion in the first quarter of 2024, boosted by Meta (META), Salesforce (CRM), and Booking Holdings (BKNG) initiating multi-billion dollar dividend payouts, S&P Dow Jones Indices reported.
There were $22.7 billion worth of dividend hikes in the first quarter, up from $17.5 billion the quarter prior. Those gains more than offset dividend decreases of $6.7 billion in the first quarter, after $3.9 billion in reductions in the fourth quarter of 2023.
Much of the dividend growth was driven by a few large-caps as Meta, Salesforce, and Booking Holdings initiated their first dividends. Together, the three companies' dividends accounted for nearly one-third (31.6%) of the $16 billion increase in the first quarter of 2024.
"S&P 500 large caps appear to be weathering uncertainty and volatility better," S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt said, noting that concerns about the economy and interest rates could hold back the size of dividend hikes through the rest of the year.
While the Federal Reserve has signaled there could be interest rate cuts in 2024, policymakers also suggested more reports showing cooling inflation would be needed before they would cut rates.
S&P Dow Jones Indices said it expects the S&P 500 index could post a 6% increase in dividend payments for 2024, up from a 5.1% gain in 2023, but down from the 10.8% rise seen in 2022.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/investing-strategy-quiz-8549450 | Quiz: What's Your Investing Strategy? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 is no one-size-fits-all way to invest. However, there are some key indicators that one strategy may suit you better than another, depending on your feelings around risk tolerance, and your particular financial goals, level of knowledge, and time horizon. If you're new to investing or simply revising your strategy, this quiz may give you a place to start.
</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-digiohembed" id="mntl-sc-block_3-0"> <div class="mntl-sc-block-digiohembed__container" data-guid="lightbox-inline-form-b8053c43-87c0-42ee-b7ee-c5f6b40224b6" data-title="What's Your Investing Strategy?" id="lightbox-inline-form-b8053c43-87c0-42ee-b7ee-c5f6b40224b6">
</div>
</div>
<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-what-is-an-investment-strategy"></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 An Investment Strategy? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Your personal<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentstrategy.asp"> investment strategy </a>refers to the guiding principles you rely on to achieve financial and investment goals. Different investors follow different strategies, varying from conservative to aggressive, depending on a variety of factors, including, but not limited to:
</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>Age</li><li>Goals</li><li>Geography</li><li>Time horizon</li><li>Financial situation</li><li>Risk tolerance</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"> These factors help investors determine the kind of investments researched and ultimately purchased.
</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-know-your-risk-tolerance"></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"> Know Your Risk Tolerance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Risk, aka how much you can stand to possibly lose, is a huge component of an investment strategy. Some individuals have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">high tolerance for risk,</a> while other investors are risk-averse.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> People who are more open to risk, or have a greater investment horizon, tend to employ <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aggressiveinvestmentstrategy.asp">aggressive plans</a> because they have a longer timeline, while those who primarily want to preserve capital are more likely to take a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conservativeinvesting.asp">conservative approach</a>. It comes down to personal preference, too.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<span class="heading-toc" id="toc-how-to-create-an-investment-strategy"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> How to Create an Investment Strategy </span> </h2>
<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"> 1. Write It Down </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Once you have an idea of what strategy you want to adopt, write down your process and how you’re going to get there.
</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"> 2. Believe in Your Plan </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Your unique knowledge, through research and experience, is your competitive advantage. Use it regularly within your investment strategy.
</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"> 3. Make It Resilient </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Good investment managers know where portfolio performance comes from and can explain not only their strategy's strengths but also its weaknesses. This will allow you to maintain confidence, invest with conviction, and find alternative moves that complement your own.
</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"> 4. Measure It </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Develop a benchmark that matches your financial goals, which in turn, should match your strategy. Do this by setting a target return percentage or comparing your results to a passive market index, such as the S&P 500.
</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_1-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>You can have a mix of strategies, and that's OK! It's also important to note that your financial situation and goals can, and will, change. When they do, review and adjust your investment strategy accordingly. </p></div></div></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"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/10/creating-a-better-investment-strategy.asp">investment strategy</a> is a plan designed to help individual investors achieve their financial and investment goals. When choosing from a conservative, moderate, or aggressive strategy, you should think about your age, capital, risk tolerance, and goals. As your personal situation changes, you should reevaluate your investment strategy and readjust accordingly.<br/>
</p></div> | There is no one-size-fits-all way to invest. However, there are some key indicators that one strategy may suit you better than another, depending on your feelings around risk tolerance, and your particular financial goals, level of knowledge, and time horizon. If you're new to investing or simply revising your strategy, this quiz may give you a place to start.
## What Is An Investment Strategy?
Your personal [investment strategy](https://www.investopedia.com/terms/i/investmentstrategy.asp) refers to the guiding principles you rely on to achieve financial and investment goals. Different investors follow different strategies, varying from conservative to aggressive, depending on a variety of factors, including, but not limited to:
* Age
* Goals
* Geography
* Time horizon
* Financial situation
* Risk tolerance
These factors help investors determine the kind of investments researched and ultimately purchased.
## Know Your Risk Tolerance
Risk, aka how much you can stand to possibly lose, is a huge component of an investment strategy. Some individuals have a [high tolerance for risk,](https://www.investopedia.com/terms/r/risktolerance.asp) while other investors are risk-averse.
People who are more open to risk, or have a greater investment horizon, tend to employ [aggressive plans](https://www.investopedia.com/terms/a/aggressiveinvestmentstrategy.asp) because they have a longer timeline, while those who primarily want to preserve capital are more likely to take a [conservative approach](https://www.investopedia.com/terms/c/conservativeinvesting.asp). It comes down to personal preference, too.
## How to Create an Investment Strategy
### 1. Write It Down
Once you have an idea of what strategy you want to adopt, write down your process and how you’re going to get there.
### 2. Believe in Your Plan
Your unique knowledge, through research and experience, is your competitive advantage. Use it regularly within your investment strategy.
### 3. Make It Resilient
Good investment managers know where portfolio performance comes from and can explain not only their strategy's strengths but also its weaknesses. This will allow you to maintain confidence, invest with conviction, and find alternative moves that complement your own.
### 4. Measure It
Develop a benchmark that matches your financial goals, which in turn, should match your strategy. Do this by setting a target return percentage or comparing your results to a passive market index, such as the S&P 500.
###
You can have a mix of strategies, and that's OK! It's also important to note that your financial situation and goals can, and will, change. When they do, review and adjust your investment strategy accordingly.
## The Bottom Line
An [investment strategy](https://www.investopedia.com/articles/trading/10/creating-a-better-investment-strategy.asp) is a plan designed to help individual investors achieve their financial and investment goals. When choosing from a conservative, moderate, or aggressive strategy, you should think about your age, capital, risk tolerance, and goals. As your personal situation changes, you should reevaluate your investment strategy and readjust accordingly.
| There is no one-size-fits-all way to invest. However, there are some key indicators that one strategy may suit you better than another, depending on your feelings around risk tolerance, and your particular financial goals, level of knowledge, and time horizon. If you're new to investing or simply revising your strategy, this quiz may give you a place to start.
What Is An Investment Strategy?
Your personal investment strategy refers to the guiding principles you rely on to achieve financial and investment goals. Different investors follow different strategies, varying from conservative to aggressive, depending on a variety of factors, including, but not limited to:
AgeGoalsGeographyTime horizonFinancial situationRisk tolerance
These factors help investors determine the kind of investments researched and ultimately purchased.
Know Your Risk Tolerance
Risk, aka how much you can stand to possibly lose, is a huge component of an investment strategy. Some individuals have a high tolerance for risk, while other investors are risk-averse.
People who are more open to risk, or have a greater investment horizon, tend to employ aggressive plans because they have a longer timeline, while those who primarily want to preserve capital are more likely to take a conservative approach. It comes down to personal preference, too.
How to Create an Investment Strategy
1. Write It Down
Once you have an idea of what strategy you want to adopt, write down your process and how you’re going to get there.
2. Believe in Your Plan
Your unique knowledge, through research and experience, is your competitive advantage. Use it regularly within your investment strategy.
3. Make It Resilient
Good investment managers know where portfolio performance comes from and can explain not only their strategy's strengths but also its weaknesses. This will allow you to maintain confidence, invest with conviction, and find alternative moves that complement your own.
4. Measure It
Develop a benchmark that matches your financial goals, which in turn, should match your strategy. Do this by setting a target return percentage or comparing your results to a passive market index, such as the S&P 500.
You can have a mix of strategies, and that's OK! It's also important to note that your financial situation and goals can, and will, change. When they do, review and adjust your investment strategy accordingly.
The Bottom Line
An investment strategy is a plan designed to help individual investors achieve their financial and investment goals. When choosing from a conservative, moderate, or aggressive strategy, you should think about your age, capital, risk tolerance, and goals. As your personal situation changes, you should reevaluate your investment strategy and readjust accordingly.
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"aggressive plans",
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],
[
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https://www.investopedia.com/tech/whats-environmental-impact-cryptocurrency/ | What's the Environmental Impact of Cryptocurrency? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Cryptocurrency is a virtual currency touted as a way to remove all of the costs incurred between money users and suppliers and put its control into the hands of the people.
</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"> But cryptocurrency requires energy, equipment, internet, and a global networking infrastructure to be useful. Thus, it has a large environmental impact, with some using as much energy as small countries to maintain a blockchain. There are even concerns about cryptocurrency's water footprint. Keep reading to learn more about cryptocurrency's impact on the environment.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining.</li><li>The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities.<span class="ql-inline-citation" data-cite="19"></span></li><li>Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining.<span class="ql-inline-citation" data-cite="17"></span></li><li>Some cryptocurrencies do not use mining, but Bitcoin is unlikely to change its consensus algorithm.</li><li>The traditional financial systems, of which only credit card energy use is available, use about as much energy as a non-proof-of-work blockchain.<span class="ql-inline-citation" data-cite="29"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-cryptocurrency-energy-consumption"></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"> Cryptocurrency Energy Consumption </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> There is no direct way to calculate how much energy is used for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a> and cryptocurrency mining, but the figure can be estimated from the network's hashrate and the consumption by commercially-available mining rigs. For example, the Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin, the most widely-mined cryptocurrency network, uses an estimated 140 Terawatt-hours (TWh) of electricity annually (0.63% of global electricity use) and about 352 TWh of energy (0.22% of global energy production) at the point of production—more than Pakistan and Ukraine, using the latest country energy estimates from 2019.<span class="ql-inline-citation" data-cite="15"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Another estimate by Digiconomist, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/digital-money.asp">cryptocurrency</a> analytics site, placed the figure at 138 Terawatt-hours based on energy consumption through Dec. 11, 2023. This computed to around 773.61 kilowatt-hours of electricity per transaction, the same amount of power consumed by the average American household over 26 days.<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum</a>, the second-largest cryptocurrency network, was estimated to use 0.01 Terawatt-hours of electricity per year, based on energy consumption through Dec. 11, 2023. The average Ethereum transaction required 0.02 kilowatt-hours of electricity.<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>
<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>Thousands of different cryptocurrencies and hundreds of exchanges exist worldwide.<span class="ql-inline-citation" data-cite="13"></span> None of the cryptocurrency energy use reports or calculations account for the energy expended to develop new coins or administer services for them.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The amount of energy consumed by cryptocurrency mining will likely vary over time, assuming that prices and user adoption continue to change. Cryptocurrency mining is a competitive process: as the value of the block reward increases, the incentives to start mining also increase. Higher cryptocurrency prices mean more energy consumed by crypto networks because more people join the mining networks trying to profit from the increases.
</p>
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<span class="heading-toc" id="toc-why-cryptocurrency-mining-requires-energy"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Why Cryptocurrency Mining Requires Energy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks.
</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 way the transaction validation process is designed uses <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nfts-and-the-environment-5220221">large amounts of energy</a>—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.
</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-not-all-cryptocurrencies-use-mining"></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"> Not All Cryptocurrencies Use Mining </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> It's important to point out that not all cryptocurrencies use a system that depends on large amounts of energy to run. Ethereum, Solana, and many others use a system that requires very little energy—their environmental impact adds little to the impact already created by the global networking infrastructure and its daily use.
</p>
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<span class="heading-toc" id="toc-environmental-impacts-of-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"> Environmental Impacts of Cryptocurrency Mining </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Calculating <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-s-climate-impact-6544631">the carbon footprint of cryptocurrency</a> is more complicated. Although fossil fuels are the predominant energy source in most countries where cryptocurrency is mined, miners must seek out the most inexpensive energy sources to remain profitable.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Digiconomist estimates that the Bitcoin network is responsible for about 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman.<span class="ql-inline-citation" data-cite="28"></span> Based on data through December 2022, Ethereum produced an estimated 35.4 million tons of carbon dioxide emissions before dropping to 0.01 million tons following its transition to proof of work.<span class="ql-inline-citation" data-cite="2"></span>
</p>
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<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"> Driving Factors </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Greed and a fear of missing the next gold rush drive Bitcoin and similar cryptocurrencies to use so much energy—these blockchains automatically adjust the mining difficulty according to how powerful the networks are. In other words, the less computing power the network has, the lower the mining difficulty is and the less energy it uses per transaction.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> But because there is a reward for the most and fastest computing power, those who can afford to have flooded the network with energy-hungry machines networked in a way that gives them the upper hand in receiving rewards. This attracts other participants, and the group grows in size and energy use—all because the financial returns can exceed the initial costs. The environmental impacts are always an afterthought when profits and return on investment are involved.
</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"> Countries With the Largest Impact </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Researchers at the University of Cambridge report that most Bitcoin mining occurs in the U.S. (38%), China (21%), and Kazakhstan (12%). According to the Center for Strategic and International Studies, about 76% of the energy consumed in China is generated from coal and crude oil.<span class="ql-inline-citation" data-cite="26"></span><span class="ql-inline-citation" data-cite="22"></span> The U.S. gets most of its electricity by burning fossil fuels, per 2019 data from the EIA.<span class="ql-inline-citation" data-cite="25"></span> Kazakhstan mainly uses fossil fuels.<span class="ql-inline-citation" data-cite="22"></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_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> As a result, three <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092915/5-countries-produce-most-carbon-dioxide-co2.asp">countries heavily dependent on fossil fuels</a> are responsible for around 72% of the world's Bitcoin mining.
</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"> Electronic Waste </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Cryptocurrency mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. This is especially true for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asic.asp">Application-Specific Integrated Circuit</a> (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According to Digiconomist, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/bitcoin-lightning-network-problems/">Bitcoin network</a> generates approximately 72,500 tons of electronic waste annually.<span class="ql-inline-citation" data-cite="17"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-subheading__text"> Water Footprint </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies with a continuous discharge.<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_46-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> The results of these practices are unknown, as not enough research has yet been completed to learn how much water is consumed (made unusable) or contaminated.
</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-could-cryptocurrency-mining-use-less-energy"></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"> Could Cryptocurrency Mining Use Less Energy? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Large-scale cryptocurrency miners are often located where energy is abundant, reliable, and cheap. But, processing cryptocurrency transactions and minting new coins does not need to be energy-intensive.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proof-stake-pos.asp">proof-of-stake</a> (PoS) consensus mechanism is an alternative to cryptocurrency mining that does not use extensive computing power. The authority to validate transactions and operate the crypto network is instead granted based on the amount of cryptocurrency a validator has "staked" or put up as collateral for honest behavior and the privilege of earning fees.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Other methods of validation, such as proof of history, proof of elapsed time, proof of burn, and proof of capacity, are also being developed. While Ethereum's developers have retired the blockchain's proof-of-work mechanism—with estimates of a 99.9% reduction in carbon emissions—there is no such objective in the Bitcoin community.<span class="ql-inline-citation" data-cite="27"></span> Since Bitcoin is the most popular crypto, it means that mining, along with its enormous energy costs, is likely here to stay.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_56-0"><span class="heading-toc" id="toc-is-cryptocurrency-environmentally-friendly"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Cryptocurrency Environmentally Friendly?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Some cryptocurrencies have intense energy requirements and special equipment needs, generating lots of waste. In that sense, some are not environmentally friendly. However, it's important to remember that the environmental costs of making and maintaining fiat currency and our current banking system are also energy intensive.</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-can-bitcoin-become-environmentally-friendly"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Bitcoin Become Environmentally Friendly?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In short, because the validation process is energy-intensive, competitive, and rewards-based, it is unlikely that Bitcoin will reduce its energy footprint. Even after the last bitcoin is rewarded, the network will still require large amounts of electricity to validate transactions unless it switches to another verification protocol.</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-how-much-of-crypto-is-renewable"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much of Crypto Is Renewable?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There is currently not enough official information available to determine how much of the energy consumed by cryptocurrencies is from renewable sources.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> The Bitcoin network and similar cryptocurrencies use large amounts of energy. Proponents say it is justified because these virtual currencies bring financial systems to millions of people who do not have access to loans, banking, or other services. Some opponents say it is a waste of energy because cryptocurrency has no value. Others argue that crypto only fills the pockets of those who can afford expensive mining equipment, notably businesses and the already wealthy.<br/>
</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"> Regardless of the opinions of fans and skeptics, cryptocurrency has an environmental impact. It consumes energy primarily generated by fossil fuels. At a time when the world is in dire need of reducing its carbon footprint, the last thing anyone needs is another source of money-making at the expense of the planet and its inhabitants.
</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"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1702172374840779&usg=AOvVaw3_kBQndvAFOoebFQr9Dtv8"> </a><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1702172374840990&usg=AOvVaw0GRKX2X9oB61vZpzVJJpcu">warranty and liability disclaimer</a> for more info. As of the date this article was written, the author does not own cryptocurrency.</em>
</p></div> | Cryptocurrency is a virtual currency touted as a way to remove all of the costs incurred between money users and suppliers and put its control into the hands of the people.
But cryptocurrency requires energy, equipment, internet, and a global networking infrastructure to be useful. Thus, it has a large environmental impact, with some using as much energy as small countries to maintain a blockchain. There are even concerns about cryptocurrency's water footprint. Keep reading to learn more about cryptocurrency's impact on the environment.
### Key Takeaways
* Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining.
* The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities.
* Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining.
* Some cryptocurrencies do not use mining, but Bitcoin is unlikely to change its consensus algorithm.
* The traditional financial systems, of which only credit card energy use is available, use about as much energy as a non-proof-of-work blockchain.
## Cryptocurrency Energy Consumption
There is no direct way to calculate how much energy is used for [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp) and cryptocurrency mining, but the figure can be estimated from the network's hashrate and the consumption by commercially-available mining rigs. For example, the Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin, the most widely-mined cryptocurrency network, uses an estimated 140 Terawatt-hours (TWh) of electricity annually (0.63% of global electricity use) and about 352 TWh of energy (0.22% of global energy production) at the point of production—more than Pakistan and Ukraine, using the latest country energy estimates from 2019.
Another estimate by Digiconomist, a [cryptocurrency](https://www.investopedia.com/terms/d/digital-money.asp) analytics site, placed the figure at 138 Terawatt-hours based on energy consumption through Dec. 11, 2023. This computed to around 773.61 kilowatt-hours of electricity per transaction, the same amount of power consumed by the average American household over 26 days.
[Ethereum](https://www.investopedia.com/terms/e/ethereum.asp), the second-largest cryptocurrency network, was estimated to use 0.01 Terawatt-hours of electricity per year, based on energy consumption through Dec. 11, 2023. The average Ethereum transaction required 0.02 kilowatt-hours of electricity.
###
Thousands of different cryptocurrencies and hundreds of exchanges exist worldwide. None of the cryptocurrency energy use reports or calculations account for the energy expended to develop new coins or administer services for them.
The amount of energy consumed by cryptocurrency mining will likely vary over time, assuming that prices and user adoption continue to change. Cryptocurrency mining is a competitive process: as the value of the block reward increases, the incentives to start mining also increase. Higher cryptocurrency prices mean more energy consumed by crypto networks because more people join the mining networks trying to profit from the increases.
## Why Cryptocurrency Mining Requires Energy
The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks.
The way the transaction validation process is designed uses [large amounts of energy](https://www.investopedia.com/nfts-and-the-environment-5220221)—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.
## Not All Cryptocurrencies Use Mining
It's important to point out that not all cryptocurrencies use a system that depends on large amounts of energy to run. Ethereum, Solana, and many others use a system that requires very little energy—their environmental impact adds little to the impact already created by the global networking infrastructure and its daily use.
## Environmental Impacts of Cryptocurrency Mining
Calculating [the carbon footprint of cryptocurrency](https://www.investopedia.com/crypto-s-climate-impact-6544631) is more complicated. Although fossil fuels are the predominant energy source in most countries where cryptocurrency is mined, miners must seek out the most inexpensive energy sources to remain profitable.
Digiconomist estimates that the Bitcoin network is responsible for about 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman. Based on data through December 2022, Ethereum produced an estimated 35.4 million tons of carbon dioxide emissions before dropping to 0.01 million tons following its transition to proof of work.
### Driving Factors
Greed and a fear of missing the next gold rush drive Bitcoin and similar cryptocurrencies to use so much energy—these blockchains automatically adjust the mining difficulty according to how powerful the networks are. In other words, the less computing power the network has, the lower the mining difficulty is and the less energy it uses per transaction.
But because there is a reward for the most and fastest computing power, those who can afford to have flooded the network with energy-hungry machines networked in a way that gives them the upper hand in receiving rewards. This attracts other participants, and the group grows in size and energy use—all because the financial returns can exceed the initial costs. The environmental impacts are always an afterthought when profits and return on investment are involved.
### Countries With the Largest Impact
Researchers at the University of Cambridge report that most Bitcoin mining occurs in the U.S. (38%), China (21%), and Kazakhstan (12%). According to the Center for Strategic and International Studies, about 76% of the energy consumed in China is generated from coal and crude oil. The U.S. gets most of its electricity by burning fossil fuels, per 2019 data from the EIA. Kazakhstan mainly uses fossil fuels.
As a result, three [countries heavily dependent on fossil fuels](https://www.investopedia.com/articles/investing/092915/5-countries-produce-most-carbon-dioxide-co2.asp) are responsible for around 72% of the world's Bitcoin mining.
### Electronic Waste
Cryptocurrency mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. This is especially true for [Application-Specific Integrated Circuit](https://www.investopedia.com/terms/a/asic.asp) (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According to Digiconomist, the [Bitcoin network](https://www.investopedia.com/tech/bitcoin-lightning-network-problems/) generates approximately 72,500 tons of electronic waste annually.
### Water Footprint
Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies with a continuous discharge.
The results of these practices are unknown, as not enough research has yet been completed to learn how much water is consumed (made unusable) or contaminated.
## Could Cryptocurrency Mining Use Less Energy?
Large-scale cryptocurrency miners are often located where energy is abundant, reliable, and cheap. But, processing cryptocurrency transactions and minting new coins does not need to be energy-intensive.
The [proof-of-stake](https://www.investopedia.com/terms/p/proof-stake-pos.asp) (PoS) consensus mechanism is an alternative to cryptocurrency mining that does not use extensive computing power. The authority to validate transactions and operate the crypto network is instead granted based on the amount of cryptocurrency a validator has "staked" or put up as collateral for honest behavior and the privilege of earning fees.
Other methods of validation, such as proof of history, proof of elapsed time, proof of burn, and proof of capacity, are also being developed. While Ethereum's developers have retired the blockchain's proof-of-work mechanism—with estimates of a 99.9% reduction in carbon emissions—there is no such objective in the Bitcoin community. Since Bitcoin is the most popular crypto, it means that mining, along with its enormous energy costs, is likely here to stay.
## Is Cryptocurrency Environmentally Friendly?
Some cryptocurrencies have intense energy requirements and special equipment needs, generating lots of waste. In that sense, some are not environmentally friendly. However, it's important to remember that the environmental costs of making and maintaining fiat currency and our current banking system are also energy intensive.
## Can Bitcoin Become Environmentally Friendly?
In short, because the validation process is energy-intensive, competitive, and rewards-based, it is unlikely that Bitcoin will reduce its energy footprint. Even after the last bitcoin is rewarded, the network will still require large amounts of electricity to validate transactions unless it switches to another verification protocol.
## How Much of Crypto Is Renewable?
There is currently not enough official information available to determine how much of the energy consumed by cryptocurrencies is from renewable sources.
## The Bottom Line
The Bitcoin network and similar cryptocurrencies use large amounts of energy. Proponents say it is justified because these virtual currencies bring financial systems to millions of people who do not have access to loans, banking, or other services. Some opponents say it is a waste of energy because cryptocurrency has no value. Others argue that crypto only fills the pockets of those who can afford expensive mining equipment, notably businesses and the already wealthy.
Regardless of the opinions of fans and skeptics, cryptocurrency has an environmental impact. It consumes energy primarily generated by fossil fuels. At a time when the world is in dire need of reducing its carbon footprint, the last thing anyone needs is another source of money-making at the expense of the planet and its inhabitants.
*The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our[warranty and liability disclaimer](https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1702172374840990&usg=AOvVaw0GRKX2X9oB61vZpzVJJpcu) for more info. As of the date this article was written, the author does not own cryptocurrency.*
| Cryptocurrency is a virtual currency touted as a way to remove all of the costs incurred between money users and suppliers and put its control into the hands of the people.
But cryptocurrency requires energy, equipment, internet, and a global networking infrastructure to be useful. Thus, it has a large environmental impact, with some using as much energy as small countries to maintain a blockchain. There are even concerns about cryptocurrency's water footprint. Keep reading to learn more about cryptocurrency's impact on the environment.
Key Takeaways
Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining.The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities.Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining.Some cryptocurrencies do not use mining, but Bitcoin is unlikely to change its consensus algorithm.The traditional financial systems, of which only credit card energy use is available, use about as much energy as a non-proof-of-work blockchain.
Cryptocurrency Energy Consumption
There is no direct way to calculate how much energy is used for Bitcoin and cryptocurrency mining, but the figure can be estimated from the network's hashrate and the consumption by commercially-available mining rigs. For example, the Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin, the most widely-mined cryptocurrency network, uses an estimated 140 Terawatt-hours (TWh) of electricity annually (0.63% of global electricity use) and about 352 TWh of energy (0.22% of global energy production) at the point of production—more than Pakistan and Ukraine, using the latest country energy estimates from 2019.
Another estimate by Digiconomist, a cryptocurrency analytics site, placed the figure at 138 Terawatt-hours based on energy consumption through Dec. 11, 2023. This computed to around 773.61 kilowatt-hours of electricity per transaction, the same amount of power consumed by the average American household over 26 days.
Ethereum, the second-largest cryptocurrency network, was estimated to use 0.01 Terawatt-hours of electricity per year, based on energy consumption through Dec. 11, 2023. The average Ethereum transaction required 0.02 kilowatt-hours of electricity.
Thousands of different cryptocurrencies and hundreds of exchanges exist worldwide. None of the cryptocurrency energy use reports or calculations account for the energy expended to develop new coins or administer services for them.
The amount of energy consumed by cryptocurrency mining will likely vary over time, assuming that prices and user adoption continue to change. Cryptocurrency mining is a competitive process: as the value of the block reward increases, the incentives to start mining also increase. Higher cryptocurrency prices mean more energy consumed by crypto networks because more people join the mining networks trying to profit from the increases.
Why Cryptocurrency Mining Requires Energy
The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks.
The way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.
Not All Cryptocurrencies Use Mining
It's important to point out that not all cryptocurrencies use a system that depends on large amounts of energy to run. Ethereum, Solana, and many others use a system that requires very little energy—their environmental impact adds little to the impact already created by the global networking infrastructure and its daily use.
Environmental Impacts of Cryptocurrency Mining
Calculating the carbon footprint of cryptocurrency is more complicated. Although fossil fuels are the predominant energy source in most countries where cryptocurrency is mined, miners must seek out the most inexpensive energy sources to remain profitable.
Digiconomist estimates that the Bitcoin network is responsible for about 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman. Based on data through December 2022, Ethereum produced an estimated 35.4 million tons of carbon dioxide emissions before dropping to 0.01 million tons following its transition to proof of work.
Driving Factors
Greed and a fear of missing the next gold rush drive Bitcoin and similar cryptocurrencies to use so much energy—these blockchains automatically adjust the mining difficulty according to how powerful the networks are. In other words, the less computing power the network has, the lower the mining difficulty is and the less energy it uses per transaction.
But because there is a reward for the most and fastest computing power, those who can afford to have flooded the network with energy-hungry machines networked in a way that gives them the upper hand in receiving rewards. This attracts other participants, and the group grows in size and energy use—all because the financial returns can exceed the initial costs. The environmental impacts are always an afterthought when profits and return on investment are involved.
Countries With the Largest Impact
Researchers at the University of Cambridge report that most Bitcoin mining occurs in the U.S. (38%), China (21%), and Kazakhstan (12%). According to the Center for Strategic and International Studies, about 76% of the energy consumed in China is generated from coal and crude oil. The U.S. gets most of its electricity by burning fossil fuels, per 2019 data from the EIA. Kazakhstan mainly uses fossil fuels.
As a result, three countries heavily dependent on fossil fuels are responsible for around 72% of the world's Bitcoin mining.
Electronic Waste
Cryptocurrency mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. This is especially true for Application-Specific Integrated Circuit (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According to Digiconomist, the Bitcoin network generates approximately 72,500 tons of electronic waste annually.
Water Footprint
Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies with a continuous discharge.
The results of these practices are unknown, as not enough research has yet been completed to learn how much water is consumed (made unusable) or contaminated.
Could Cryptocurrency Mining Use Less Energy?
Large-scale cryptocurrency miners are often located where energy is abundant, reliable, and cheap. But, processing cryptocurrency transactions and minting new coins does not need to be energy-intensive.
The proof-of-stake (PoS) consensus mechanism is an alternative to cryptocurrency mining that does not use extensive computing power. The authority to validate transactions and operate the crypto network is instead granted based on the amount of cryptocurrency a validator has "staked" or put up as collateral for honest behavior and the privilege of earning fees.
Other methods of validation, such as proof of history, proof of elapsed time, proof of burn, and proof of capacity, are also being developed. While Ethereum's developers have retired the blockchain's proof-of-work mechanism—with estimates of a 99.9% reduction in carbon emissions—there is no such objective in the Bitcoin community. Since Bitcoin is the most popular crypto, it means that mining, along with its enormous energy costs, is likely here to stay.
Is Cryptocurrency Environmentally Friendly?
Some cryptocurrencies have intense energy requirements and special equipment needs, generating lots of waste. In that sense, some are not environmentally friendly. However, it's important to remember that the environmental costs of making and maintaining fiat currency and our current banking system are also energy intensive.
Can Bitcoin Become Environmentally Friendly?
In short, because the validation process is energy-intensive, competitive, and rewards-based, it is unlikely that Bitcoin will reduce its energy footprint. Even after the last bitcoin is rewarded, the network will still require large amounts of electricity to validate transactions unless it switches to another verification protocol.
How Much of Crypto Is Renewable?
There is currently not enough official information available to determine how much of the energy consumed by cryptocurrencies is from renewable sources.
The Bottom Line
The Bitcoin network and similar cryptocurrencies use large amounts of energy. Proponents say it is justified because these virtual currencies bring financial systems to millions of people who do not have access to loans, banking, or other services. Some opponents say it is a waste of energy because cryptocurrency has no value. Others argue that crypto only fills the pockets of those who can afford expensive mining equipment, notably businesses and the already wealthy.
Regardless of the opinions of fans and skeptics, cryptocurrency has an environmental impact. It consumes energy primarily generated by fossil fuels. At a time when the world is in dire need of reducing its carbon footprint, the last thing anyone needs is another source of money-making at the expense of the planet and its inhabitants.
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 cryptocurrency.
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"https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1702172374840990&usg=AOvVaw0GRKX2X9oB61vZpzVJJpcu"
]
] |
https://www.investopedia.com/terms/a/anti-diversion-clause.asp | Anti-Diversion Clause: What It is, How It Works | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The anti-diversion clause is a U.S. government regulation that prohibits exported goods from being shipped to unapproved destinations. The Bureau of Industry and Security under the Department of Commerce requires commercially exported goods to be accompanied by a destination control statement. This document states that the goods are only authorized for export to certain locations and that U.S. law prohibits their diversion. The latter part of this statement is the anti-diversion clause.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> In practice, you may see "anti-diversion" shortened to "diversion."
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<span class="heading-toc" id="toc-understanding-the-anti-diversion-clause"></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 Anti-Diversion Clause </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The destination control statement and anti-diversion clause must appear on the invoice and ocean bill of lading or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/airway-bill.asp" rel="noopener noreferrer">air waybill</a> that accompanies the exported goods. The statement certifies that to the best of the shipper's knowledge, the shipment is headed to its stated destination. National security, nonproliferation treaties and foreign policy are some of the reasons why a government may be concerned with controlling its exports. In the U.S., most exports of items on the Commerce Control List must contain a destination control statement.<span class="ql-inline-citation" data-cite="1"></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_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Diversion occurs when products are sold in unauthorized places. These restrictions could be for a number of reasons, including sanctions, trade issues and consumer safety concerns. When concerns arise, certain categories of goods are identified as those most likely to be illegally diverted to a restricted country. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/billoflading.asp" rel="noopener noreferrer">bill of lading</a> or other documents of such products will display official wording (called the destination control statement) that the license of the exporter is not valid except for specified receivers of the goods.
</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"> Anti-diversion worries are a fairly standard concern for companies exporting domestic goods.
</p></div> | The anti-diversion clause is a U.S. government regulation that prohibits exported goods from being shipped to unapproved destinations. The Bureau of Industry and Security under the Department of Commerce requires commercially exported goods to be accompanied by a destination control statement. This document states that the goods are only authorized for export to certain locations and that U.S. law prohibits their diversion. The latter part of this statement is the anti-diversion clause.
In practice, you may see "anti-diversion" shortened to "diversion."
## Understanding the Anti-Diversion Clause
The destination control statement and anti-diversion clause must appear on the invoice and ocean bill of lading or [air waybill](https://www.investopedia.com/terms/a/airway-bill.asp) that accompanies the exported goods. The statement certifies that to the best of the shipper's knowledge, the shipment is headed to its stated destination. National security, nonproliferation treaties and foreign policy are some of the reasons why a government may be concerned with controlling its exports. In the U.S., most exports of items on the Commerce Control List must contain a destination control statement.
Diversion occurs when products are sold in unauthorized places. These restrictions could be for a number of reasons, including sanctions, trade issues and consumer safety concerns. When concerns arise, certain categories of goods are identified as those most likely to be illegally diverted to a restricted country. The [bill of lading](https://www.investopedia.com/terms/b/billoflading.asp) or other documents of such products will display official wording (called the destination control statement) that the license of the exporter is not valid except for specified receivers of the goods.
Anti-diversion worries are a fairly standard concern for companies exporting domestic goods.
| The anti-diversion clause is a U.S. government regulation that prohibits exported goods from being shipped to unapproved destinations. The Bureau of Industry and Security under the Department of Commerce requires commercially exported goods to be accompanied by a destination control statement. This document states that the goods are only authorized for export to certain locations and that U.S. law prohibits their diversion. The latter part of this statement is the anti-diversion clause.
In practice, you may see "anti-diversion" shortened to "diversion."
Understanding the Anti-Diversion Clause
The destination control statement and anti-diversion clause must appear on the invoice and ocean bill of lading or air waybill that accompanies the exported goods. The statement certifies that to the best of the shipper's knowledge, the shipment is headed to its stated destination. National security, nonproliferation treaties and foreign policy are some of the reasons why a government may be concerned with controlling its exports. In the U.S., most exports of items on the Commerce Control List must contain a destination control statement.
Diversion occurs when products are sold in unauthorized places. These restrictions could be for a number of reasons, including sanctions, trade issues and consumer safety concerns. When concerns arise, certain categories of goods are identified as those most likely to be illegally diverted to a restricted country. The bill of lading or other documents of such products will display official wording (called the destination control statement) that the license of the exporter is not valid except for specified receivers of the goods.
Anti-diversion worries are a fairly standard concern for companies exporting domestic goods.
| [
[
"air waybill",
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],
[
"bill of lading",
"https://www.investopedia.com/terms/b/billoflading.asp"
]
] |
https://www.investopedia.com/terms/t/truncation.asp | Truncation: What It Is, How It Works, Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-truncation"></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 Truncation? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Truncation is the requirement mandated by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ftc.asp">Federal Trade Commission</a> (FTC) for merchants to shorten the personal account information printed on credit and debit card receipts.
</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>Truncation is the practice of shortening the credit and debit card information printed on receipts.</li><li>This is a requirement mandated by the Federal Trade Commission (FTC) for all merchants.</li><li>It is intended to make it more difficult for thieves to access card information from stolen transaction records.</li><li>Truncation does not apply to digital transaction records retained by the merchant.</li><li>Under FACTA, merchants can be liable for damages of up to $1,000 for each violation of the truncation requirement.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-truncation"></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 Truncation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Truncation requirements are specified in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/facta.asp">Fair and Accurate Credit Transactions Act</a> (FACTA) of 2003, a law that amended and expanded the Fair Credit Reporting Act of 1970. FACTA had a focus on preventing identity theft by protecting consumers' personal data and sensitive financial information.
</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"> Under FACTA, businesses that accept credit or debit cards are prohibited from printing more than the last five digits of the card's number on their receipts. This requirement, which came into effect on Dec. 1, 2006, is designed to help protect customers from credit card fraud and identity theft.<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 requirement to truncate card numbers only applies to the receipts that are handed to customers at the point of sale. It does not apply to digital transaction records retained by the merchant. Generally speaking, merchants retain a separate copy of all receipts that contain the customer's full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">credit card</a> information. Merchants are permitted to collect and store this information under FACTA, although they must ensure that the records are securely stored and that the privacy of their customers is respected.<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"> Under FACTA, merchants can be liable for damages of up to $1,000 for each violation of the truncation requirement.<span class="ql-inline-citation" data-cite="4"></span> These damages can be incurred regardless of whether the incident in question actually harmed the customer, a fact which led to numerous individual and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/classaction.asp">class action lawsuits</a> against companies of all sizes for truncation violations in the years after the requirement went into effect. Since then, some courts have ruled that there must be proof of actual harm resulting from the violation in order for the merchant to be penalized.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<span class="heading-toc" id="toc-example-of-truncation"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Example of Truncation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Unfortunately, theft of credit card information continues to be a major problem, affecting millions of consumers each year. According to a report by the FTC, there were more than 1.3 million cases of identity theft in 2020, more than triple the number in 2018.<span class="ql-inline-citation" data-cite="5"></span> Thieves can use this stolen information in a variety of ways, such as using it to make online purchases, opening new credit accounts, or simply selling it on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blackmarket.asp">black market</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> If not for truncation, thieves could steal most of the information they need for these crimes simply by stealing or finding discarded customer receipts. Truncation makes it much harder for criminals to obtain this information. It is worth noting, however, that the truncation requirement does not apply to manual imprinters or handwritten receipts, making it especially important to securely store or dispose of these types of records.
</p></div> | ## What Is Truncation?
Truncation is the requirement mandated by the [Federal Trade Commission](https://www.investopedia.com/terms/f/ftc.asp) (FTC) for merchants to shorten the personal account information printed on credit and debit card receipts.
### Key Takeaways
* Truncation is the practice of shortening the credit and debit card information printed on receipts.
* This is a requirement mandated by the Federal Trade Commission (FTC) for all merchants.
* It is intended to make it more difficult for thieves to access card information from stolen transaction records.
* Truncation does not apply to digital transaction records retained by the merchant.
* Under FACTA, merchants can be liable for damages of up to $1,000 for each violation of the truncation requirement.
## Understanding Truncation
Truncation requirements are specified in the [Fair and Accurate Credit Transactions Act](https://www.investopedia.com/terms/f/facta.asp) (FACTA) of 2003, a law that amended and expanded the Fair Credit Reporting Act of 1970. FACTA had a focus on preventing identity theft by protecting consumers' personal data and sensitive financial information.
Under FACTA, businesses that accept credit or debit cards are prohibited from printing more than the last five digits of the card's number on their receipts. This requirement, which came into effect on Dec. 1, 2006, is designed to help protect customers from credit card fraud and identity theft.
The requirement to truncate card numbers only applies to the receipts that are handed to customers at the point of sale. It does not apply to digital transaction records retained by the merchant. Generally speaking, merchants retain a separate copy of all receipts that contain the customer's full [credit card](https://www.investopedia.com/terms/c/creditcard.asp) information. Merchants are permitted to collect and store this information under FACTA, although they must ensure that the records are securely stored and that the privacy of their customers is respected.
Under FACTA, merchants can be liable for damages of up to $1,000 for each violation of the truncation requirement. These damages can be incurred regardless of whether the incident in question actually harmed the customer, a fact which led to numerous individual and [class action lawsuits](https://www.investopedia.com/terms/c/classaction.asp) against companies of all sizes for truncation violations in the years after the requirement went into effect. Since then, some courts have ruled that there must be proof of actual harm resulting from the violation in order for the merchant to be penalized.
## Example of Truncation
Unfortunately, theft of credit card information continues to be a major problem, affecting millions of consumers each year. According to a report by the FTC, there were more than 1.3 million cases of identity theft in 2020, more than triple the number in 2018. Thieves can use this stolen information in a variety of ways, such as using it to make online purchases, opening new credit accounts, or simply selling it on the [black market](https://www.investopedia.com/terms/b/blackmarket.asp).
If not for truncation, thieves could steal most of the information they need for these crimes simply by stealing or finding discarded customer receipts. Truncation makes it much harder for criminals to obtain this information. It is worth noting, however, that the truncation requirement does not apply to manual imprinters or handwritten receipts, making it especially important to securely store or dispose of these types of records.
| What Is Truncation?
Truncation is the requirement mandated by the Federal Trade Commission (FTC) for merchants to shorten the personal account information printed on credit and debit card receipts.
Key Takeaways
Truncation is the practice of shortening the credit and debit card information printed on receipts.This is a requirement mandated by the Federal Trade Commission (FTC) for all merchants.It is intended to make it more difficult for thieves to access card information from stolen transaction records.Truncation does not apply to digital transaction records retained by the merchant.Under FACTA, merchants can be liable for damages of up to $1,000 for each violation of the truncation requirement.
Understanding Truncation
Truncation requirements are specified in the Fair and Accurate Credit Transactions Act (FACTA) of 2003, a law that amended and expanded the Fair Credit Reporting Act of 1970. FACTA had a focus on preventing identity theft by protecting consumers' personal data and sensitive financial information.
Under FACTA, businesses that accept credit or debit cards are prohibited from printing more than the last five digits of the card's number on their receipts. This requirement, which came into effect on Dec. 1, 2006, is designed to help protect customers from credit card fraud and identity theft.
The requirement to truncate card numbers only applies to the receipts that are handed to customers at the point of sale. It does not apply to digital transaction records retained by the merchant. Generally speaking, merchants retain a separate copy of all receipts that contain the customer's full credit card information. Merchants are permitted to collect and store this information under FACTA, although they must ensure that the records are securely stored and that the privacy of their customers is respected.
Under FACTA, merchants can be liable for damages of up to $1,000 for each violation of the truncation requirement. These damages can be incurred regardless of whether the incident in question actually harmed the customer, a fact which led to numerous individual and class action lawsuits against companies of all sizes for truncation violations in the years after the requirement went into effect. Since then, some courts have ruled that there must be proof of actual harm resulting from the violation in order for the merchant to be penalized.
Example of Truncation
Unfortunately, theft of credit card information continues to be a major problem, affecting millions of consumers each year. According to a report by the FTC, there were more than 1.3 million cases of identity theft in 2020, more than triple the number in 2018. Thieves can use this stolen information in a variety of ways, such as using it to make online purchases, opening new credit accounts, or simply selling it on the black market.
If not for truncation, thieves could steal most of the information they need for these crimes simply by stealing or finding discarded customer receipts. Truncation makes it much harder for criminals to obtain this information. It is worth noting, however, that the truncation requirement does not apply to manual imprinters or handwritten receipts, making it especially important to securely store or dispose of these types of records.
| [
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],
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],
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],
[
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https://www.investopedia.com/articles/etfs/062716/hedging-etf-indexes-relevant-strategy-qqq-psq.asp | Hedging With Index-Based 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 track or seek to outperform a particular index, sector, commodity, or other asset. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">ETFs</a> offer broad exposure to the market and allow investors to achieve objectives within their portfolios. This can include <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedging</a> options for investors concerned about economic or market cycle volatility. Here are four hedging strategies that utilize index-based ETFs.
</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>ETFs provide investors with viable hedging options to protect against potential losses and generate income.</li><li>Hedging strategies with ETFs allow investors to keep their portfolios intact, which may reduce tax consequences and trading costs.</li><li>Hedging strategies are best used for short-term and tactical purposes, particularly those employing inverse and leveraged ETFs.</li></ul></div></div></div>
<span class="heading-toc" id="toc-hedging-with-inverse-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Hedging With Inverse ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Investors long in index-based funds or stock holdings and worried about short-term risk can take a position in an inverse ETF, which appreciates when its tracking index falls in value. A long position in the Invesco QQQ (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=qqq">QQQ</a>), which tracks the NASDAQ 100 Index, could be hedged with an offsetting position in the ProShares Short QQQ (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=psq">PSQ</a>). Any losses of Invesco QQQ are neutralized through gains of ProShares Short QQQ.<span class="ql-inline-citation" data-cite="7"></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_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Investors can also hedge stock portfolios with inverse index funds of similar holdings. A portfolio assembled to track 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 Index</a> could be hedged with the ProShares Short S&P 500 ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=sh">SH</a>), which aims to appreciate by the same percentage as the declines on the index.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<span class="heading-toc" id="toc-hedging-with-leveraged-funds"></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"> Hedging With Leveraged Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> With leveraged inverse funds, the intrinsic volatility results in a lower capital requirement to offset declines. A fund offering triple leverage, such as the ProShares UltraPro Short QQQ (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=sqqq">SQQQ</a>), requires capital to fully offset changes in an index, approximately one-third of the long position.<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_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> For example, a 3% decline in a $10,000 position in the Invesco QQQ is a loss of $300. In a triple-leveraged inverse fund, the percentage loss on the index is multiplied by three for a gain of 9%. A gain of 9% on a $3,300 position is $297, offsetting 99% of the loss. Due to the reset of leverage daily, the performance of these funds is generally more predictable when they are used as short-term trading vehicles.<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_14-0"></div>
<span class="heading-toc" id="toc-writing-etf-options"></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"> Writing ETF Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Investors also have the option of hedging with leveraged inverse funds. Adding <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a> to an inverse fund multiplies the percentage changes on the index tracked, making these ETFs more volatile but allowing for smaller allocations of capital to hedge positions. The capital required to fully hedge long exposure with a non-leveraged fund equals the amount invested in the long position.
</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"> Investors expecting markets to move sideways can sell options against their positions to generate income. Referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coveredcall.asp">covered call</a> writing, this strategy can be implemented using a wide range of index-based ETFs, including the Invesco QQQ, the SPDR S&P 500 ETF Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=spy">SPY</a>), and iShares Russell Mid-Cap ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwr">IWR</a>).<span class="ql-inline-citation" data-cite="10"></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_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In a sideways-to-down market, investors can write calls against an ETF, collect the premiums, and then write calls again after expiration if the shares are not called away. The primary risk is that option sellers forego any appreciation above the strike price on the underlying shares, having agreed in the contract to sell shares at that level.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>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> approved the first eleven <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-8358373">spot bitcoin ETFs</a> in the United States on Jan. 10, 2024. Bitcoin futures ETFs have been trading since 2021.<span class="ql-inline-citation" data-cite="16"></span></p></div></div></div>
<span class="heading-toc" id="toc-buying-puts-on-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Buying Puts on ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Investors seeking to hedge against price declines on their index-based ETFs can buy put options on their positions to offset some or all losses on long positions, depending on the number of options purchased.
</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"> An owner of 1,000 shares of an ETF trading at $80 might buy 10 put options with a strike price of $77.50, priced at $1.00, for a total cost of $1,000. At the expiration of the option, if the price of the ETF drops to $70, the loss on the position is $10,000.
</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 10 puts, however, have an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp">intrinsic value</a> of $7.50, or $7,500 for the position. Subtracting the $1,000 cost of buying the put options, the net gain is $6,500, which reduces the loss on the combined positions to $3,500. Buying 16 put options with an ending intrinsic value of $6.50 results in a net profit of $10,400, completely covering the loss on the ETF.
</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-how-can-investors-use-etfs-to-hedge-exchange-rates"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can Investors Use ETFs to Hedge Exchange Rates?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Before ETFs, large entities used currency forward contracts, options, or futures to hedge a non-U.S. investment.<span class="ql-inline-citation" data-cite="14"></span> Individual investors can attempt to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/09/exchange-rate-risk-currency-etf.asp">hedge the exchange rate risk of long non-U.S. investments</a> by purchasing corresponding amounts of currency ETFs that take a short dollar position, such as the Invesco DB US Dollar Index Bearish (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=UDN">UDN</a>).<span class="ql-inline-citation" data-cite="11"></span> An investor outside the United States might choose Invesco DB US Dollar Index Bullish (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=UUP">UUP</a>) to take a long U.S. dollar position to hedge portfolios from exchange rate risks.<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_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-inflation-hedging-when-investing-in-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Inflation Hedging When Investing in ETFs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Inflation can swing up or down during normal or abnormal economic cycles. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation-hedge.asp">Inflation hedging</a> with ETFs hedges against an unknown and unpredictable force. Many investors seek out commodities ETFs as a form of hedging against higher inflation based on the theory that if inflation rises or is expected to rise, so will the price of commodities. While inflation is rising, other asset classes like stocks may not rise, and investors can participate in the growth of commodities investments.</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-commodity-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Commodity ETFs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Commodities include grains, gold, beef, oil, and natural gas. Many ETFs give investors access to precious metals, natural resources, and other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp#toc-understanding-commodities">commodities</a>. Examples include the U.S. Oil Fund (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=USO">USO</a>) and the SPDR Gold Trust (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GLD">GLD</a>). There are also broad commodity ETFs like Invesco DB Commodity Tracking (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DBC">DBC</a>).<span class="ql-inline-citation" data-cite="15"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> ETFs allow investors to take positions with little or no entrance fees or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commission.asp">commissions</a>. Since shares trade like stocks, the process of buying and selling is a straightforward process for most individual investors. ETFs cover many markets, including <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/advantages-and-disadvantages-buying-stocks-instead-of-bonds/">stocks, bonds</a>, and commodities.
</p></div> | Exchange-traded funds track or seek to outperform a particular index, sector, commodity, or other asset. [ETFs](https://www.investopedia.com/terms/e/etf.asp) offer broad exposure to the market and allow investors to achieve objectives within their portfolios. This can include [hedging](https://www.investopedia.com/terms/h/hedge.asp) options for investors concerned about economic or market cycle volatility. Here are four hedging strategies that utilize index-based ETFs.
### Key Takeaways
* ETFs provide investors with viable hedging options to protect against potential losses and generate income.
* Hedging strategies with ETFs allow investors to keep their portfolios intact, which may reduce tax consequences and trading costs.
* Hedging strategies are best used for short-term and tactical purposes, particularly those employing inverse and leveraged ETFs.
## Hedging With Inverse ETFs
Investors long in index-based funds or stock holdings and worried about short-term risk can take a position in an inverse ETF, which appreciates when its tracking index falls in value. A long position in the Invesco QQQ ([QQQ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=qqq)), which tracks the NASDAQ 100 Index, could be hedged with an offsetting position in the ProShares Short QQQ ([PSQ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=psq)). Any losses of Invesco QQQ are neutralized through gains of ProShares Short QQQ.
Investors can also hedge stock portfolios with inverse index funds of similar holdings. A portfolio assembled to track the [S&P 500 Index](https://www.investopedia.com/terms/s/sp500.asp) could be hedged with the ProShares Short S&P 500 ETF ([SH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sh)), which aims to appreciate by the same percentage as the declines on the index.
## Hedging With Leveraged Funds
With leveraged inverse funds, the intrinsic volatility results in a lower capital requirement to offset declines. A fund offering triple leverage, such as the ProShares UltraPro Short QQQ ([SQQQ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sqqq)), requires capital to fully offset changes in an index, approximately one-third of the long position.
For example, a 3% decline in a $10,000 position in the Invesco QQQ is a loss of $300. In a triple-leveraged inverse fund, the percentage loss on the index is multiplied by three for a gain of 9%. A gain of 9% on a $3,300 position is $297, offsetting 99% of the loss. Due to the reset of leverage daily, the performance of these funds is generally more predictable when they are used as short-term trading vehicles.
## Writing ETF Options
Investors also have the option of hedging with leveraged inverse funds. Adding [leverage](https://www.investopedia.com/terms/l/leverage.asp) to an inverse fund multiplies the percentage changes on the index tracked, making these ETFs more volatile but allowing for smaller allocations of capital to hedge positions. The capital required to fully hedge long exposure with a non-leveraged fund equals the amount invested in the long position.
Investors expecting markets to move sideways can sell options against their positions to generate income. Referred to as [covered call](https://www.investopedia.com/terms/c/coveredcall.asp) writing, this strategy can be implemented using a wide range of index-based ETFs, including the Invesco QQQ, the SPDR S&P 500 ETF Trust ([SPY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=spy)), and iShares Russell Mid-Cap ETF ([IWR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwr)).
In a sideways-to-down market, investors can write calls against an ETF, collect the premiums, and then write calls again after expiration if the shares are not called away. The primary risk is that option sellers forego any appreciation above the strike price on the underlying shares, having agreed in the contract to sell shares at that level.
###
The [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) approved the first eleven [spot bitcoin ETFs](https://www.investopedia.com/spot-bitcoin-etfs-8358373) in the United States on Jan. 10, 2024. Bitcoin futures ETFs have been trading since 2021.
## Buying Puts on ETFs
Investors seeking to hedge against price declines on their index-based ETFs can buy put options on their positions to offset some or all losses on long positions, depending on the number of options purchased.
An owner of 1,000 shares of an ETF trading at $80 might buy 10 put options with a strike price of $77.50, priced at $1.00, for a total cost of $1,000. At the expiration of the option, if the price of the ETF drops to $70, the loss on the position is $10,000.
The 10 puts, however, have an [intrinsic value](https://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp) of $7.50, or $7,500 for the position. Subtracting the $1,000 cost of buying the put options, the net gain is $6,500, which reduces the loss on the combined positions to $3,500. Buying 16 put options with an ending intrinsic value of $6.50 results in a net profit of $10,400, completely covering the loss on the ETF.
## How Can Investors Use ETFs to Hedge Exchange Rates?
Before ETFs, large entities used currency forward contracts, options, or futures to hedge a non-U.S. investment. Individual investors can attempt to [hedge the exchange rate risk of long non-U.S. investments](https://www.investopedia.com/articles/forex/09/exchange-rate-risk-currency-etf.asp) by purchasing corresponding amounts of currency ETFs that take a short dollar position, such as the Invesco DB US Dollar Index Bearish ([UDN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=UDN)). An investor outside the United States might choose Invesco DB US Dollar Index Bullish ([UUP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=UUP)) to take a long U.S. dollar position to hedge portfolios from exchange rate risks.
## What Is Inflation Hedging When Investing in ETFs?
Inflation can swing up or down during normal or abnormal economic cycles. [Inflation hedging](https://www.investopedia.com/terms/i/inflation-hedge.asp) with ETFs hedges against an unknown and unpredictable force. Many investors seek out commodities ETFs as a form of hedging against higher inflation based on the theory that if inflation rises or is expected to rise, so will the price of commodities. While inflation is rising, other asset classes like stocks may not rise, and investors can participate in the growth of commodities investments.
## What Are Commodity ETFs?
Commodities include grains, gold, beef, oil, and natural gas. Many ETFs give investors access to precious metals, natural resources, and other [commodities](https://www.investopedia.com/terms/c/commodity.asp#toc-understanding-commodities). Examples include the U.S. Oil Fund ([USO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=USO)) and the SPDR Gold Trust ([GLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GLD)). There are also broad commodity ETFs like Invesco DB Commodity Tracking ([DBC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DBC)).
## The Bottom Line
ETFs allow investors to take positions with little or no entrance fees or [commissions](https://www.investopedia.com/terms/c/commission.asp). Since shares trade like stocks, the process of buying and selling is a straightforward process for most individual investors. ETFs cover many markets, including [stocks, bonds](https://www.investopedia.com/ask/answers/advantages-and-disadvantages-buying-stocks-instead-of-bonds/), and commodities.
| Exchange-traded funds track or seek to outperform a particular index, sector, commodity, or other asset. ETFs offer broad exposure to the market and allow investors to achieve objectives within their portfolios. This can include hedging options for investors concerned about economic or market cycle volatility. Here are four hedging strategies that utilize index-based ETFs.
Key Takeaways
ETFs provide investors with viable hedging options to protect against potential losses and generate income.Hedging strategies with ETFs allow investors to keep their portfolios intact, which may reduce tax consequences and trading costs.Hedging strategies are best used for short-term and tactical purposes, particularly those employing inverse and leveraged ETFs.
Hedging With Inverse ETFs
Investors long in index-based funds or stock holdings and worried about short-term risk can take a position in an inverse ETF, which appreciates when its tracking index falls in value. A long position in the Invesco QQQ (QQQ), which tracks the NASDAQ 100 Index, could be hedged with an offsetting position in the ProShares Short QQQ (PSQ). Any losses of Invesco QQQ are neutralized through gains of ProShares Short QQQ.
Investors can also hedge stock portfolios with inverse index funds of similar holdings. A portfolio assembled to track the S&P 500 Index could be hedged with the ProShares Short S&P 500 ETF (SH), which aims to appreciate by the same percentage as the declines on the index.
Hedging With Leveraged Funds
With leveraged inverse funds, the intrinsic volatility results in a lower capital requirement to offset declines. A fund offering triple leverage, such as the ProShares UltraPro Short QQQ (SQQQ), requires capital to fully offset changes in an index, approximately one-third of the long position.
For example, a 3% decline in a $10,000 position in the Invesco QQQ is a loss of $300. In a triple-leveraged inverse fund, the percentage loss on the index is multiplied by three for a gain of 9%. A gain of 9% on a $3,300 position is $297, offsetting 99% of the loss. Due to the reset of leverage daily, the performance of these funds is generally more predictable when they are used as short-term trading vehicles.
Writing ETF Options
Investors also have the option of hedging with leveraged inverse funds. Adding leverage to an inverse fund multiplies the percentage changes on the index tracked, making these ETFs more volatile but allowing for smaller allocations of capital to hedge positions. The capital required to fully hedge long exposure with a non-leveraged fund equals the amount invested in the long position.
Investors expecting markets to move sideways can sell options against their positions to generate income. Referred to as covered call writing, this strategy can be implemented using a wide range of index-based ETFs, including the Invesco QQQ, the SPDR S&P 500 ETF Trust (SPY), and iShares Russell Mid-Cap ETF (IWR).
In a sideways-to-down market, investors can write calls against an ETF, collect the premiums, and then write calls again after expiration if the shares are not called away. The primary risk is that option sellers forego any appreciation above the strike price on the underlying shares, having agreed in the contract to sell shares at that level.
The U.S. Securities and Exchange Commission (SEC) approved the first eleven spot bitcoin ETFs in the United States on Jan. 10, 2024. Bitcoin futures ETFs have been trading since 2021.
Buying Puts on ETFs
Investors seeking to hedge against price declines on their index-based ETFs can buy put options on their positions to offset some or all losses on long positions, depending on the number of options purchased.
An owner of 1,000 shares of an ETF trading at $80 might buy 10 put options with a strike price of $77.50, priced at $1.00, for a total cost of $1,000. At the expiration of the option, if the price of the ETF drops to $70, the loss on the position is $10,000.
The 10 puts, however, have an intrinsic value of $7.50, or $7,500 for the position. Subtracting the $1,000 cost of buying the put options, the net gain is $6,500, which reduces the loss on the combined positions to $3,500. Buying 16 put options with an ending intrinsic value of $6.50 results in a net profit of $10,400, completely covering the loss on the ETF.
How Can Investors Use ETFs to Hedge Exchange Rates?
Before ETFs, large entities used currency forward contracts, options, or futures to hedge a non-U.S. investment. Individual investors can attempt to hedge the exchange rate risk of long non-U.S. investments by purchasing corresponding amounts of currency ETFs that take a short dollar position, such as the Invesco DB US Dollar Index Bearish (UDN). An investor outside the United States might choose Invesco DB US Dollar Index Bullish (UUP) to take a long U.S. dollar position to hedge portfolios from exchange rate risks.
What Is Inflation Hedging When Investing in ETFs?
Inflation can swing up or down during normal or abnormal economic cycles. Inflation hedging with ETFs hedges against an unknown and unpredictable force. Many investors seek out commodities ETFs as a form of hedging against higher inflation based on the theory that if inflation rises or is expected to rise, so will the price of commodities. While inflation is rising, other asset classes like stocks may not rise, and investors can participate in the growth of commodities investments.
What Are Commodity ETFs?
Commodities include grains, gold, beef, oil, and natural gas. Many ETFs give investors access to precious metals, natural resources, and other commodities. Examples include the U.S. Oil Fund (USO) and the SPDR Gold Trust (GLD). There are also broad commodity ETFs like Invesco DB Commodity Tracking (DBC).
The Bottom Line
ETFs allow investors to take positions with little or no entrance fees or commissions. Since shares trade like stocks, the process of buying and selling is a straightforward process for most individual investors. ETFs cover many markets, including stocks, bonds, and commodities.
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]
] |
https://www.investopedia.com/terms/d/direct-consolidation-loan.asp | Direct Consolidation Loan: Pros, Cons, and Process | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-direct-consolidation-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 Direct Consolidation Loan? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A direct consolidation loan combines two or more federal education loans into a single loan. This loan comes with a fixed interest rate that is based on the weighted average of the rates of the consolidated loans. Combining debt through the direct <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consolidation.asp">consolidation</a> loan program includes a free application for the borrower.
</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 direct consolidation loan combines two or more federal education loans into a single loan.</li><li>The fixed rate is based on the weighted average rate of the combined loans.</li><li>Most federal loans are eligible for consolidation, but private loans are not.</li><li>Borrowers can consolidate once they complete school, withdraw from school, or fall below half-time student status.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-direct-consolidation-loans"></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 Direct Consolidation Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Direct consolidation loans allow borrowers to lower the number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loan</a> payments they have to make each month by combining them into a single payment. Loans are managed by the U.S. Department of Education, and the application is free. Most federal loans are eligible for consolidation, but private loans are not. Borrowers can consolidate once they complete or withdraw from school or fall below half-time student status.<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_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Borrowers who obtain a direct consolidation loan also access <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-loan-forgiveness.asp">loan forgiveness options</a>. Loan forgiveness programs allow borrowers to cancel their obligation to repay all or a portion of the remaining <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a> and interest owed on a student loan. Common forgiveness programs include the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness (PSLF) program.<span class="ql-inline-citation" data-cite="29"></span> In most cases, student loan forgiveness is not considered taxable income and borrowers are not required to pay <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incometax.asp">income tax</a> on canceled or forgiven balances.<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_10-0"></div>
<span class="heading-toc" id="toc-direct-consolidation-loan-process"></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"> Direct Consolidation Loan Process </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Direct consolidation loans are issued through the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal-direct-student-loan-program.asp">Federal Direct Student Loan Program</a>. The Federal Direct Student Loan Program allows students and parents to borrow directly from the U.S. Department of Education.
</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"> Before consolidating, borrowers should consider benefits associated with the original loans, such as interest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountrate.asp">rate discounts</a> and rebates. When the loans are rolled into a new direct consolidated loan, borrowers may lose benefits. Additionally, if the new loan increases the repayment period, the borrower will likely pay more interest.
</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"> After completing a free application, the borrower confirms the loans and agrees to repay the new direct consolidation loan. The borrower will have a single monthly payment on the new loan instead of multiple monthly payments on several loans.
</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-pros-and-cons-of-a-direct-consolidation-loan"></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 and Cons of a Direct Consolidation Loan </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_20-0"> <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>Lower monthly payments</p></li>
<li><p>One monthly payment</p></li>
<li><p>Different repayment options</p></li>
<li><p>Access to loan forgiveness options</p></li>
<li><p>A fixed interest rate that may be lower than the rates on the previous 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>Could pay more interest over life of loan</p></li>
<li><p>No grace period</p></li>
<li><p>Prior loan payments don't count toward loan forgiveness requirements</p></li>
<li><p>You may lose some benefits by consolidating your loans</p></li>
</ul>
</div>
</div></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"> Pros Explained </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Borrowers may be eligible for repayment terms of up to 30 years with one monthly payment. This makes it easier to keep track of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loans-4689727">student loan</a> balance. Direct consolidation loans have a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed interest rate</a>, and borrowers may access different repayment options.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The options include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0">
<li>A standard repayment plan</li>
<li>A graduated repayment plan</li>
<li>A extended repayment plan</li>
<li>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> </li>
<li>The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pay-as-you-earn.asp">Pay As You Earn (PAYE) Plan</a></li>
<li>An Income-Based Repayment (IBR) Plan</li>
<li>An Income-Contingent Repayment (ICR) Plan</li>
<li>An Income-Sensitive Repayment Plan<span class="ql-inline-citation" data-cite="22"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Loans come out of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> status once consolidated if borrowers meet specific requirements.<span class="ql-inline-citation" data-cite="28"></span></p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> Cons Explained </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> When loans are consolidated, the interest on the consolidated loan is based on a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/weightedaverage.asp">weighted average</a> of the rates on their old loans, rounded to the nearest one-eighth of a percent (0.125%). The interest rate on a consolidated loan may be higher or lower than the average rates of the previous loans.<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_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Because consolidation extends the repayment period, the borrower's monthly payment is lowered but may result in paying more money over the life of the loan. A direct consolidation loan does not come with a grace period. The repayment period starts immediately upon consolidation, with the first payment due in about 60 days.<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_35-0"></div>
<span class="heading-toc" id="toc-loan-forgiveness-and-assistance"></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"> Loan Forgiveness and Assistance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> In August 2022, the Biden administration announced a plan to forgive up to $20,000 in student loan debt for borrowers who had received Pell Grants and $10,000 for other borrowers, at a total cost of $430 billion. However, the Supreme Court struck down this plan in June 2023. The court ruled the administration lacked the authority under existing federal law to cancel the debt.<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_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> In response to the decision, the White House unveiled the Saving on a Valuable Education (SAVE) Plan, a new income-driven repayment (IDR) option. Features of the plan include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> <li>Lowering monthly payments for undergraduate borrowers to 5% of discretionary income.</li><li>Changing the discretionary income formula so that an estimated one million low-income borrowers qualify for monthly payments of $0.</li><li>Halting the capitalization of unpaid interest, so that loan balances don’t grow as long as payments are kept current.</li><li>Eliminating the need for a spouse to cosign an IDR application.<span class="ql-inline-citation" data-cite="31"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_43-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_44-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The SAVE Plan, an income-driven repayment option for student loan borrowers, sets monthly payments at $0 for single borrowers earning less than $32,800 per year. You can apply for this plan and income-driven repayment options on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/idr/">Federal Student Aid</a> website.<span class="ql-inline-citation" data-cite="32"></span></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-loans-can-be-consolidated-into-a-direct-subsidized-consolidation-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Loans Can Be Consolidated into a Direct Subsidized Consolidation Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Borrowers can consolidate subsidized and unsubsidized Stafford loans, Supplemental Loans for Students, Federally Insured Student Loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.<span class="ql-inline-citation" data-cite="28"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-what-is-the-interest-rate-on-a-direct-consolidation-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Interest Rate on a Direct Consolidation Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. If the weighted average interest on the loans is 6.20%, for example, the new interest rate will be 6.25% after consolidating.<span class="ql-inline-citation" data-cite="13"></span><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-does-loan-consolidation-qualify-for-forgiveness-or-income-driven-repayment-plans"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Loan Consolidation Qualify for Forgiveness or Income-Driven Repayment Plans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>By opting for direct loan consolidation, borrowers can access income-driven repayment plans. They may also opt for direct loan consolidation if they want to be eligible for certain loan forgiveness programs. With an income-driven repayment plan under the SAVE Plan, borrowers can qualify for forgiveness of the remaining <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountbalance.asp">balance</a> after 20 years.<span class="ql-inline-citation" data-cite="22"></span><br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-how-long-does-it-take-for-a-direct-consolidation-loan-to-pay-off-old-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Does It Take for a Direct Consolidation Loan to Pay off Old Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The terms on a consolidated loan range up to 30 years, depending on the balance and repayment schedule.<span class="ql-inline-citation" data-cite="28"></span><br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Borrowers who juggle multiple payments on many federal student loans may want to consider a direct consolidation loan. This program combines the loans into a single loan with a fixed interest rate. There's no credit check required, and borrowers don't have to pay an application fee. Information is available on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/loan-consolidation/">Department of Education's website</a>.
</p></div> | ## What Is a Direct Consolidation Loan?
A direct consolidation loan combines two or more federal education loans into a single loan. This loan comes with a fixed interest rate that is based on the weighted average of the rates of the consolidated loans. Combining debt through the direct [consolidation](https://www.investopedia.com/terms/c/consolidation.asp) loan program includes a free application for the borrower.
### Key Takeaways
* A direct consolidation loan combines two or more federal education loans into a single loan.
* The fixed rate is based on the weighted average rate of the combined loans.
* Most federal loans are eligible for consolidation, but private loans are not.
* Borrowers can consolidate once they complete school, withdraw from school, or fall below half-time student status.
## Understanding Direct Consolidation Loans
Direct consolidation loans allow borrowers to lower the number of [loan](https://www.investopedia.com/terms/l/loan.asp) payments they have to make each month by combining them into a single payment. Loans are managed by the U.S. Department of Education, and the application is free. Most federal loans are eligible for consolidation, but private loans are not. Borrowers can consolidate once they complete or withdraw from school or fall below half-time student status.
Borrowers who obtain a direct consolidation loan also access [loan forgiveness options](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp). Loan forgiveness programs allow borrowers to cancel their obligation to repay all or a portion of the remaining [principal](https://www.investopedia.com/terms/p/principal.asp) and interest owed on a student loan. Common forgiveness programs include the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness (PSLF) program. In most cases, student loan forgiveness is not considered taxable income and borrowers are not required to pay [income tax](https://www.investopedia.com/terms/i/incometax.asp) on canceled or forgiven balances.
## Direct Consolidation Loan Process
Direct consolidation loans are issued through the [Federal Direct Student Loan Program](https://www.investopedia.com/terms/f/federal-direct-student-loan-program.asp). The Federal Direct Student Loan Program allows students and parents to borrow directly from the U.S. Department of Education.
Before consolidating, borrowers should consider benefits associated with the original loans, such as interest [rate discounts](https://www.investopedia.com/terms/d/discountrate.asp) and rebates. When the loans are rolled into a new direct consolidated loan, borrowers may lose benefits. Additionally, if the new loan increases the repayment period, the borrower will likely pay more interest.
After completing a free application, the borrower confirms the loans and agrees to repay the new direct consolidation loan. The borrower will have a single monthly payment on the new loan instead of multiple monthly payments on several loans.
## Pros and Cons of a Direct Consolidation Loan
Pros
* Lower monthly payments
* One monthly payment
* Different repayment options
* Access to loan forgiveness options
* A fixed interest rate that may be lower than the rates on the previous loans
Cons
* Could pay more interest over life of loan
* No grace period
* Prior loan payments don't count toward loan forgiveness requirements
* You may lose some benefits by consolidating your loans
### Pros Explained
Borrowers may be eligible for repayment terms of up to 30 years with one monthly payment. This makes it easier to keep track of a [student loan](https://www.investopedia.com/student-loans-4689727) balance. Direct consolidation loans have a [fixed interest rate](https://www.investopedia.com/terms/f/fixedinterestrate.asp), and borrowers may access different repayment options.
The options include:
* A standard repayment plan
* A graduated repayment plan
* A extended repayment plan
* The [Saving on a Valuable Education (SAVE) Plan](https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022)
* The [Pay As You Earn (PAYE) Plan](https://www.investopedia.com/terms/p/pay-as-you-earn.asp)
* An Income-Based Repayment (IBR) Plan
* An Income-Contingent Repayment (ICR) Plan
* An Income-Sensitive Repayment Plan
###
Loans come out of [default](https://www.investopedia.com/terms/d/default2.asp) status once consolidated if borrowers meet specific requirements.
### Cons Explained
When loans are consolidated, the interest on the consolidated loan is based on a [weighted average](https://www.investopedia.com/terms/w/weightedaverage.asp) of the rates on their old loans, rounded to the nearest one-eighth of a percent (0.125%). The interest rate on a consolidated loan may be higher or lower than the average rates of the previous loans.
Because consolidation extends the repayment period, the borrower's monthly payment is lowered but may result in paying more money over the life of the loan. A direct consolidation loan does not come with a grace period. The repayment period starts immediately upon consolidation, with the first payment due in about 60 days.
## Loan Forgiveness and Assistance
In August 2022, the Biden administration announced a plan to forgive up to $20,000 in student loan debt for borrowers who had received Pell Grants and $10,000 for other borrowers, at a total cost of $430 billion. However, the Supreme Court struck down this plan in June 2023. The court ruled the administration lacked the authority under existing federal law to cancel the debt.
In response to the decision, the White House unveiled the Saving on a Valuable Education (SAVE) Plan, a new income-driven repayment (IDR) option. Features of the plan include:
* Lowering monthly payments for undergraduate borrowers to 5% of discretionary income.
* Changing the discretionary income formula so that an estimated one million low-income borrowers qualify for monthly payments of $0.
* Halting the capitalization of unpaid interest, so that loan balances don’t grow as long as payments are kept current.
* Eliminating the need for a spouse to cosign an IDR application.
###
The SAVE Plan, an income-driven repayment option for student loan borrowers, sets monthly payments at $0 for single borrowers earning less than $32,800 per year. You can apply for this plan and income-driven repayment options on the [Federal Student Aid](https://studentaid.gov/idr/) website.
## What Loans Can Be Consolidated into a Direct Subsidized Consolidation Loan?
Borrowers can consolidate subsidized and unsubsidized Stafford loans, Supplemental Loans for Students, Federally Insured Student Loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.
## What Is the Interest Rate on a Direct Consolidation Loan?
The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. If the weighted average interest on the loans is 6.20%, for example, the new interest rate will be 6.25% after consolidating.
## Does Loan Consolidation Qualify for Forgiveness or Income-Driven Repayment Plans?
By opting for direct loan consolidation, borrowers can access income-driven repayment plans. They may also opt for direct loan consolidation if they want to be eligible for certain loan forgiveness programs. With an income-driven repayment plan under the SAVE Plan, borrowers can qualify for forgiveness of the remaining [balance](https://www.investopedia.com/terms/a/accountbalance.asp) after 20 years.
## How Long Does It Take for a Direct Consolidation Loan to Pay off Old Loans?
The terms on a consolidated loan range up to 30 years, depending on the balance and repayment schedule.
## The Bottom Line
Borrowers who juggle multiple payments on many federal student loans may want to consider a direct consolidation loan. This program combines the loans into a single loan with a fixed interest rate. There's no credit check required, and borrowers don't have to pay an application fee. Information is available on the [Department of Education's website](https://studentaid.gov/loan-consolidation/).
| What Is a Direct Consolidation Loan?
A direct consolidation loan combines two or more federal education loans into a single loan. This loan comes with a fixed interest rate that is based on the weighted average of the rates of the consolidated loans. Combining debt through the direct consolidation loan program includes a free application for the borrower.
Key Takeaways
A direct consolidation loan combines two or more federal education loans into a single loan.The fixed rate is based on the weighted average rate of the combined loans.Most federal loans are eligible for consolidation, but private loans are not.Borrowers can consolidate once they complete school, withdraw from school, or fall below half-time student status.
Understanding Direct Consolidation Loans
Direct consolidation loans allow borrowers to lower the number of loan payments they have to make each month by combining them into a single payment. Loans are managed by the U.S. Department of Education, and the application is free. Most federal loans are eligible for consolidation, but private loans are not. Borrowers can consolidate once they complete or withdraw from school or fall below half-time student status.
Borrowers who obtain a direct consolidation loan also access loan forgiveness options. Loan forgiveness programs allow borrowers to cancel their obligation to repay all or a portion of the remaining principal and interest owed on a student loan. Common forgiveness programs include the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness (PSLF) program. In most cases, student loan forgiveness is not considered taxable income and borrowers are not required to pay income tax on canceled or forgiven balances.
Direct Consolidation Loan Process
Direct consolidation loans are issued through the Federal Direct Student Loan Program. The Federal Direct Student Loan Program allows students and parents to borrow directly from the U.S. Department of Education.
Before consolidating, borrowers should consider benefits associated with the original loans, such as interest rate discounts and rebates. When the loans are rolled into a new direct consolidated loan, borrowers may lose benefits. Additionally, if the new loan increases the repayment period, the borrower will likely pay more interest.
After completing a free application, the borrower confirms the loans and agrees to repay the new direct consolidation loan. The borrower will have a single monthly payment on the new loan instead of multiple monthly payments on several loans.
Pros and Cons of a Direct Consolidation Loan
Pros
Lower monthly payments
One monthly payment
Different repayment options
Access to loan forgiveness options
A fixed interest rate that may be lower than the rates on the previous loans
Cons
Could pay more interest over life of loan
No grace period
Prior loan payments don't count toward loan forgiveness requirements
You may lose some benefits by consolidating your loans
Pros Explained
Borrowers may be eligible for repayment terms of up to 30 years with one monthly payment. This makes it easier to keep track of a student loan balance. Direct consolidation loans have a fixed interest rate, and borrowers may access different repayment options.
The options include:
A standard repayment plan
A graduated repayment plan
A extended repayment plan
The Saving on a Valuable Education (SAVE) Plan
The Pay As You Earn (PAYE) Plan
An Income-Based Repayment (IBR) Plan
An Income-Contingent Repayment (ICR) Plan
An Income-Sensitive Repayment Plan
Loans come out of default status once consolidated if borrowers meet specific requirements.
Cons Explained
When loans are consolidated, the interest on the consolidated loan is based on a weighted average of the rates on their old loans, rounded to the nearest one-eighth of a percent (0.125%). The interest rate on a consolidated loan may be higher or lower than the average rates of the previous loans.
Because consolidation extends the repayment period, the borrower's monthly payment is lowered but may result in paying more money over the life of the loan. A direct consolidation loan does not come with a grace period. The repayment period starts immediately upon consolidation, with the first payment due in about 60 days.
Loan Forgiveness and Assistance
In August 2022, the Biden administration announced a plan to forgive up to $20,000 in student loan debt for borrowers who had received Pell Grants and $10,000 for other borrowers, at a total cost of $430 billion. However, the Supreme Court struck down this plan in June 2023. The court ruled the administration lacked the authority under existing federal law to cancel the debt.
In response to the decision, the White House unveiled the Saving on a Valuable Education (SAVE) Plan, a new income-driven repayment (IDR) option. Features of the plan include:
Lowering monthly payments for undergraduate borrowers to 5% of discretionary income.Changing the discretionary income formula so that an estimated one million low-income borrowers qualify for monthly payments of $0.Halting the capitalization of unpaid interest, so that loan balances don’t grow as long as payments are kept current.Eliminating the need for a spouse to cosign an IDR application.
The SAVE Plan, an income-driven repayment option for student loan borrowers, sets monthly payments at $0 for single borrowers earning less than $32,800 per year. You can apply for this plan and income-driven repayment options on the Federal Student Aid website.
What Loans Can Be Consolidated into a Direct Subsidized Consolidation Loan?
Borrowers can consolidate subsidized and unsubsidized Stafford loans, Supplemental Loans for Students, Federally Insured Student Loans, PLUS loans, direct loans, Perkins loans, and any other type of federal student loan.
What Is the Interest Rate on a Direct Consolidation Loan?
The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. If the weighted average interest on the loans is 6.20%, for example, the new interest rate will be 6.25% after consolidating.
Does Loan Consolidation Qualify for Forgiveness or Income-Driven Repayment Plans?
By opting for direct loan consolidation, borrowers can access income-driven repayment plans. They may also opt for direct loan consolidation if they want to be eligible for certain loan forgiveness programs. With an income-driven repayment plan under the SAVE Plan, borrowers can qualify for forgiveness of the remaining balance after 20 years.
How Long Does It Take for a Direct Consolidation Loan to Pay off Old Loans?
The terms on a consolidated loan range up to 30 years, depending on the balance and repayment schedule.
The Bottom Line
Borrowers who juggle multiple payments on many federal student loans may want to consider a direct consolidation loan. This program combines the loans into a single loan with a fixed interest rate. There's no credit check required, and borrowers don't have to pay an application fee. Information is available on the Department of Education's website.
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https://www.investopedia.com/terms/a/atm.asp | What Is an ATM and 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-an-automated-teller-machine-atm"></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 Automated Teller Machine (ATM)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An automated teller machine (ATM) is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Anyone with a credit card or debit card can access cash at most ATMs, either in the U.S. or other countries.
</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"> ATMs are convenient, allowing consumers to perform quick self-service transactions such as deposits, cash withdrawals, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/stop-paying-bills-late.asp">bill payments</a>, and transfers between accounts.
</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"> Fees are commonly charged for cash withdrawals by the bank where the account is located, by the operator of the ATM, or by both. Some or all of these <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-checking-accounts-with-no-atm-fees-5079489">fees can be avoided</a> by using an ATM operated directly by the bank network that holds the account. Using an ATM abroad can cost more than using one in the U.S. due to exchange rates or transaction fees.<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_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>ATMS, or automated teller machines, are banking outlets where you can withdraw cash without going into a branch of their bank.</li><li>Some ATMs only dispense cash, while others allow transactions such as check deposits or balance transfers.</li><li>The first ATMs appeared in 1960s and now number more than 2 million worldwide.</li><li>Today’s ATMs are capable of accepting deposits as well as administering several other banking services.</li><li>To avoid ATM fees, try to use an ATM by your own bank.</li></ul></div></div></div>
<span class="heading-toc" id="toc-history-of-atms"></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"> History of ATMs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The first ATM appeared at a branch of Barclays Bank in London in 1967, though there are reports of a cash dispenser in use in Japan in the mid-1960s.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="3"></span> The interbank communications networks that allowed a consumer to use one bank’s card at another bank’s ATM followed in the 1970s.
</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"> Within a few years, ATMs had spread around the globe, securing a presence in every major country. They now can be found even in tiny island nations such as Kiribati and the Federated States of Micronesia.<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_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> ATMs are also known automated bank machines (ABMs), cashpoints, or cash machines.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">More than 4 million</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Number of ATMs in use around the world.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<span class="heading-toc" id="toc-types-of-atms"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Types of ATMs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> There are two main types of ATMs. Basic units only allow you to withdraw cash and receive updated account balances.
</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 more complex machines accept deposits, facilitate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit</a> payments and transfers, and access account information. To access the advanced features of the complex units, you often must be an accountholder at the bank that operates the machine.<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_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>You can now buy and sell Bitcoin and other crypto tokens via <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin-atm.asp">Bitcoin ATMs</a>, Bitcoin ATMsare internet-connected terminals that will dispense cash in return for crypto. They may also accept cash or credit card to purchase crypto. There are now more than 28,000 Bitcoin ATMs located around the world.<span class="ql-inline-citation" data-cite="9"></span></p></div></div></div>
<span class="heading-toc" id="toc-atm-design-elements"></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"> ATM Design Elements </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The design of each ATM may be different, but they all contain the same basic parts:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0">
<li><strong>Card reader</strong>: This part reads the chip on the front of your card or the magnetic stripe on the back.</li>
<li><strong>Keypad</strong>: The keypad is used to input information, including your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-identification-number.asp">personal identification number (PIN)</a>, the type of transaction required, and the amount of the transaction.</li>
<li><strong>Cash dispenser</strong>: Bills are dispensed through a slot in the machine, which is connected to a safe at the bottom of the machine.</li>
<li><strong>Printer</strong>:<strong> </strong>If required, you can request receipts that are printed out of the ATM. The receipt records the type of transaction, the amount, and the current account balance.</li>
<li><strong>Screen</strong>: The ATM issues prompts that guide you through the process of executing the transaction. Information about accounts and their balances is also transmitted on the screen.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Full-service machines often have slots for depositing paper checks or cash.<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_32-0"></div>
<span class="heading-toc" id="toc-how-to-use-an-atm"></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 Use an ATM </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> To use an ATM, you typically insert your bank cards and follow the prompts to withdraw cash, which is dispensed through a slot. ATMs require you to use a plastic card—either a bank <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> or a credit card—to complete a transaction. Your identity is authenticated by a PIN before any transaction can be made.
</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"> Many cards come with a chip, which transmits data from the card to the machine. These work in the same way as a bar code that is scanned by a code reader.
</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"> Banks place ATMs inside and outside of their branches. Other ATMs are located in high-traffic areas such as shopping centers, grocery stores, convenience stores, airports, bus and railway stations, gas stations, casinos, restaurants, and other locations.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_40-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_41-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Most ATMs in banks are multifunctional, while off-site ATMs are generally only for cash withdrawals.</p></div></div></div>
<span class="heading-toc" id="toc-atm-fees"></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"> ATM Fees </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Account holders can typically use their bank’s ATMs at no charge, but an ATM owned by another bank usually charges a fee. According to MoneyRates.com, the average total fees to withdraw cash from an out-of-network ATM was $4.55 in 2022. Some banks will reimburse their customers for the fee, especially if there is no corresponding ATM available in the area.<span class="ql-inline-citation" data-cite="14"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> ATM fees can add up for users who make withdrawals regularly. For example, if you make weekly withdrawals at an ATM that charges $4 and is not from your bank, you would pay more than $200 a year in ATM fees.
</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-using-atms-outside-the-us"></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"> Using ATMs Outside the U.S. </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> ATMs make it easier for you to access your checking or savings accounts from almost anywhere in the world when you travel.
</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"> Travel experts recommend using foreign ATMs as a source of cash abroad, as they generally receive a more favorable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchangerate.asp">exchange rate</a> than they would at most currency exchange offices.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> However, the accountholder’s bank may charge a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-transaction-fee.asp">transaction fee</a> or a percentage of the amount exchanged. Many ATMs don't list the exchange rate on the receipt, making it difficult to track spending.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-how-much-can-you-withdraw-from-an-automated-teller-machine-atm"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Can You Withdraw from an Automated Teller Machine (ATM)?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The amount that you can withdraw from an automated teller machine (ATM) per day, per week, or per month will vary based on your bank and account status at that bank. For instance, some banks limit daily cash withdrawals to $300. But most Citibank accounts allow up to $1,500, depending on your account.<span class="ql-inline-citation" data-cite="15"></span> You may be able to get around these limits by calling your bank to request permission or upgrading your banking status by depositing more funds.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_56-0"><span class="heading-toc" id="toc-how-do-you-make-a-deposit-at-an-atm"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Make a Deposit at an ATM?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If you are a bank’s customer, you may be able to deposit cash or checks via one of their ATMs. To do this, you may simply need to insert the checks or cash directly into the machine. Other machines may require you to fill out a deposit slip and put the money into an envelope before inserting it into the machine. Be sure to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-endorse-a-check-5188585">endorse the back of any checks</a> and note “For Deposit Only” to be safer.</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-which-bank-installed-the-first-atm-in-the-us"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Bank Installed the First ATM in the U.S.?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The first ATM in the U.S. was installed by Chemical Bank in Rockville Center (Long Island), New York, in 1969 (two years after Barclays installed the first ATM in the U.K.). By the end of 1971, more than 1,000 ATMs were installed worldwide.<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"> ATM, or automated teller machine, is a machine that lets you get cash from your bank account without visiting a teller. Some ATMs are simple cash dispensers, while others allow a variety of transactions such as check deposits, balance transfers, and bill payments. Before you make a withdrawal, make sure you understand what fees you will have to pay.
</p></div> | ## What Is an Automated Teller Machine (ATM)?
An automated teller machine (ATM) is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Anyone with a credit card or debit card can access cash at most ATMs, either in the U.S. or other countries.
ATMs are convenient, allowing consumers to perform quick self-service transactions such as deposits, cash withdrawals, [bill payments](https://www.investopedia.com/articles/pf/08/stop-paying-bills-late.asp), and transfers between accounts.
Fees are commonly charged for cash withdrawals by the bank where the account is located, by the operator of the ATM, or by both. Some or all of these [fees can be avoided](https://www.investopedia.com/best-checking-accounts-with-no-atm-fees-5079489) by using an ATM operated directly by the bank network that holds the account. Using an ATM abroad can cost more than using one in the U.S. due to exchange rates or transaction fees.
### Key Takeaways
* ATMS, or automated teller machines, are banking outlets where you can withdraw cash without going into a branch of their bank.
* Some ATMs only dispense cash, while others allow transactions such as check deposits or balance transfers.
* The first ATMs appeared in 1960s and now number more than 2 million worldwide.
* Today’s ATMs are capable of accepting deposits as well as administering several other banking services.
* To avoid ATM fees, try to use an ATM by your own bank.
## History of ATMs
The first ATM appeared at a branch of Barclays Bank in London in 1967, though there are reports of a cash dispenser in use in Japan in the mid-1960s. The interbank communications networks that allowed a consumer to use one bank’s card at another bank’s ATM followed in the 1970s.
Within a few years, ATMs had spread around the globe, securing a presence in every major country. They now can be found even in tiny island nations such as Kiribati and the Federated States of Micronesia.
ATMs are also known automated bank machines (ABMs), cashpoints, or cash machines.
### More than 4 million
Number of ATMs in use around the world.
## Types of ATMs
There are two main types of ATMs. Basic units only allow you to withdraw cash and receive updated account balances.
The more complex machines accept deposits, facilitate [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp) payments and transfers, and access account information. To access the advanced features of the complex units, you often must be an accountholder at the bank that operates the machine.
###
You can now buy and sell Bitcoin and other crypto tokens via [Bitcoin ATMs](https://www.investopedia.com/terms/b/bitcoin-atm.asp), Bitcoin ATMsare internet-connected terminals that will dispense cash in return for crypto. They may also accept cash or credit card to purchase crypto. There are now more than 28,000 Bitcoin ATMs located around the world.
## ATM Design Elements
The design of each ATM may be different, but they all contain the same basic parts:
* **Card reader**: This part reads the chip on the front of your card or the magnetic stripe on the back.
* **Keypad**: The keypad is used to input information, including your [personal identification number (PIN)](https://www.investopedia.com/terms/p/personal-identification-number.asp), the type of transaction required, and the amount of the transaction.
* **Cash dispenser**: Bills are dispensed through a slot in the machine, which is connected to a safe at the bottom of the machine.
* **Printer**:If required, you can request receipts that are printed out of the ATM. The receipt records the type of transaction, the amount, and the current account balance.
* **Screen**: The ATM issues prompts that guide you through the process of executing the transaction. Information about accounts and their balances is also transmitted on the screen.
Full-service machines often have slots for depositing paper checks or cash.
## How To Use an ATM
To use an ATM, you typically insert your bank cards and follow the prompts to withdraw cash, which is dispensed through a slot. ATMs require you to use a plastic card—either a bank [debit card](https://www.investopedia.com/terms/d/debitcard.asp) or a credit card—to complete a transaction. Your identity is authenticated by a PIN before any transaction can be made.
Many cards come with a chip, which transmits data from the card to the machine. These work in the same way as a bar code that is scanned by a code reader.
Banks place ATMs inside and outside of their branches. Other ATMs are located in high-traffic areas such as shopping centers, grocery stores, convenience stores, airports, bus and railway stations, gas stations, casinos, restaurants, and other locations.
###
Most ATMs in banks are multifunctional, while off-site ATMs are generally only for cash withdrawals.
## ATM Fees
Account holders can typically use their bank’s ATMs at no charge, but an ATM owned by another bank usually charges a fee. According to MoneyRates.com, the average total fees to withdraw cash from an out-of-network ATM was $4.55 in 2022. Some banks will reimburse their customers for the fee, especially if there is no corresponding ATM available in the area.
ATM fees can add up for users who make withdrawals regularly. For example, if you make weekly withdrawals at an ATM that charges $4 and is not from your bank, you would pay more than $200 a year in ATM fees.
## Using ATMs Outside the U.S.
ATMs make it easier for you to access your checking or savings accounts from almost anywhere in the world when you travel.
Travel experts recommend using foreign ATMs as a source of cash abroad, as they generally receive a more favorable [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp) than they would at most currency exchange offices.
However, the accountholder’s bank may charge a [transaction fee](https://www.investopedia.com/terms/f/foreign-transaction-fee.asp) or a percentage of the amount exchanged. Many ATMs don't list the exchange rate on the receipt, making it difficult to track spending.
## How Much Can You Withdraw from an Automated Teller Machine (ATM)?
The amount that you can withdraw from an automated teller machine (ATM) per day, per week, or per month will vary based on your bank and account status at that bank. For instance, some banks limit daily cash withdrawals to $300. But most Citibank accounts allow up to $1,500, depending on your account. You may be able to get around these limits by calling your bank to request permission or upgrading your banking status by depositing more funds.
## How Do You Make a Deposit at an ATM?
If you are a bank’s customer, you may be able to deposit cash or checks via one of their ATMs. To do this, you may simply need to insert the checks or cash directly into the machine. Other machines may require you to fill out a deposit slip and put the money into an envelope before inserting it into the machine. Be sure to [endorse the back of any checks](https://www.investopedia.com/how-to-endorse-a-check-5188585) and note “For Deposit Only” to be safer.
## Which Bank Installed the First ATM in the U.S.?
The first ATM in the U.S. was installed by Chemical Bank in Rockville Center (Long Island), New York, in 1969 (two years after Barclays installed the first ATM in the U.K.). By the end of 1971, more than 1,000 ATMs were installed worldwide.
## The Bottom Line
ATM, or automated teller machine, is a machine that lets you get cash from your bank account without visiting a teller. Some ATMs are simple cash dispensers, while others allow a variety of transactions such as check deposits, balance transfers, and bill payments. Before you make a withdrawal, make sure you understand what fees you will have to pay.
| What Is an Automated Teller Machine (ATM)?
An automated teller machine (ATM) is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Anyone with a credit card or debit card can access cash at most ATMs, either in the U.S. or other countries.
ATMs are convenient, allowing consumers to perform quick self-service transactions such as deposits, cash withdrawals, bill payments, and transfers between accounts.
Fees are commonly charged for cash withdrawals by the bank where the account is located, by the operator of the ATM, or by both. Some or all of these fees can be avoided by using an ATM operated directly by the bank network that holds the account. Using an ATM abroad can cost more than using one in the U.S. due to exchange rates or transaction fees.
Key Takeaways
ATMS, or automated teller machines, are banking outlets where you can withdraw cash without going into a branch of their bank.Some ATMs only dispense cash, while others allow transactions such as check deposits or balance transfers.The first ATMs appeared in 1960s and now number more than 2 million worldwide.Today’s ATMs are capable of accepting deposits as well as administering several other banking services.To avoid ATM fees, try to use an ATM by your own bank.
History of ATMs
The first ATM appeared at a branch of Barclays Bank in London in 1967, though there are reports of a cash dispenser in use in Japan in the mid-1960s. The interbank communications networks that allowed a consumer to use one bank’s card at another bank’s ATM followed in the 1970s.
Within a few years, ATMs had spread around the globe, securing a presence in every major country. They now can be found even in tiny island nations such as Kiribati and the Federated States of Micronesia.
ATMs are also known automated bank machines (ABMs), cashpoints, or cash machines.
More than 4 million
Number of ATMs in use around the world.
Types of ATMs
There are two main types of ATMs. Basic units only allow you to withdraw cash and receive updated account balances.
The more complex machines accept deposits, facilitate line of credit payments and transfers, and access account information. To access the advanced features of the complex units, you often must be an accountholder at the bank that operates the machine.
You can now buy and sell Bitcoin and other crypto tokens via Bitcoin ATMs, Bitcoin ATMsare internet-connected terminals that will dispense cash in return for crypto. They may also accept cash or credit card to purchase crypto. There are now more than 28,000 Bitcoin ATMs located around the world.
ATM Design Elements
The design of each ATM may be different, but they all contain the same basic parts:
Card reader: This part reads the chip on the front of your card or the magnetic stripe on the back.
Keypad: The keypad is used to input information, including your personal identification number (PIN), the type of transaction required, and the amount of the transaction.
Cash dispenser: Bills are dispensed through a slot in the machine, which is connected to a safe at the bottom of the machine.
Printer: If required, you can request receipts that are printed out of the ATM. The receipt records the type of transaction, the amount, and the current account balance.
Screen: The ATM issues prompts that guide you through the process of executing the transaction. Information about accounts and their balances is also transmitted on the screen.
Full-service machines often have slots for depositing paper checks or cash.
How To Use an ATM
To use an ATM, you typically insert your bank cards and follow the prompts to withdraw cash, which is dispensed through a slot. ATMs require you to use a plastic card—either a bank debit card or a credit card—to complete a transaction. Your identity is authenticated by a PIN before any transaction can be made.
Many cards come with a chip, which transmits data from the card to the machine. These work in the same way as a bar code that is scanned by a code reader.
Banks place ATMs inside and outside of their branches. Other ATMs are located in high-traffic areas such as shopping centers, grocery stores, convenience stores, airports, bus and railway stations, gas stations, casinos, restaurants, and other locations.
Most ATMs in banks are multifunctional, while off-site ATMs are generally only for cash withdrawals.
ATM Fees
Account holders can typically use their bank’s ATMs at no charge, but an ATM owned by another bank usually charges a fee. According to MoneyRates.com, the average total fees to withdraw cash from an out-of-network ATM was $4.55 in 2022. Some banks will reimburse their customers for the fee, especially if there is no corresponding ATM available in the area.
ATM fees can add up for users who make withdrawals regularly. For example, if you make weekly withdrawals at an ATM that charges $4 and is not from your bank, you would pay more than $200 a year in ATM fees.
Using ATMs Outside the U.S.
ATMs make it easier for you to access your checking or savings accounts from almost anywhere in the world when you travel.
Travel experts recommend using foreign ATMs as a source of cash abroad, as they generally receive a more favorable exchange rate than they would at most currency exchange offices.
However, the accountholder’s bank may charge a transaction fee or a percentage of the amount exchanged. Many ATMs don't list the exchange rate on the receipt, making it difficult to track spending.
How Much Can You Withdraw from an Automated Teller Machine (ATM)?
The amount that you can withdraw from an automated teller machine (ATM) per day, per week, or per month will vary based on your bank and account status at that bank. For instance, some banks limit daily cash withdrawals to $300. But most Citibank accounts allow up to $1,500, depending on your account. You may be able to get around these limits by calling your bank to request permission or upgrading your banking status by depositing more funds.
How Do You Make a Deposit at an ATM?
If you are a bank’s customer, you may be able to deposit cash or checks via one of their ATMs. To do this, you may simply need to insert the checks or cash directly into the machine. Other machines may require you to fill out a deposit slip and put the money into an envelope before inserting it into the machine. Be sure to endorse the back of any checks and note “For Deposit Only” to be safer.
Which Bank Installed the First ATM in the U.S.?
The first ATM in the U.S. was installed by Chemical Bank in Rockville Center (Long Island), New York, in 1969 (two years after Barclays installed the first ATM in the U.K.). By the end of 1971, more than 1,000 ATMs were installed worldwide.
The Bottom Line
ATM, or automated teller machine, is a machine that lets you get cash from your bank account without visiting a teller. Some ATMs are simple cash dispensers, while others allow a variety of transactions such as check deposits, balance transfers, and bill payments. Before you make a withdrawal, make sure you understand what fees you will have to pay.
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"line of credit",
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https://www.investopedia.com/terms/m/market_cycles.asp | Market Cycles: Definition, How They Work, and Types | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-market-cycles"></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 Market Cycles? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Market cycles, also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments. During a cycle, some securities or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetclasses.asp">asset classes</a> outperform others because their business models are aligned with conditions for growth. Market cycles are the period between the two latest highs or lows of a common benchmark, such as the S&P 500, highlighting a fund’s performance through both an up and a down market.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A cycle refers to trends or patterns that emerge during different business environments.</li><li>A cycle time frame often differs for each individual person depending on what trends they are looking for.</li><li>A market cycle often has four distinct phases.</li><li>It can be almost impossible to identify what phase of the cycle we are currently in. </li><li>At different stages of a full market cycle, different securities will respond to market forces differently.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-market-cycles-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How Market Cycles Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> New market cycles form when trends within a particular sector or industry develop in response to meaningful innovation, new products, or regulatory environment. These cycles or trends are often called secular. During these periods, revenue and net profits may exhibit similar growth patterns among many companies within a given industry, which is cyclical in nature.
</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"> Market cycles are often hard to pinpoint until after the fact and rarely have a specific, clearly identifiable beginning or ending point which often leads to confusion or controversy surrounding the assessment of policies and strategies. However, most market veterans believe they exist, and many investors pursue <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentstrategy.asp">investment strategies</a> that aim to profit from them by trading securities ahead of directional shifts in the cycle.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_11-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_12-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>There are stock market anomalies that cannot be explained but occur year after year. </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_13-0"> <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_14-0"> A market cycle can range anywhere from a few minutes to many years, depending on the market in question, as there are many markets to look at, and the time horizon which is being analyzed. Different careers will look at different aspects of the range. A day trader may look at five-minute bars whereas a real estate investor will look at a cycle ranging up to 20 years.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<span class="heading-toc" id="toc-types-of-market-cycles"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Types of Market Cycles </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Market cycles are generally considered to exhibit four distinctive phases. At different stages of a full market cycle, different securities will respond to market forces differently. For example, during a market upswing, luxury goods tend to outperform, as people are comfortable buying powerboats and Harley Davidson motorcycles. In contrast, during a market downswing, the consumer durables industry tends to outperform, as people usually don't cut back their toothpaste and toilet paper consumption during a market pullback.
</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 four stages of a market cycle include the accumulation, uptrend or mark-up, distribution, and downtrend or markdown phases.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li><strong>Accumulation Phase:</strong> Accumulation occurs after the market has bottomed and the innovators and early adopters begin to buy, figuring the worst is over.</li><li><strong>Mark-up Phase: </strong>This occurs when the market has been stable for a while and moves higher in price.</li><li><strong>Distribution Phase: </strong>Sellers begin to dominate as the stock reaches its peak.</li><li><strong>Downtrend: </strong>Downtrend occurs when the stock price is tumbling down.</li>
</ol>
<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"> Market cycles take both fundamental and technical indicators (charting) into account, using securities prices and other metrics as a gauge of cyclical behavior.
</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"> Some examples include 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>, semiconductor/operating system cycles within technology, and the movement of interest-rate-sensitive financial stocks.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_27-0"><span class="heading-toc" id="toc-how-long-is-a-market-cycle"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Is a Market Cycle?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Cycles in the market tend to have cycles lasting 6-12 months on average. However, fiscal policy in either the United States or world markets can have a widespread effect on the length of a market cycle. The average is 6 to 12 but if, for example, the Federal Reserve were to drastically cut interest rates, it could prolong a market trending upward for a period of years.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-are-the-4-market-cycles"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the 4 Market Cycles?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are four phases of market cycles: the accumulation phase, mark-up phase, distribution phase, and downturn phase. The first two phases could be considered mirror images of the others. Accumulation is when investors and businesses are scaling back into the market and increasing their exposure, whereas distribution is the opposite, and is a period when investors start shaving exposure from their positions. Mark-up is an increase in price while a downturn is a decrease.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-what-is-market-mid-cycle"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Market Mid-Cycle?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A market mid-cycle occurs when an economy is strong but growth is moderating or slightly slowing. Corporate profits are delivering as expected and interest rates are low. This tends to be the longest part of the market cycle.</p></div>
</div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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"> Markets generally follow the same cycle and although there is an average period of time for each cycle, political and fiscal policy can either extend or contract certain phases. Financial markets experience many mini-cycles in the short term, but large market cycles tend to occur in terms of months or years.
</p></div> | ## What Are Market Cycles?
Market cycles, also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments. During a cycle, some securities or [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp) outperform others because their business models are aligned with conditions for growth. Market cycles are the period between the two latest highs or lows of a common benchmark, such as the S&P 500, highlighting a fund’s performance through both an up and a down market.
### Key Takeaways
* A cycle refers to trends or patterns that emerge during different business environments.
* A cycle time frame often differs for each individual person depending on what trends they are looking for.
* A market cycle often has four distinct phases.
* It can be almost impossible to identify what phase of the cycle we are currently in.
* At different stages of a full market cycle, different securities will respond to market forces differently.
## How Market Cycles Work
New market cycles form when trends within a particular sector or industry develop in response to meaningful innovation, new products, or regulatory environment. These cycles or trends are often called secular. During these periods, revenue and net profits may exhibit similar growth patterns among many companies within a given industry, which is cyclical in nature.
Market cycles are often hard to pinpoint until after the fact and rarely have a specific, clearly identifiable beginning or ending point which often leads to confusion or controversy surrounding the assessment of policies and strategies. However, most market veterans believe they exist, and many investors pursue [investment strategies](https://www.investopedia.com/terms/i/investmentstrategy.asp) that aim to profit from them by trading securities ahead of directional shifts in the cycle.
###
There are stock market anomalies that cannot be explained but occur year after year.
## Special Considerations
A market cycle can range anywhere from a few minutes to many years, depending on the market in question, as there are many markets to look at, and the time horizon which is being analyzed. Different careers will look at different aspects of the range. A day trader may look at five-minute bars whereas a real estate investor will look at a cycle ranging up to 20 years.
## Types of Market Cycles
Market cycles are generally considered to exhibit four distinctive phases. At different stages of a full market cycle, different securities will respond to market forces differently. For example, during a market upswing, luxury goods tend to outperform, as people are comfortable buying powerboats and Harley Davidson motorcycles. In contrast, during a market downswing, the consumer durables industry tends to outperform, as people usually don't cut back their toothpaste and toilet paper consumption during a market pullback.
The four stages of a market cycle include the accumulation, uptrend or mark-up, distribution, and downtrend or markdown phases.
1. **Accumulation Phase:** Accumulation occurs after the market has bottomed and the innovators and early adopters begin to buy, figuring the worst is over.
2. **Mark-up Phase:** This occurs when the market has been stable for a while and moves higher in price.
3. **Distribution Phase:** Sellers begin to dominate as the stock reaches its peak.
4. **Downtrend:** Downtrend occurs when the stock price is tumbling down.
Market cycles take both fundamental and technical indicators (charting) into account, using securities prices and other metrics as a gauge of cyclical behavior.
Some examples include the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp), semiconductor/operating system cycles within technology, and the movement of interest-rate-sensitive financial stocks.
## How Long Is a Market Cycle?
Cycles in the market tend to have cycles lasting 6-12 months on average. However, fiscal policy in either the United States or world markets can have a widespread effect on the length of a market cycle. The average is 6 to 12 but if, for example, the Federal Reserve were to drastically cut interest rates, it could prolong a market trending upward for a period of years.
## What Are the 4 Market Cycles?
There are four phases of market cycles: the accumulation phase, mark-up phase, distribution phase, and downturn phase. The first two phases could be considered mirror images of the others. Accumulation is when investors and businesses are scaling back into the market and increasing their exposure, whereas distribution is the opposite, and is a period when investors start shaving exposure from their positions. Mark-up is an increase in price while a downturn is a decrease.
## What Is Market Mid-Cycle?
A market mid-cycle occurs when an economy is strong but growth is moderating or slightly slowing. Corporate profits are delivering as expected and interest rates are low. This tends to be the longest part of the market cycle.
## The Bottom Line
Markets generally follow the same cycle and although there is an average period of time for each cycle, political and fiscal policy can either extend or contract certain phases. Financial markets experience many mini-cycles in the short term, but large market cycles tend to occur in terms of months or years.
| What Are Market Cycles?
Market cycles, also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments. During a cycle, some securities or asset classes outperform others because their business models are aligned with conditions for growth. Market cycles are the period between the two latest highs or lows of a common benchmark, such as the S&P 500, highlighting a fund’s performance through both an up and a down market.
Key Takeaways
A cycle refers to trends or patterns that emerge during different business environments.A cycle time frame often differs for each individual person depending on what trends they are looking for.A market cycle often has four distinct phases.It can be almost impossible to identify what phase of the cycle we are currently in. At different stages of a full market cycle, different securities will respond to market forces differently.
How Market Cycles Work
New market cycles form when trends within a particular sector or industry develop in response to meaningful innovation, new products, or regulatory environment. These cycles or trends are often called secular. During these periods, revenue and net profits may exhibit similar growth patterns among many companies within a given industry, which is cyclical in nature.
Market cycles are often hard to pinpoint until after the fact and rarely have a specific, clearly identifiable beginning or ending point which often leads to confusion or controversy surrounding the assessment of policies and strategies. However, most market veterans believe they exist, and many investors pursue investment strategies that aim to profit from them by trading securities ahead of directional shifts in the cycle.
There are stock market anomalies that cannot be explained but occur year after year.
Special Considerations
A market cycle can range anywhere from a few minutes to many years, depending on the market in question, as there are many markets to look at, and the time horizon which is being analyzed. Different careers will look at different aspects of the range. A day trader may look at five-minute bars whereas a real estate investor will look at a cycle ranging up to 20 years.
Types of Market Cycles
Market cycles are generally considered to exhibit four distinctive phases. At different stages of a full market cycle, different securities will respond to market forces differently. For example, during a market upswing, luxury goods tend to outperform, as people are comfortable buying powerboats and Harley Davidson motorcycles. In contrast, during a market downswing, the consumer durables industry tends to outperform, as people usually don't cut back their toothpaste and toilet paper consumption during a market pullback.
The four stages of a market cycle include the accumulation, uptrend or mark-up, distribution, and downtrend or markdown phases.
Accumulation Phase: Accumulation occurs after the market has bottomed and the innovators and early adopters begin to buy, figuring the worst is over.Mark-up Phase: This occurs when the market has been stable for a while and moves higher in price.Distribution Phase: Sellers begin to dominate as the stock reaches its peak.Downtrend: Downtrend occurs when the stock price is tumbling down.
Market cycles take both fundamental and technical indicators (charting) into account, using securities prices and other metrics as a gauge of cyclical behavior.
Some examples include the business cycle, semiconductor/operating system cycles within technology, and the movement of interest-rate-sensitive financial stocks.
How Long Is a Market Cycle?
Cycles in the market tend to have cycles lasting 6-12 months on average. However, fiscal policy in either the United States or world markets can have a widespread effect on the length of a market cycle. The average is 6 to 12 but if, for example, the Federal Reserve were to drastically cut interest rates, it could prolong a market trending upward for a period of years.
What Are the 4 Market Cycles?
There are four phases of market cycles: the accumulation phase, mark-up phase, distribution phase, and downturn phase. The first two phases could be considered mirror images of the others. Accumulation is when investors and businesses are scaling back into the market and increasing their exposure, whereas distribution is the opposite, and is a period when investors start shaving exposure from their positions. Mark-up is an increase in price while a downturn is a decrease.
What Is Market Mid-Cycle?
A market mid-cycle occurs when an economy is strong but growth is moderating or slightly slowing. Corporate profits are delivering as expected and interest rates are low. This tends to be the longest part of the market cycle.
The Bottom Line
Markets generally follow the same cycle and although there is an average period of time for each cycle, political and fiscal policy can either extend or contract certain phases. Financial markets experience many mini-cycles in the short term, but large market cycles tend to occur in terms of months or years.
| [
[
"asset classes",
"https://www.investopedia.com/terms/a/assetclasses.asp"
],
[
"investment strategies",
"https://www.investopedia.com/terms/i/investmentstrategy.asp"
],
[
"business cycle",
"https://www.investopedia.com/terms/b/businesscycle.asp"
]
] |
https://www.investopedia.com/terms/p/profitability.asp | Profitability Index (PI): Definition, Components, and Formula | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-profitability-index-pi"></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 Profitability Index (PI)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The profitability index (PI), alternatively referred to as value investment ratio (VIR) or profit investment ratio (PIR), describes an index that represents the relationship between the costs and benefits of a proposed project.
</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 profitability index is calculated as the ratio between the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/presentvalue.asp">present value</a> of future expected cash flows and the initial amount invested in the project. A higher PI means that a project will be considered more attractive.
</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 profitability index (PI) is a measure of a project's or investment's attractiveness.</li><li>The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.</li><li>A PI greater than 1.0 is deemed as a good investment, with higher values corresponding to more attractive projects.</li><li>Under capital constraints and mutually exclusive projects, only those with the highest PIs should be undertaken.</li></ul></div></div></div>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Theresa Chiechi</p></span>
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<span class="heading-toc" id="toc-understanding-the-profitability-index-pi"></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 the Profitability Index (PI) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The profitability index is helpful in ranking various projects because it lets investors quantify the value created per each investment unit. A profitability index of 1.0 is logically the lowest acceptable measure on the index, as any value lower than that number would indicate that the project's present value (PV) is less than the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/initialcashflow.asp">initial investment</a>. As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The profitability index is an appraisal technique applied to potential capital outlays. The method divides the projected capital inflow by the projected capital outflow to determine the profitability of a project. As indicated by the aforementioned formula, the profitability index uses the present value of future cash flows and the initial investment to represent the aforementioned variables.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> When using the profitability index to compare the desirability of projects, it's essential to consider how the technique disregards project size. Therefore, projects with larger cash inflows may result in lower profitability index calculations because their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp">profit margins</a> are not as high.
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<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">What Is PI for an Investment?</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The PI, or the profitability index, measures the costs and benefits of a proposed project. It is calculated as the present value of the expected cash flows, divided by the cost of the initial investment.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<span class="heading-toc" id="toc-formula-for-the-profitability-index"></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"> Formula for the Profitability Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The profitability index can be computed using the following ratio:
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<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>
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<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"> PV of Future Cash Flows (Numerator) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The present value of future cash flows requires the implementation of time value of money calculations. Cash flows are discounted the appropriate number of periods to equate future cash flows to current monetary levels. Discounting accounts for the idea that the value of $1 today does not equal the value of $1 received in one year because money in the present offers more earning potential via interest-bearing savings accounts, than money yet unavailable. Cash flows received further in the future are therefore considered to have a lower present value than money received closer to the present.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Investment Required (Denominator) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The discounted projected cash outflows represent the initial capital outlay of a project. The initial investment required is only the cash flow required at the start of the project. All other outlays may occur at any point in the project's life, and these are factored into the calculation through the use of discounting in the numerator. These additional capital outlays may factor in benefits relating to taxation or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/depreciation.asp" rel="noopener noreferrer">depreciation</a>.
</p>
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<span class="heading-toc" id="toc-interpreting-the-profitability-index"></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"> Interpreting the Profitability Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Because profitability index calculations cannot be negative, they consequently must be converted to positive figures before they are deemed useful. Calculations greater than 1.0 indicate the future anticipated discounted cash inflows of the project are greater than the anticipated discounted cash outflows. Calculations less than 1.0 indicate the deficit of the outflows is greater than the discounted inflows, and the project should not be accepted. Calculations that equal 1.0 bring about situations of indifference where any gains or losses from a project are minimal.
</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"> When using the profitability index exclusively, calculations greater than 1.0 are ranked based on the highest calculation. When limited capital is available, and projects are mutually exclusive, the project with the highest profitability index is to be accepted as it indicates the project with the most productive use of limited capital.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The profitability index is also called the benefit-cost ratio for this reason. Although some projects result in higher net present values, those projects may be passed over because they do not have the highest profitability index and do not represent the most beneficial usage of company assets.
</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-profitability-index"></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 Profitability Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Imagine that a company is considering two potential projects: building a new factory, or expanding an existing one. The factory expansion project is expected to cost $1 million and generate cash flows of $200,000 per year for the next 5 years, with a discount rate of 10%. The new factory project is expected to cost $2 million and generate cash flows of $300,000 per year for the next 5 years, also with a discount rate of 10%.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> To calculate the profitability index for the factory expansion project, the present value of the future cash flows would be calculated using the following formula:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + ... + CFn / (1 + r)^n
</blockquote>
<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"> Where PV is the present value, CF is the cash flow in a given year, r is the discount rate, and n is the number of years.
</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"> Plugging in the values for this example, we get:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> <li>PV = $200,000 / (1 + 0.10)^1 + $200,000 / (1 + 0.10)^2 + ... + $200,000 / (1 + 0.10)^5</li><li>PV = $750,319</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The profitability index for the factory expansion project is then calculated as:
</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>PI = PV / Initial Investment</li><li>PI = $750,319 / $1,000,000</li><li>PI = 0.75</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"> To calculate the profitability index for the new factory project, the present value of the future cash flows would be calculated using the same formula:
</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>PV = $300,000 / (1 + 0.10)^1 + $300,000 / (1 + 0.10)^2 + ... + $300,000 / (1 + 0.10)^5</li><li>PV = $1,125,479</li>
</ul>
<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"> The profitability index for the new factory project is then calculated 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>PI = PV / Initial Investment</li><li>PI = $1,125,479/ $2,000,000</li><li>PI = 0.56</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"> In this example, the factory expansion project has a higher profitability index, meaning it is a more attractive investment. The company might decide to pursue this project instead of the new factory project because it is expected to generate more value per unit of investment.
</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"> However, since both PIs are less than 1.0, the company may end up forgoing either project in favor of a better opportunity elsewhere.
</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-advantages-and-disadvantages-of-the-profitability-index"></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"> Advantages and Disadvantages of the Profitability Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Here are some advantages of the profitability index:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> <li>It considers the time value of money: The profitability index takes into account the fact that money today is worth more than the same amount of money in the future, due to the potential for earning interest. This makes it a more accurate measure of investment attractiveness than simply looking at the total expected cash flows.</li><li>It allows for comparison of projects with different lifespans: The profitability index can be used to compare projects with different lifespans, because it takes into account the present value of future cash flows rather than just the total expected cash flows.</li><li>It helps with decision-making under capital constraints: When a company has limited resources and can't pursue all potential projects, the profitability index can be used to prioritize which projects to pursue first.</li>
</ol>
<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"> Here are some disadvantages of the profitability index:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> <li>It only considers the initial investment: The profitability index only looks at the initial investment required for a project and ignores ongoing or future investments that may be necessary. This can make it difficult to accurately compare projects with different investment requirements.</li><li>It doesn't consider the size of the project: The profitability index does not take into account the size of the project, so a large project with lower profit margins may have a lower profitability index than a smaller project with higher profit margins.</li><li>It relies on accurate forecasting: The profitability index relies on accurate forecasting of future cash flows and discount rates, which can be difficult to predict with certainty. If the assumptions used in the calculation are incorrect, the resulting profitability index may not accurately reflect the attractiveness of the project.</li>
</ol>
<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-comparisonlist mntl-block" id="mntl-sc-block_73-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_74-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Profitability Index Pros and Cons</h3>
<div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Accounts for the time value of money</p></li>
<li><p>Allows comparisons across different projects</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>Does not consider ongoing future costs</p></li>
<li><p>Ignores project size</p></li>
<li><p>Bad forecasts or assumptions can make the analysis unreliable</p></li>
</ul>
</div>
</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-how-is-the-profitability-index-computed"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is the Profitability Index Computed?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The profitability index is a calculation determined by dividing the present value of futures cash flows by the initial investment in the project. The present value of the future cash flows is calculated using the time value of money, which takes into account the fact that money today is worth more than the same amount of money in the future due to the potential for earning interest. The initial investment is the amount of capital required to start the project.</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-what-is-the-profitability-index-used-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Profitability Index Used for?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The profitability index is used for comparison and contrast when a company has several investments and projects it is considering undertaking. The PI is especially useful when a company has limited resources and can't pursue all potential projects, as it can be used to prioritize which projects to pursue first. The index can be used alongside other metrics to determine which is the best investment.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_80-0"><span class="heading-toc" id="toc-what-is-a-good-profitability-index"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good Profitability Index?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Generally, the higher the PI the better. A profitability index greater than 1.0 is often considered to be a good investment, as it means that the expected return is higher than the initial investment. When making comparisons, the project with the highest PI may be the best option.</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-are-other-names-for-the-profitability-index"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Other Names for the Profitability Index?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The profitability index is also called the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitability-index-rule.asp">profit investment ratio</a> (PIR), cost-benefit ratio, or the value investment ratio (VIR).</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"> The profitability index (PI) is a measure of the attractiveness of a project or investment. It is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project. A PI greater than 1.0 is considered to be a good investment, with higher values corresponding to more attractive projects. The PI is useful for ranking and comparing different projects, but it is important to consider how this technique disregards project size and only looks at the present value of future cash flows and the initial investment. Under capital constraints and when comparing mutually exclusive projects, only those with the highest PIs should be undertaken.
</p></div> | ## What Is the Profitability Index (PI)?
The profitability index (PI), alternatively referred to as value investment ratio (VIR) or profit investment ratio (PIR), describes an index that represents the relationship between the costs and benefits of a proposed project.
The profitability index is calculated as the ratio between the [present value](https://www.investopedia.com/terms/p/presentvalue.asp) of future expected cash flows and the initial amount invested in the project. A higher PI means that a project will be considered more attractive.
### Key Takeaways
* The profitability index (PI) is a measure of a project's or investment's attractiveness.
* The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.
* A PI greater than 1.0 is deemed as a good investment, with higher values corresponding to more attractive projects.
* Under capital constraints and mutually exclusive projects, only those with the highest PIs should be undertaken.
![Profitability Index: A measure of a project's or investment's attractiveness.]()
:max_bytes(150000):strip_icc()/profitability.asp-Final-125c21eeb4ae4e25a91f84efeb289e7a.png)
Investopedia / Theresa Chiechi
## Understanding the Profitability Index (PI)
The profitability index is helpful in ranking various projects because it lets investors quantify the value created per each investment unit. A profitability index of 1.0 is logically the lowest acceptable measure on the index, as any value lower than that number would indicate that the project's present value (PV) is less than the [initial investment](https://www.investopedia.com/terms/i/initialcashflow.asp). As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
The profitability index is an appraisal technique applied to potential capital outlays. The method divides the projected capital inflow by the projected capital outflow to determine the profitability of a project. As indicated by the aforementioned formula, the profitability index uses the present value of future cash flows and the initial investment to represent the aforementioned variables.
When using the profitability index to compare the desirability of projects, it's essential to consider how the technique disregards project size. Therefore, projects with larger cash inflows may result in lower profitability index calculations because their [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp) are not as high.
### What Is PI for an Investment?
The PI, or the profitability index, measures the costs and benefits of a proposed project. It is calculated as the present value of the expected cash flows, divided by the cost of the initial investment.
## Formula for the Profitability Index
The profitability index can be computed using the following ratio:
![Image]()
:max_bytes(150000):strip_icc()/dotdash_final_Profitability_Index_Oct_2020-011-3cc06137c4e24b7dbef3515c7d989bd3.jpg)
Image by Sabrina Jiang © Investopedia 2020
### PV of Future Cash Flows (Numerator)
The present value of future cash flows requires the implementation of time value of money calculations. Cash flows are discounted the appropriate number of periods to equate future cash flows to current monetary levels. Discounting accounts for the idea that the value of $1 today does not equal the value of $1 received in one year because money in the present offers more earning potential via interest-bearing savings accounts, than money yet unavailable. Cash flows received further in the future are therefore considered to have a lower present value than money received closer to the present.
### Investment Required (Denominator)
The discounted projected cash outflows represent the initial capital outlay of a project. The initial investment required is only the cash flow required at the start of the project. All other outlays may occur at any point in the project's life, and these are factored into the calculation through the use of discounting in the numerator. These additional capital outlays may factor in benefits relating to taxation or [depreciation](https://www.investopedia.com/terms/d/depreciation.asp).
## Interpreting the Profitability Index
Because profitability index calculations cannot be negative, they consequently must be converted to positive figures before they are deemed useful. Calculations greater than 1.0 indicate the future anticipated discounted cash inflows of the project are greater than the anticipated discounted cash outflows. Calculations less than 1.0 indicate the deficit of the outflows is greater than the discounted inflows, and the project should not be accepted. Calculations that equal 1.0 bring about situations of indifference where any gains or losses from a project are minimal.
When using the profitability index exclusively, calculations greater than 1.0 are ranked based on the highest calculation. When limited capital is available, and projects are mutually exclusive, the project with the highest profitability index is to be accepted as it indicates the project with the most productive use of limited capital.
The profitability index is also called the benefit-cost ratio for this reason. Although some projects result in higher net present values, those projects may be passed over because they do not have the highest profitability index and do not represent the most beneficial usage of company assets.
## Example of the Profitability Index
Imagine that a company is considering two potential projects: building a new factory, or expanding an existing one. The factory expansion project is expected to cost $1 million and generate cash flows of $200,000 per year for the next 5 years, with a discount rate of 10%. The new factory project is expected to cost $2 million and generate cash flows of $300,000 per year for the next 5 years, also with a discount rate of 10%.
To calculate the profitability index for the factory expansion project, the present value of the future cash flows would be calculated using the following formula:
> PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + ... + CFn / (1 + r)^n
Where PV is the present value, CF is the cash flow in a given year, r is the discount rate, and n is the number of years.
Plugging in the values for this example, we get:
* PV = $200,000 / (1 + 0.10)^1 + $200,000 / (1 + 0.10)^2 + ... + $200,000 / (1 + 0.10)^5
* PV = $750,319
The profitability index for the factory expansion project is then calculated as:
* PI = PV / Initial Investment
* PI = $750,319 / $1,000,000
* PI = 0.75
To calculate the profitability index for the new factory project, the present value of the future cash flows would be calculated using the same formula:
* PV = $300,000 / (1 + 0.10)^1 + $300,000 / (1 + 0.10)^2 + ... + $300,000 / (1 + 0.10)^5
* PV = $1,125,479
The profitability index for the new factory project is then calculated as:
* PI = PV / Initial Investment
* PI = $1,125,479/ $2,000,000
* PI = 0.56
In this example, the factory expansion project has a higher profitability index, meaning it is a more attractive investment. The company might decide to pursue this project instead of the new factory project because it is expected to generate more value per unit of investment.
However, since both PIs are less than 1.0, the company may end up forgoing either project in favor of a better opportunity elsewhere.
## Advantages and Disadvantages of the Profitability Index
Here are some advantages of the profitability index:
1. It considers the time value of money: The profitability index takes into account the fact that money today is worth more than the same amount of money in the future, due to the potential for earning interest. This makes it a more accurate measure of investment attractiveness than simply looking at the total expected cash flows.
2. It allows for comparison of projects with different lifespans: The profitability index can be used to compare projects with different lifespans, because it takes into account the present value of future cash flows rather than just the total expected cash flows.
3. It helps with decision-making under capital constraints: When a company has limited resources and can't pursue all potential projects, the profitability index can be used to prioritize which projects to pursue first.
Here are some disadvantages of the profitability index:
1. It only considers the initial investment: The profitability index only looks at the initial investment required for a project and ignores ongoing or future investments that may be necessary. This can make it difficult to accurately compare projects with different investment requirements.
2. It doesn't consider the size of the project: The profitability index does not take into account the size of the project, so a large project with lower profit margins may have a lower profitability index than a smaller project with higher profit margins.
3. It relies on accurate forecasting: The profitability index relies on accurate forecasting of future cash flows and discount rates, which can be difficult to predict with certainty. If the assumptions used in the calculation are incorrect, the resulting profitability index may not accurately reflect the attractiveness of the project.
### Profitability Index Pros and Cons
Pros
* Accounts for the time value of money
* Allows comparisons across different projects
Cons
* Does not consider ongoing future costs
* Ignores project size
* Bad forecasts or assumptions can make the analysis unreliable
## How Is the Profitability Index Computed?
The profitability index is a calculation determined by dividing the present value of futures cash flows by the initial investment in the project. The present value of the future cash flows is calculated using the time value of money, which takes into account the fact that money today is worth more than the same amount of money in the future due to the potential for earning interest. The initial investment is the amount of capital required to start the project.
## What Is the Profitability Index Used for?
The profitability index is used for comparison and contrast when a company has several investments and projects it is considering undertaking. The PI is especially useful when a company has limited resources and can't pursue all potential projects, as it can be used to prioritize which projects to pursue first. The index can be used alongside other metrics to determine which is the best investment.
## What Is a Good Profitability Index?
Generally, the higher the PI the better. A profitability index greater than 1.0 is often considered to be a good investment, as it means that the expected return is higher than the initial investment. When making comparisons, the project with the highest PI may be the best option.
## What Are Other Names for the Profitability Index?
The profitability index is also called the [profit investment ratio](https://www.investopedia.com/terms/p/profitability-index-rule.asp) (PIR), cost-benefit ratio, or the value investment ratio (VIR).
## The Bottom Line
The profitability index (PI) is a measure of the attractiveness of a project or investment. It is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project. A PI greater than 1.0 is considered to be a good investment, with higher values corresponding to more attractive projects. The PI is useful for ranking and comparing different projects, but it is important to consider how this technique disregards project size and only looks at the present value of future cash flows and the initial investment. Under capital constraints and when comparing mutually exclusive projects, only those with the highest PIs should be undertaken.
| What Is the Profitability Index (PI)?
The profitability index (PI), alternatively referred to as value investment ratio (VIR) or profit investment ratio (PIR), describes an index that represents the relationship between the costs and benefits of a proposed project.
The profitability index is calculated as the ratio between the present value of future expected cash flows and the initial amount invested in the project. A higher PI means that a project will be considered more attractive.
Key Takeaways
The profitability index (PI) is a measure of a project's or investment's attractiveness.The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.A PI greater than 1.0 is deemed as a good investment, with higher values corresponding to more attractive projects.Under capital constraints and mutually exclusive projects, only those with the highest PIs should be undertaken.
Investopedia / Theresa Chiechi
Understanding the Profitability Index (PI)
The profitability index is helpful in ranking various projects because it lets investors quantify the value created per each investment unit. A profitability index of 1.0 is logically the lowest acceptable measure on the index, as any value lower than that number would indicate that the project's present value (PV) is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
The profitability index is an appraisal technique applied to potential capital outlays. The method divides the projected capital inflow by the projected capital outflow to determine the profitability of a project. As indicated by the aforementioned formula, the profitability index uses the present value of future cash flows and the initial investment to represent the aforementioned variables.
When using the profitability index to compare the desirability of projects, it's essential to consider how the technique disregards project size. Therefore, projects with larger cash inflows may result in lower profitability index calculations because their profit margins are not as high.
What Is PI for an Investment?
The PI, or the profitability index, measures the costs and benefits of a proposed project. It is calculated as the present value of the expected cash flows, divided by the cost of the initial investment.
Formula for the Profitability Index
The profitability index can be computed using the following ratio:
Image by Sabrina Jiang © Investopedia 2020
PV of Future Cash Flows (Numerator)
The present value of future cash flows requires the implementation of time value of money calculations. Cash flows are discounted the appropriate number of periods to equate future cash flows to current monetary levels. Discounting accounts for the idea that the value of $1 today does not equal the value of $1 received in one year because money in the present offers more earning potential via interest-bearing savings accounts, than money yet unavailable. Cash flows received further in the future are therefore considered to have a lower present value than money received closer to the present.
Investment Required (Denominator)
The discounted projected cash outflows represent the initial capital outlay of a project. The initial investment required is only the cash flow required at the start of the project. All other outlays may occur at any point in the project's life, and these are factored into the calculation through the use of discounting in the numerator. These additional capital outlays may factor in benefits relating to taxation or depreciation.
Interpreting the Profitability Index
Because profitability index calculations cannot be negative, they consequently must be converted to positive figures before they are deemed useful. Calculations greater than 1.0 indicate the future anticipated discounted cash inflows of the project are greater than the anticipated discounted cash outflows. Calculations less than 1.0 indicate the deficit of the outflows is greater than the discounted inflows, and the project should not be accepted. Calculations that equal 1.0 bring about situations of indifference where any gains or losses from a project are minimal.
When using the profitability index exclusively, calculations greater than 1.0 are ranked based on the highest calculation. When limited capital is available, and projects are mutually exclusive, the project with the highest profitability index is to be accepted as it indicates the project with the most productive use of limited capital.
The profitability index is also called the benefit-cost ratio for this reason. Although some projects result in higher net present values, those projects may be passed over because they do not have the highest profitability index and do not represent the most beneficial usage of company assets.
Example of the Profitability Index
Imagine that a company is considering two potential projects: building a new factory, or expanding an existing one. The factory expansion project is expected to cost $1 million and generate cash flows of $200,000 per year for the next 5 years, with a discount rate of 10%. The new factory project is expected to cost $2 million and generate cash flows of $300,000 per year for the next 5 years, also with a discount rate of 10%.
To calculate the profitability index for the factory expansion project, the present value of the future cash flows would be calculated using the following formula:
PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + ... + CFn / (1 + r)^n
Where PV is the present value, CF is the cash flow in a given year, r is the discount rate, and n is the number of years.
Plugging in the values for this example, we get:
PV = $200,000 / (1 + 0.10)^1 + $200,000 / (1 + 0.10)^2 + ... + $200,000 / (1 + 0.10)^5PV = $750,319
The profitability index for the factory expansion project is then calculated as:
PI = PV / Initial InvestmentPI = $750,319 / $1,000,000PI = 0.75
To calculate the profitability index for the new factory project, the present value of the future cash flows would be calculated using the same formula:
PV = $300,000 / (1 + 0.10)^1 + $300,000 / (1 + 0.10)^2 + ... + $300,000 / (1 + 0.10)^5PV = $1,125,479
The profitability index for the new factory project is then calculated as:
PI = PV / Initial InvestmentPI = $1,125,479/ $2,000,000PI = 0.56
In this example, the factory expansion project has a higher profitability index, meaning it is a more attractive investment. The company might decide to pursue this project instead of the new factory project because it is expected to generate more value per unit of investment.
However, since both PIs are less than 1.0, the company may end up forgoing either project in favor of a better opportunity elsewhere.
Advantages and Disadvantages of the Profitability Index
Here are some advantages of the profitability index:
It considers the time value of money: The profitability index takes into account the fact that money today is worth more than the same amount of money in the future, due to the potential for earning interest. This makes it a more accurate measure of investment attractiveness than simply looking at the total expected cash flows.It allows for comparison of projects with different lifespans: The profitability index can be used to compare projects with different lifespans, because it takes into account the present value of future cash flows rather than just the total expected cash flows.It helps with decision-making under capital constraints: When a company has limited resources and can't pursue all potential projects, the profitability index can be used to prioritize which projects to pursue first.
Here are some disadvantages of the profitability index:
It only considers the initial investment: The profitability index only looks at the initial investment required for a project and ignores ongoing or future investments that may be necessary. This can make it difficult to accurately compare projects with different investment requirements.It doesn't consider the size of the project: The profitability index does not take into account the size of the project, so a large project with lower profit margins may have a lower profitability index than a smaller project with higher profit margins.It relies on accurate forecasting: The profitability index relies on accurate forecasting of future cash flows and discount rates, which can be difficult to predict with certainty. If the assumptions used in the calculation are incorrect, the resulting profitability index may not accurately reflect the attractiveness of the project.
Profitability Index Pros and Cons
Pros
Accounts for the time value of money
Allows comparisons across different projects
Cons
Does not consider ongoing future costs
Ignores project size
Bad forecasts or assumptions can make the analysis unreliable
How Is the Profitability Index Computed?
The profitability index is a calculation determined by dividing the present value of futures cash flows by the initial investment in the project. The present value of the future cash flows is calculated using the time value of money, which takes into account the fact that money today is worth more than the same amount of money in the future due to the potential for earning interest. The initial investment is the amount of capital required to start the project.
What Is the Profitability Index Used for?
The profitability index is used for comparison and contrast when a company has several investments and projects it is considering undertaking. The PI is especially useful when a company has limited resources and can't pursue all potential projects, as it can be used to prioritize which projects to pursue first. The index can be used alongside other metrics to determine which is the best investment.
What Is a Good Profitability Index?
Generally, the higher the PI the better. A profitability index greater than 1.0 is often considered to be a good investment, as it means that the expected return is higher than the initial investment. When making comparisons, the project with the highest PI may be the best option.
What Are Other Names for the Profitability Index?
The profitability index is also called the profit investment ratio (PIR), cost-benefit ratio, or the value investment ratio (VIR).
The Bottom Line
The profitability index (PI) is a measure of the attractiveness of a project or investment. It is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project. A PI greater than 1.0 is considered to be a good investment, with higher values corresponding to more attractive projects. The PI is useful for ranking and comparing different projects, but it is important to consider how this technique disregards project size and only looks at the present value of future cash flows and the initial investment. Under capital constraints and when comparing mutually exclusive projects, only those with the highest PIs should be undertaken.
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https://www.investopedia.com/best-3-month-cd-rates-5272288 | Best 3-Month CD Rates for May 2024 | <div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content list-sc" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body">
<span class="comp external-content mntl-external-component" id="external-content_1-0"><article class="comp article list-sc list-sc-content--finance list-sc--base mntl-block" id="list-sc-content--finance_1-0">
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The best rate on a 3-month <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp#what-is-a-certificate-of-deposit-cd">certificate of deposit (CD)</a> is 5.51% APY from TotalDirectBank. To find you the highest 3-month CD rates nationwide, we review CDs from hundreds of banks and credit unions every day. CD terms of 2–4 months are eligible for our 3-month rankings, with minimum deposit requirements of up to $25,000. A 3-month CD can be a useful financial tool if your time horizon is relatively short. Below are the top CD rates available from our partners, followed by the best CD rates that we've found from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816">our research</a> that are available to U.S. customers everywhere.
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In the News</h3><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0">
<p>The Fed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952">held rates steady for a sixth consecutive time</a> at its meeting ending on May 1. The 5.25% to 5.50% range is the highest it has been since 2001, and Fed officials noted in a statement that there has been a lack of recent progress toward the committee's goal of lowering inflation. Consumer prices rose 3.5% over the year in March. Officials don't foresee reducing the target range until they are confident inflation is moving toward 2%.<span class="ql-inline-citation" data-cite="39"></span><span class="ql-inline-citation" data-cite="40"></span></p>
<p>CD yields closely follow the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">fed funds rate</a>. Back in October, CD rates reached peaks not seen in more than 20 years. But now, the Fed’s holding pattern has caused CD rates to plateau. Once it appears the Fed is ready to make a rate cut, rates on new CDs will fall.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-3">
You can find our ranking of the highest CD rates with terms of 2–4 months below. In cases where more than one institution pays the same annual percentage yield, we've prioritized CDs by the shortest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/term.asp">term</a>, then the CD requiring a smaller <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum_deposit.asp">minimum deposit</a>, and if still a tie, alphabetically by institution name.
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<span class="heading-toc" id="toc-best-3-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0-4"> <span class="mntl-sc-block-heading__text"> Best 3-Month CD Rates </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-5">
<li>TotalDirectBank – <strong>5.51% APY</strong><br/></li><li>Dow Credit Union – <strong>5.30% APY</strong><br/></li><li>Popular Direct – <strong>5.30% APY</strong><br/></li><li>Merrick Bank – <strong>5.30% APY</strong></li><li>Merchants Bank of Indiana – <strong>5.25% APY</strong></li><li>Banesco USA – <strong>5.25% APY</strong><br/></li><li>Financial Partners Credit Union – <strong>5.25% APY</strong></li><li>Digital Federal Credit Union – <strong>5.13% APY</strong><br/></li><li>Brilliant Bank – <strong>5.10% APY*</strong><br/></li><li>Beal Bank USA – <strong>5.05% APY*</strong></li><li>Farmers Insurance Federal Credit Union – <strong>5.00% APY</strong></li><li>Princeton Federal Credit Union – <strong>4.86% APY</strong></li><li>Great River Federal Credit Union – <strong>4.80% APY</strong></li><li>NexBank – <strong>4.80% APY</strong></li><li>Financial Resources Federal Credit Union – <strong>4.59% APY</strong><br/></li>
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-6">
Details on these top-paying nationally available three-month CDs are provided below, including their minimum required deposits and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">early withdrawal penalties</a>. For credit union CDs, information on how to easily join each credit union is also provided.
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<div class="comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_1-0-7">
<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/V2aSk/3/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Best 3-Month CD Rates Since Nov 2021"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
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<div class="comp related-link mntl-sc-block prm-sc-block-featuredlink--finance prm-sc-block-featuredlink mntl-sc-block-featuredlink mntl-block" id="mntl-sc-block_1-0-8">
<a class="mntl-sc-block-featuredlink__link mntl-text-link" data-click-action="OffPageClick - Internal [Read our full methodology]" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Featured Link" href="https://www.investopedia.com/best-cd-rates-4770214" id="mntl-sc-block-featuredlink__link_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Best CD Rates for May 2024: Up to 5.51%</span></a><!-- end: mntl-sc-block-featuredlink__link mntl-text-link -->
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<span class="heading-toc" id="toc-totaldirectbank--551-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0"> <a class="mntl-sc-block-heading__link" href="https://www.totaldirectbank.com/personal/cds#main" rel="noopener nofollow sponsored nocaes" target="_blank">TotalDirectBank – 5.51% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-1">
<li><strong>Term (months)</strong>: 3</li><li><strong>Minimum deposit</strong>: $25,000</li><li><strong>Early-withdrawal penalty</strong>: 1 month of interest</li><li><strong>Overview</strong>: TotalDirectBank is an online-only operation of City National Bank of Florida, established in Miami in 1946.<span class="ql-inline-citation" data-cite="5"></span></li>
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<span class="heading-toc" id="toc-dow-credit-union--530-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-2"> <a class="mntl-sc-block-heading__link" href="https://dowcreditunion.org/account/certificates-of-deposit" rel="noopener nofollow nocaes" target="_blank">Dow Credit Union – 5.30% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-3">
<li><strong>Term (months):</strong> 3</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 3 months of interest</li><li><strong>Overview:</strong> Anyone can join Dow Credit Union by making a $10 donation to the Midland Area Community Foundation scholarship fund during the membership application process. The credit union is based out of Midland, Michigan, and was chartered in 1937.<span class="ql-inline-citation" data-cite="8"></span></li>
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<span class="heading-toc" id="toc-popular-direct--530-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-4"> <a class="mntl-sc-block-heading__link" href="https://www.populardirect.com/products/cds/" rel="noopener nofollow sponsored nocaes" target="_blank">Popular Direct – 5.30% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-5">
<li><strong>Term (months)</strong>: 3</li><li><strong>Minimum deposit</strong>: $10,000</li><li><strong>Early-withdrawal penalty</strong>: 3 months of interest</li><li><strong>Overview</strong>:<strong> </strong>Popular Direct is the online-only arm of Popular Bank, the U.S. banking subsidiary of Popular Inc., which serves banking customers in the U.S., Puerto Rico, and the Caribbean.<span class="ql-inline-citation" data-cite="15"></span></li>
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<span class="heading-toc" id="toc-merrick-bank-530-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-6"> <a class="mntl-sc-block-heading__link" href="https://www.merrickbank.com/Products/CDs" rel="noopener nofollow sponsored nocaes" target="_blank">Merrick Bank - 5.30% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-7">
<li><strong>Term (months)</strong>: 3</li><li><strong>Minimum deposit</strong>: $25,000</li><li><strong>Early-withdrawal penalty</strong>:<strong> </strong>3 months of interest</li><li><strong>Overview</strong>: While primarily a credit card issuer and consumer finance provider, Merrick Bank also offers online-only certificates of deposit.<span class="ql-inline-citation" data-cite="10"></span></li>
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<span class="heading-toc" id="toc-merchants-bank-of-indiana--525-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-8"> <a class="mntl-sc-block-heading__link" href="https://www.merchantsbankofindiana.com/certificates-of-deposit/" rel="noopener nofollow nocaes" target="_blank">Merchants Bank of Indiana – 5.25% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-9">
<li><strong>Term (months):</strong> 3</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> 3 months of interest</li><li><strong>Overview:</strong> FDIC-insured since 1934, Merchants Bank of Indiana operates six branches in the greater Indianapolis area, while serving online customers across the country. It is headquartered in Carmel, Indiana.<span class="ql-inline-citation" data-cite="43"></span></li>
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<span class="heading-toc" id="toc-banesco-usa--525-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-10"> <a class="mntl-sc-block-heading__link" href="https://banescousa.com/personal/products/banesmart-certificates-of-deposit/" rel="noopener nofollow nocaes" target="_blank">Banesco USA – 5.25% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11">
<li><strong>Term (months)</strong>: 3</li><li><strong>Minimum deposit</strong>: $1,500</li><li><strong>Early-withdrawal penalty</strong>:<strong> </strong>3 months of interest</li><li><strong>Overview</strong>: Banesco USA was established in 2006 with offices in Florida and Puerto Rico. It serves customers nationwide through its online banking.<span class="ql-inline-citation" data-cite="24"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-6">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-6">
<span class="heading-toc" id="toc-financial-partners-credit-union--525-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-12"> <a class="mntl-sc-block-heading__link" href="https://fpcu.org/money-saving-rates/certificates-ira-rates" rel="noopener nofollow sponsored nocaes" target="_blank">Financial Partners Credit Union – 5.25% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-13">
<li><strong>Term (months):</strong> 4</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> 3 months of interest</li><li><strong>Overview:</strong> Anyone can join Financial Partners if they're a member of the American Consumer Council and if they keep $25 or more in a FPCU savings account. Financial Partners Credit Union was formed in 1937 to serve employees of North American Aviation. It is headquartered in Downey, California.<span class="ql-inline-citation" data-cite="32"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-7">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-7">
<span class="heading-toc" id="toc-digital-federal-credit-union--513-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-14"> <a class="mntl-sc-block-heading__link" href="https://www.dcu.org/bank/certificates.html" rel="noopener nofollow sponsored nocaes" target="_blank">Digital Federal Credit Union – 5.13% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15">
<li><strong>Term (months)</strong>: 3–5 months</li><li><strong>Minimum deposit</strong>: $25,000</li><li><strong>Early-withdrawal penalty</strong>: 2 months of interest</li><li><strong>Overview</strong>: Membership is available to anyone nationwide who joins Reach Out for Schools at a cost of $10 and maintains a $5 balance in a savings account. Digital Federal Credit Union (DCU) was chartered in 1979. Its headquarters are in Massachusetts.<span class="ql-inline-citation" data-cite="22"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-8">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-8">
<span class="heading-toc" id="toc-brilliant-bank--510-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-16"> <a class="mntl-sc-block-heading__link" href="https://www.brilliant.bank/cds/" rel="noopener nofollow nocaes" target="_blank">Brilliant Bank – 5.10% APY*</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-17">
<li><strong>Term (months)</strong>: 3</li><li><strong>Minimum deposit</strong>: $1,000</li><li><strong>Early withdrawal penalty</strong>: Half the interest that would have been earned if held to maturity</li><li><strong>Overview</strong>: Brilliant Bank is an online-only division of FDIC-insured Equity Bank, which operates branches in Arkansas, Kansas, Missouri, and Oklahoma.<span class="ql-inline-citation" data-cite="14"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-18">
<em>*Online accounts from Brilliant Bank are not available to residents of Arkansas, Kansas, Missouri, and Oklahoma.</em>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-9">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-9">
<span class="heading-toc" id="toc-beal-bank-usa--505-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-19"> <a class="mntl-sc-block-heading__link" href="https://www.bealbank.com/bbusa/home" rel="noopener nofollow nocaes" target="_blank">Beal Bank USA – 5.05% APY*</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-20">
<li><strong>Term (months):</strong> 3</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> The greater of 1% of the amount withdrawn or 50% of the interest that would have been earned on the amount withdrawn</li><li><strong>Overview:</strong> Formerly Beal Bank Nevada, Beal Bank USA dates back to 2004 and is headquartered in Las Vegas. Its partner bank, Beal Bank, was founded in 1988 and is headquartered in Plano, Texas.<span class="ql-inline-citation" data-cite="41"></span><span class="ql-inline-citation" data-cite="42"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-21">
<em>*Online account opening is not available to customers in Ohio or Texas.</em>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-10">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-10">
<span class="heading-toc" id="toc-farmers-insurance-federal-credit-union--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-22"> <a class="mntl-sc-block-heading__link" href="https://figfcu.org/deposit-account-rates" rel="noopener nofollow nocaes" target="_blank">Farmers Insurance Federal Credit Union – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-23">
<li><strong>Term (months):</strong> 3</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early-withdrawal penalty:</strong> Complex formula with a minimum penalty of 3 months' interest</li><li><strong>Overview:</strong> Anyone can join Farmers Insurance Federal Credit Union by agreeing to a free membership in the nonprofit American Consumer Council and keeping at least $5 in a savings account. The credit union is based out of Burbank, California, and dates back to 1936.<span class="ql-inline-citation" data-cite="17"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-11">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-11">
<span class="heading-toc" id="toc-princeton-federal-credit-union--486-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-24"> <a class="mntl-sc-block-heading__link" href="https://www.princetonfcu.org/home/rates/certificate" rel="noopener nofollow nocaes" target="_blank">Princeton Federal Credit Union – 4.86% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-25">
<li><strong>Term (months):</strong> 4</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> 3 months of interest</li><li><strong>Overview:</strong> Anyone nationwide is eligible to join Princeton FCU by agreeing to a complimentary membership with CrossState Credit Union Association. Princeton FCU was chartered in 1972 by faculty and staff at Princeton University. It is headquartered in Princeton, New Jersey.<span class="ql-inline-citation" data-cite="29"></span><span class="ql-inline-citation" data-cite="30"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-12">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-12">
<span class="heading-toc" id="toc-great-river-federal-credit-union--480-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-26"> <a class="mntl-sc-block-heading__link" href="https://www.greatriverfcu.org/money-market-and-share-certificates/" rel="noopener nofollow nocaes" target="_blank">Great River Federal Credit Union – 4.80% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27">
<li><strong>Term (months):</strong> 3</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> Anyone can join Great River by agreeing to a free membership in the nonprofit American Consumer Council and keeping at least $5 in a member savings account. Headquartered in Saint Cloud, Minnesota, Great River FCU originally was chartered in 1948 as Machinists Federal Credit Union.<span class="ql-inline-citation" data-cite="33"></span><span class="ql-inline-citation" data-cite="34"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-13">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-13">
<span class="heading-toc" id="toc-nexbank--480-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-28"> <a class="mntl-sc-block-heading__link" href="https://www.nexbankpersonal.com/certificates-of-deposit-cds" rel="noopener nofollow sponsored nocaes" target="_blank">NexBank – 4.80% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-29">
<li><strong>Term (months)</strong>: 3</li><li><strong>Minimum deposit</strong>: $10,000</li><li><strong>Early-withdrawal penalty</strong>: 1 month of interest</li><li><strong>Overview</strong>: Founded in 1934, NexBank operates three branches in Dallas and serves customers nationwide with online banking.<span class="ql-inline-citation" data-cite="18"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-14">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-14">
<span class="heading-toc" id="toc-financial-resources-federal-credit-union--459-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-30"> <a class="mntl-sc-block-heading__link" href="https://myfinancialresources.org/home/borrow/rates/" rel="noopener nofollow nocaes" target="_blank">Financial Resources Federal Credit Union – 4.59% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-31">
<li><strong>Term (months):</strong> 3</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> Anyone can join Financial Resources by signing up for a free membership in the American Consumer Council and holding $10 or more in an FRFCU savings account. Headquartered in Bridgewater, New Jersey, Financial Resources FCU dates back more than a century.<span class="ql-inline-citation" data-cite="23"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp article-container article-outro mntl-block" id="article-outro_1-0">
<div class="comp left-nav article-outro__left-nav mntl-block" id="article-outro__left-nav_1-0"></div><!-- end: comp left-nav article-outro__left-nav mntl-block -->
<div class="comp expert-content article-outro__content prm-sc-page mntl-sc-page mntl-block" id="article-outro__content_1-0">
<div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_3-0">
<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-1">
Important</h3><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-1">
<p>The best-paying <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings account</a> today is 5.50% from Poppy Bank and guaranteed for 90 days from the date the account is opened. Be sure to consider the interest rates of 3-month CDs in comparison to high-yield savings accounts. Though traditional savings accounts generally pay minimal interest, high-yield savings accounts can pay rates higher than those of a 3-month CD while not requiring you to give up access to your funds.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<span class="heading-toc" id="toc-pros-and-cons-of-3-month-cds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-1"> <span class="mntl-sc-block-heading__text"> Pros and Cons of 3-Month CDs<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-2">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Extremely safe and predictable</p></li>
<li><p>Can help deter spending temptations</p></li>
<li><p>Gives you options after just a short commitment</p></li>
<li><p>May pay a higher APY than a standard savings account</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Withdrawing early will trigger a penalty</p></li>
<li><p>May pay a lower APY than high-yield accounts that allow withdrawals</p></li>
<li><p>In a short time, you'll need to decide again about what to do with your funds</p></li>
</ul>
</div>
</div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist -->
<span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-3"> <span class="mntl-sc-block-heading__text"> Pros Explained<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-4">
<li><strong>Extremely safe and predictable</strong>: CDs opened at FDIC banks and NCUA credit unions are federally insured, protecting up to $250,000 of your deposit in the unlikely event that the institution fails. In addition, since the CD's rate is fixed for the 3-month term, your earnings are completely predictable.</li><li><strong>Can help deter spending temptations</strong>: Putting money in a 3-month CD instead of just keeping it in a savings account can be a useful tool for blocking the temptation to spend your savings on an unplanned purchase.</li><li><strong>Gives you options</strong> <strong>after just a short commitment:</strong> You only have to wait three months before you can access your funds again and make a new choice with your money. Perhaps rates have climbed and now you can open another CD with a higher APY. Or maybe you want to use the cash now or keep it in a liquid savings account for a near-term expense.</li><li><strong>May pay a higher APY than a standard savings account</strong>: You'll be able to earn more with a 3-month CD than by keeping money in your checking account, and you may be able to outearn your bank's savings account rate as well.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-5"> <span class="mntl-sc-block-heading__text"> Cons Explained<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-6">
<li><strong>Withdrawing early will trigger a penalty</strong>: Anytime you cash in a CD before maturity, you'll be hit with an early withdrawal penalty. Each bank and credit union has a stated policy on how they calculate their penalty, with the most typical practice being a number of months of forfeited interest.</li><li><strong>May pay a lower APY than high-yield accounts that allow withdrawals</strong>: Though longer-term CDs usually pay more than high-yield savings accounts, short 3-month CDs often do not. So if you can earn as much or more with a savings account, that may be a better option, as it keeps your money accessible.</li><li><strong>In a short time, you'll need to decide again about what to do with your funds</strong>: With a 3-month CD, you go through the process of opening the CD and then, in just three months, have to decide all over again where to put your money.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-note mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_3-0-7">
<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-2">
Fast Fact</h3><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-2">
<p>When asked in late April what they would invest in if they had an extra $10,000, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investors-aren-t-worried-right-now-but-they-re-not-buying-either-8642075">12% of Investopedia readers</a> said they would open a CD. Back in December and January, 11% and 9% of readers (respectively) said they’d invest extra funds in CDs, with that share dipping even further to 8% in March. While CDs sit below individual stocks as the top response (at 19%), CDs are always a good option for those looking for safer investments.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/rEleD/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0-1" title="12% of Readers Would Open a CD if They Had an Extra $10,000"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
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<span class="heading-toc" id="toc-compare-the-best-3-month-cds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-9"> <span class="mntl-sc-block-heading__text"> Compare the Best 3-Month CDs<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="PRM Roundup | Table Block" id="mntl-sc-block_3-0-10">
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<tr>
<th>Institution</th>
<th>Rate (APY)</th>
<th>Term</th>
<th>Minimum Deposit</th>
<th>Early Withdrawal Penalty</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.mutualone.com/client-services/rates-calculators/deposit-rates/#greyscale" rel="noopener noreferrer nofollow">MutualOne Bank</a></td>
<td>5.65%</td>
<td>3 months</td>
<td>$500</td>
<td>All earned interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.totaldirectbank.com/personal/cds#main" rel="sponsored nofollow">TotalDirectBank</a></td>
<td>5.51%</td>
<td>3 months</td>
<td>$25,000</td>
<td>1 month of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://dowcreditunion.org/account/certificates-of-deposit" rel="nofollow">Dow Credit Union</a></td>
<td>5.30%</td>
<td>3 months</td>
<td>$500</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.populardirect.com/products/cds/" rel="sponsored nofollow">Popular Direct</a></td>
<td>5.30%</td>
<td>3 months</td>
<td>$10,000</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.merrickbank.com/Products/CDs" rel="sponsored nofollow">Merrick Bank</a></td>
<td>5.30%</td>
<td>3 months</td>
<td>$25,000</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.merchantsbankofindiana.com/certificates-of-deposit/" rel="noopener noreferrer nofollow">Merchants Bank of Indiana</a></td>
<td>5.25%</td>
<td>3 months</td>
<td>$1,000</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://banescousa.com/personal/products/banesmart-certificates-of-deposit/" rel="nofollow">Banesco USA</a></td>
<td>5.25%</td>
<td>3 months</td>
<td>$1,500</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://fpcu.org/money-saving-rates/certificates-ira-rates" rel="sponsored nofollow">Financial Partners Credit Union</a></td>
<td>5.25%</td>
<td>4 months</td>
<td>$1,000</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.dcu.org/bank/certificates.html" rel="sponsored nofollow">Digital Federal Credit Union</a></td>
<td>5.13%</td>
<td>3–5 months</td>
<td>$25,000</td>
<td>2 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.brilliant.bank/cds/" rel="nofollow">Brilliant Bank</a></td>
<td>5.10%</td>
<td>3 months</td>
<td>$1,000</td>
<td>Half the interest that would have been earned if held to maturity</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bealbank.com/bbusa/home" rel="noopener noreferrer nofollow">Beal Bank USA</a></td>
<td>5.05%</td>
<td>3 months</td>
<td>$1,000</td>
<td>The greater of 1% of the amount withdrawn or 50% of the interest that would have been earned on the amount withdrawn</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://figfcu.org/deposit-account-rates" rel="nofollow">Farmers Insurance Federal Credit Union</a></td>
<td>5.00%</td>
<td>3 months</td>
<td>$1,000</td>
<td>Complex formula with a minimum penalty of 3 months' interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.princetonfcu.org/home/rates/certificate" rel="nofollow">Princeton Federal Credit Union</a></td>
<td>4.86%</td>
<td>4 months</td>
<td>$1,000</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.greatriverfcu.org/money-market-and-share-certificates/" rel="nofollow">Great River Federal Credit Union</a></td>
<td>4.80%</td>
<td>3 months</td>
<td>$500</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.nexbankpersonal.com/certificates-of-deposit-cds" rel="sponsored nofollow">NexBank</a></td>
<td>4.80%</td>
<td>3 months</td>
<td>$10,000</td>
<td>1 month of interest</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://myfinancialresources.org/home/borrow/rates/" rel="nofollow">Financial Resources Federal Credit Union</a></td>
<td>4.59%</td>
<td>3 months</td>
<td>$500</td>
<td>6 months of interest</td>
</tr>
</tbody>
</table>
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<span class="heading-toc" id="toc-alternatives-to-3-month-cds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-11"> <span class="mntl-sc-block-heading__text"> Alternatives to 3-Month CDs<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_3-0-12"> <span class="mntl-sc-block-subheading__text"> Savings or Money Market Accounts<br/> </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-13">
Instead of locking up your funds in a 3-month CD, you could just hold them in a liquid savings or money market account. That way you can access the funds if you need them. Just be sure to shop around for a great high-yield rate that matches or beats what you can earn with a 3-month CD.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-14">
Also, be aware that the rates paid on savings and money market accounts are variable, meaning the bank can lower them anytime they want. A CD's rate, in contrast, is fixed for the full term, though in the case of a 3-month certificate, your return is not secured for very long.
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<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_3-0-15"> <span class="mntl-sc-block-subheading__text"> Longer-Term CDs<br/> </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-16">
Instead of a 3-month CD, you could stretch to a 6-month or 1-year certificate, or an even longer term, depending on how long you feel you can live without your funds. The advantage is that you can almost always find a better rate on slightly longer CDs, since the 3-month term is typically the worst-paying CD duration.
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<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_3-0-17"> <span class="mntl-sc-block-subheading__text"> Treasury Bills<br/> </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-18">
Another short-term option you can consider instead of a 3-month CD is a U.S. Treasury bill. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">T-bills</a> allow you to lend money to the U.S. government for a short, fixed amount of time. Considered one of the safest investments in the world, T-bills offer durations ranging from four weeks to one year.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp mntl-sc-block prm-sc-block-faq--finance prm-sc-block-faq mntl-sc-block-faq mntl-block" data-click-action="OnPageClick - FAQ Header" data-tracking-container="true" data-tracking-id="PRM Roundup | FAQ" id="mntl-sc-block_3-0-19">
<span class="heading-toc" id="toc-frequently-asked-questions-46e2b506-dc24-43aa-a6c1-689ee2b64a60"></span>
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Frequently Asked Questions</h2><!-- end: comp mntl-sc-block-faq__title mntl-text-block -->
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<h3 class="accordion__title">What Is a 3-Month CD?</h3>
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<p>A certificate of deposit is a type of bank account that involves an agreement between a financial institution and an individual. The individual agrees to deposit a sum of money and keep it at the institution for a predetermined number of months or years. In exchange, the bank or credit union agrees to pay the account holder a higher interest rate than if they put the funds into a simple savings account.</p><p>A 3-month CD is therefore a certificate for which the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity period</a> or term is roughly 90 days. At most banks and credit unions, a 3-month term is the shortest certificate duration they offer, while some institutions don't offer any CDs shorter than six months.</p>
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<h3 class="accordion__title">What Are the Differences Between CD, Savings, and Money Market Accounts?</h3>
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<p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">Savings accounts</a>, money market accounts, and CDs are collectively called deposit accounts. All are intended as vehicles for holding cash <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a> at a bank or credit union. Savings accounts and money markets are more similar, while certificates of deposit are somewhat different.</p><p>A savings account allows you to withdraw funds at your convenience. The same is true for deposits: You can deposit a lump sum all at once, automate savings deposits on a regular cycle, or sporadically add funds when you have them available.</p><p>An account that allows you to deposit and withdraw funds at will is called a liquid account. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">Money market accounts</a> are another type of liquid account, with the main difference being that money market accounts traditionally include check-writing privileges.</p><p>Certificates of deposit are quite a bit different. Because you must deposit a lump sum of funds at the outset and then not touch it until the term expires, they are the opposite of liquid accounts. But what you lose in access to the funds is traded for a higher interest rate, meaning you are compensated for giving up your at-will access.<br/></p>
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<h3 class="accordion__title">Who Benefits From a 3-Month CD the Most?</h3>
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<p>Theoretically, certificates of deposit are a good vehicle for someone who wants to earn more interest by committing their funds for a short time. But in the case of 3-month CDs, the time period is so brief that the interest rate premium can be quite slight, or even nonexistent. In fact, you can often earn more with a high-yield savings account, which doesn't require you to tie up your funds.<br/></p><p>Still, some people may benefit from committing their savings to a CD instead of putting it in a liquid account. That's because making the funds inaccessible can be a benefit for savers who might otherwise be tempted to dip into their savings for an unplanned purchase.<br/></p>
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<h3 class="accordion__title">What Are the Typical Rates for a 3-Month CD?</h3>
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<p>Interest rates vary widely across the thousands of banks and credit unions that offer 3-month CDs. And rates across all deposit accounts change based on the Federal Reserve's <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>. So it pays to do your homework and shop around.</p><p>The FDIC national rate average for 3-month certificates is 1.53% APY.<span class="ql-inline-citation" data-cite="4"></span> As you can see, our current ranking of the top-paying 3-month CDs far outperforms that average. It's not uncommon to earn three to five times as much—and sometimes more—than the national average when you shop for the best rates and are open to institutions with whom you may not already have a banking relationship.<br/></p>
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<h3 class="accordion__title">How Do I Join One of the Credit Unions on the List?</h3>
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<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-4">
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<p>Credit unions differ from banks in that customers must be members of the credit union to open accounts there. Fortunately, joining a credit union is generally fairly easy to do, and it's often inexpensive or even free.</p><p>For the purposes of our nationwide rankings, all included credit unions must offer an avenue for any adult U.S. citizen to become a member regardless of where they live or work. Joining often involves making a small donation to an affiliated nonprofit organization—sometimes donating as little as $5—and keeping a small minimum balance in a member savings account (most typically $5). For some credit unions, joining incurs no fee or donation at all.</p>
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<h3 class="accordion__title">Financial Institutions We Review</h3>
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<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-5">
<div class="faq-accordion__item-answer">
<p>We researched and reviewed more than 250 banks, credit unions, and financial institutions to find the best CD rates you see above on this list. While we write individual reviews for most, we do not always write reviews for those we would not recommend. Below are the banks, credit unions, and financial institutions we researched along with links to individual company reviews to help you learn more before making a decision:<br/></p><p>1st Source Bank, 5star Bank, ableBanking, Abound Credit Union, Achieva Credit Union, Affinity Federal Credit Union, Affinity Plus Federal Credit Union, Air Force Federal Credit Union, Alabama Credit Union, Allegacy Federal Credit Union, Alliant Credit Union, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ally-bank-cd-rates-7483690">Ally Bank</a>, Amerant Bank, American 1 Credit Union, American Express, American Heritage Credit Union, Andrews Federal Credit Union, Apple Federal Credit Union, Banco do Brasil Americas, Banesco USA, Bank of Baroda, Bank5 Connect, Bank7, Texas Capital Bank, bankESB (Easthampton Savings Bank), BankUnitedDirect, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/barclays-bank-cd-rates-7481049">Barclays</a>, BBVA Bank, Bellco Credit Union, Blue Federal Credit Union, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bmo-bank-cd-rates-7500022">BMO</a>, BMO Alto, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/briodirect-bank-review-5069892">BrioDirect</a>, Cadets Federal Credit Union, California Coast Credit Union, <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/capital-one-cd-rates-7480645">Capital One</a>, Capitol Federal Savings Bank, CD Bank, CFG Bank, <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-cd-rates-7480360">Chase Bank</a>, Chevron Federal Credit Union, CIBC (Agility Banking), <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cit-bank-cd-rates-7480633">CIT Bank</a>, <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citibank-cd-rates-7482684">Citibank</a>, Citizens Access, Citizens Trust Bank, Colorado Federal Savings Bank, <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bread-savings-cd-rates-7488944">Bread Savings</a>, Communitywide Federal Credit Union, ConnectOne Bank, Connexus Credit Union, Consumers Credit Union, Corporate America Federal Credit Union (CAFCU), Credit Union of Denver, Credit Union of the Rockies, Digital, Federal Credit Union, <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-bank-review-5069129">Discover Bank</a>, DollarSavingsDirect, Dover Federal Credit Union, Dow Credit Union, Evergreen Bank Group, RocklandTrust Bank, Elements Financial, EmigrantDirect.com, Liberty Federal Credit Union, <a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fidelity-cd-rates-7496602">Fidelity Investments</a>, Financial Partners Credit Union, Financial Resources Federal Credit Union, First Financial Credit Union, First Financial Northwest Bank, First Internet Bank, First National Bank of America, First Technology Federal Credit Union, Fort Bragg Federal Credit Union, Garden Savings Federal Credit Union, Georgia Banking Company, Georgia's Own Credit Union, GreenState Credit Union, Greenwood Credit Union, Grow Financial Federal Credit Union, GTE Financial, Gulf Coast Bank & Trust Company, Hanscom Federal Credit Union, Heritage Bank, Hiway Federal Credit Union, Home Loan Investment Bank, Home Savings Bank, Hope Credit Union, HSBC Direct, Hughes Federal Credit Union, Hyperion Bank, Ideal Credit Union, iGObanking, Interior Federal Credit Union, Justice Federal Credit Union, Kinecta Federal Credit Union, KS State Bank, La Capitol Federal Credit Union, Lafayette Federal Credit Union, Lake Michigan Credit Union, Langley Federal Credit Union, Latino Community Credit Union, Limelight Bank, Live Oak Bank, Luther Burbank Savings, MYSB Direct, MAC Federal Credit Union, Main Street Bank, MainStreet Bank, MapleMark Bank, Marcus by Goldman Sachs, Market USA Federal Credit Union, Matadors Community Credit Union, MECU Credit Union, Merrick Bank, Michigan State University Federal Credit Union, Mills42 Federal Credit Union, Mountain America Credit Union, MTC Federal Credit Union, MutualOne Bank, My Banking Direct, My eBanc, My Savings Direct, NASA Federal Credit Union, Nationwide by <a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/axos-bank-review-4802090">Axos Bank</a>, <a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/navy-federal-cd-rates-7499476">Navy Federal Credit Union</a>, nbkc, NexBank, North Country Savings Bank, Northern Bank Direct, Northfield Bank, Northpointe Bank, Nuvision Federal Credit Union, Oklahoma Central Credit Union, One American Bank, OneUnited Bank, Pacific National Bank, Paramount Bank, PARDA Federal Credit Union, Partner Colorado Credit Union, Patelco Credit Union, Pen Air Federal Credit Union, <a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/penfed-cd-rates-7497239">PenFed Credit Union</a>, People's Credit Union, First Service Credit Union, Pinnacle Federal Credit Union, <a data-component="link" data-ordinal="15" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/popular-direct-bank-review-5072550">Popular Direct</a>, Premier America Credit Union, Presidential Bank, FSB, Prime Alliance Bank, PSECU (Pennsylvania State Employees Credit Union), Quontic Bank, Quorum Federal Credit Union, Rising Bank, Merrimack Valley Credit Union, Salal Credit Union, <a data-component="link" data-ordinal="16" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sallie-mae-bank-cd-rates-7485414">Sallie Mae Bank</a>, Santa Clara County Federal Credit Union, Signature Federal Credit Union, Spectrum Credit Union, SRP Federal Credit Union, State Bank of India Chicago, State Bank of India New York, State Bank of Texas, State Department Federal Credit Union, Summit Credit Union, Sun East Federal Credit Union, Superior Choice Credit Union, <a data-component="link" data-ordinal="17" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/synchrony-bank-cd-rates-7482657">Synchrony Bank</a>, TAB Bank, Teachers Federal Credit Union, Technology Credit Union, The Federal Savings Bank, <a data-component="link" data-ordinal="18" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/third-federal-cd-rates-7498126">Third Federal Savings & Loan</a>, <a data-component="link" data-ordinal="19" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/everbank-cd-rates-7483667">EverBank</a>, TotalDirectBank, Transportation Federal Credit Union, TruStone Financial Credit Union, UNIFY Financial Credit Union, Expedition Credit Union, United States Senate Federal Credit Union, United Texas Bank, University Federal Credit Union, <a data-component="link" data-ordinal="20" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-bank-cd-rates-7497336">US Bank</a>, USAlliance Financial, USPS Federal Credit Union, Velocity Credit Union, VeraBank, <a data-component="link" data-ordinal="21" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/vio-bank-review-4842261">Vio Bank</a>, Virtual Bank, WebBank, Webster Bank, <a data-component="link" data-ordinal="22" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wells-fargo-cd-rates-7483593">Wells Fargo</a>, Western Vista Credit Union, Wings Financial Credit Union, XCEL Federal Credit Union, BankPurely, giantbank.com, CapEd Credit Union, Zeal Credit Union, Finworth, Coastal1 Credit Union, Service Credit Union, National Cooperative Bank, Premier Members Credit Union, <a data-component="link" data-ordinal="23" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bank-of-america-cd-rates-7498115">Bank of America</a>, Flagstar Bank, 1st MidAmerica Credit Union, INOVA Federal Credit Union, Genisys Credit Union, Ivy Bank, Heartland Credit Union, Luana Savings Bank, Spectra Credit Union, Workers Credit Union, Credit Human, EFCU Financial, Poppy Bank, Credit One Bank, Vibrant Credit Union, CFBank, Department of Commerce Federal Credit Union, Seattle Bank, Crescent Bank, Pima Federal Credit Union, Cross River Bank, <a data-component="link" data-ordinal="24" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/usaa-bank-cd-rates-7483875">USAA</a>, Great River Federal Credit Union, Brilliant Bank, Merchants Bank of Indiana, <a data-component="link" data-ordinal="25" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lendingclub-banking-review-5071446">LendingClub</a>, Chartway Credit Union, First Central Savings Bank, AgFed Credit Union, North American Savings Bank, Pelican State Credit Union, First Community Credit Union, Bask Bank, Skyla Credit Union, SkyOne Federal Credit Union, 3Rivers Federal Credit Union, Utah First Credit Union, Pasadena Federal Credit Union, Magnifi Financial, AloStar, Primis Bank, Farmers Insurance Federal Credit Union, Tampa Bay Federal Credit Union, Veridian Credit Union, Republic Bank, Salem Five Direct, All In Credit Union, Bethpage Federal Credit Union, Self-Help Federal Credit Union, Forbright Bank, Jovia Financial Credit Union, Sun Canyon Bank, Fortera Credit Union, Partners 1st Federal Credit Union, SouthEast Bank, American Bank, Newtek Bank, CBC Federal Credit Union, <a data-component="link" data-ordinal="26" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/vanguard-cd-rates-7496300">Vanguard</a>, All America Bank, Amalgamated Bank, Citizens State Bank, AmBoy Direct, Republic Bank of Chicago, Oklahoma Community Credit Union, BluPeak Credit Union, Valley Direct, Bayer Heritage Federal Credit Union, First Harvest Credit Union, Orion Federal Credit Union, Wellby Financial, FedChoice Federal Credit Union, CoVantage Credit Union, Choice First Bank, Sandia Area Federal Credit Union, OMB Bank, Minnequa Works Credit Union, Securityplus Federal Credit Union, Bank of South Texas, T Bank</p>
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<a class="mntl-sc-block-featuredlink__link mntl-text-link" data-click-action="OffPageClick - Internal [Read our full methodology]" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Featured Link" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633" id="mntl-sc-block-featuredlink__link_1-0-1" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Best High-Yield Savings Accounts for May 2024—Up to 5.55%</span></a><!-- end: mntl-sc-block-featuredlink__link mntl-text-link -->
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<span class="heading-toc" id="toc-how-we-find-the-best-3-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-22"> <span class="mntl-sc-block-heading__text"> How We Find the Best 3-Month CD Rates<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide, and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic-insured-account.asp">FDIC</a> for banks, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua-insured-institution.asp">NCUA</a> for credit unions), and the CD's minimum initial deposit must not exceed $25,000.
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Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816">read our full methodology</a>.
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<li class="mntl-sources__source" id="citation-39"><p>Federal Reserve. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm">Federal Reserve Issues FOMC Statement</a>."</p></li>
<li class="mntl-sources__source" id="citation-40"><p>Bureau of Labor Statistics. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bls.gov/news.release/cpi.nr0.htm">Consumer Price Index</a>."</p></li>
<li class="mntl-sources__source" id="citation-5"><p>TotalDirectBank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.totaldirectbank.com/about-us" rel="nofollow sponsored">About Us</a>."</p></li>
<li class="mntl-sources__source" id="citation-8"><p>Dow Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://dowcreditunion.org/about">About</a>."</p></li>
<li class="mntl-sources__source" id="citation-15"><p>Popular Direct. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.populardirect.com/why-popular-direct/" rel="nofollow sponsored">Better Banking. Your Way</a>."</p></li>
<li class="mntl-sources__source" id="citation-10"><p>Merrick Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.merrickbank.com/About-Us" rel="nofollow sponsored">About Merrick Bank</a>."</p></li>
<li class="mntl-sources__source" id="citation-43"><p>Merchants Bank of Indiana. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://merchantsbankofindiana.com/about-merchants/">About Merchants Bancorp</a>."</p></li>
<li class="mntl-sources__source" id="citation-24"><p>Banesco USA. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://banescousa.com/about/">About Us</a>."</p></li>
<li class="mntl-sources__source" id="citation-32"><p>Financial Partners Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://fpcu.org/why-join/our-story" rel="nofollow sponsored">Our Story</a>."</p></li>
<li class="mntl-sources__source" id="citation-22"><p>Digital Federal Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.dcu.org/about/our-story.html" rel="nofollow sponsored">Our Story</a>."</p></li>
<li class="mntl-sources__source" id="citation-14"><p>Brilliant Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.brilliant.bank/about/">About Brilliant Bank</a>."</p></li>
<li class="mntl-sources__source" id="citation-41"><p>Beal Bank USA. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bealbank.com/bbusa/about-us">About Beal Bank USA</a>."</p></li>
<li class="mntl-sources__source" id="citation-42"><p>Beal Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bealbank.com/about-us">About Us</a>."</p></li>
<li class="mntl-sources__source" id="citation-17"><p>Farmers Insurance Federal Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://figfcu.org/about-us">About Us</a>."</p></li>
<li class="mntl-sources__source" id="citation-29"><p>Princeton Federal Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.princetonfcu.org/home/about/historymission">History and Mission</a>."</p></li>
<li class="mntl-sources__source" id="citation-30"><p>Princeton Federal Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.princetonfcu.org/home/about/locations">Location and Hours</a>."</p></li>
<li class="mntl-sources__source" id="citation-33"><p>National Credit Union Administration. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://mapping.ncua.gov/CreditUnionDetails/24632">Credit Union Details</a>."</p></li>
<li class="mntl-sources__source" id="citation-34"><p>Great River Federal Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.greatriverfcu.org/about-us/">About Us</a>."</p></li>
<li class="mntl-sources__source" id="citation-18"><p>FDIC. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://banks.data.fdic.gov/bankfind-suite/bankfind/details/29209">NexBank</a>."</p></li>
<li class="mntl-sources__source" id="citation-23"><p>Financial Resources Federal Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://myfinancialresources.org/home/about-us/">Get to Know Us</a>."</p></li>
<li class="mntl-sources__source" id="citation-4"><p>FDIC. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fdic.gov/resources/bankers/national-rates/index.html">National Rates and Rate Caps</a>."</p></li>
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<div class="comp related-terms__description mntl-text-block" id="related-terms__description_1-0">A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate on money held for an agreed upon period of time.</div>
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<div class="comp related-terms__description mntl-text-block" id="related-terms__description_2-0">Add-on CDs are specialty CDs that allow you to add more funds to your CD after the initial deposit. Learn whether an add-on or standard CD is a better choice for you.</div>
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<div class="comp related-terms__description mntl-text-block" id="related-terms__description_3-0">A no-penalty certificate of deposit, also known as a liquid CD, allows investors to make early withdrawals without paying a penalty. But it also pays lower interest rates.</div>
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<div class="comp related-terms__description mntl-text-block" id="related-terms__description_4-0">Specialty CDs offer features such as the ability to add to the principal or avoid early withdrawal fees. Some options offer more flexibility but may have lower rates than standard CDs.</div>
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<div class="comp related-terms__description mntl-text-block" id="related-terms__description_5-0">A variable-rate certificate of deposit is an investment product with relatively low risk, but its interest rate can fluctuate, unlike most standard CD, which have fixed rates.</div>
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<div class="comp related-terms__description mntl-text-block" id="related-terms__description_6-0">You may have to pay an early withdrawal penalty to take money out of a certificate of deposit before its term ends. Here's what you need to know.</div>
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</div></div> |
The best rate on a 3-month [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp#what-is-a-certificate-of-deposit-cd) is 5.51% APY from TotalDirectBank. To find you the highest 3-month CD rates nationwide, we review CDs from hundreds of banks and credit unions every day. CD terms of 2–4 months are eligible for our 3-month rankings, with minimum deposit requirements of up to $25,000. A 3-month CD can be a useful financial tool if your time horizon is relatively short. Below are the top CD rates available from our partners, followed by the best CD rates that we've found from [our research](https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816) that are available to U.S. customers everywhere.
### In the News
The Fed [held rates steady for a sixth consecutive time](https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952) at its meeting ending on May 1. The 5.25% to 5.50% range is the highest it has been since 2001, and Fed officials noted in a statement that there has been a lack of recent progress toward the committee's goal of lowering inflation. Consumer prices rose 3.5% over the year in March. Officials don't foresee reducing the target range until they are confident inflation is moving toward 2%.
CD yields closely follow the [fed funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp). Back in October, CD rates reached peaks not seen in more than 20 years. But now, the Fed’s holding pattern has caused CD rates to plateau. Once it appears the Fed is ready to make a rate cut, rates on new CDs will fall.
You can find our ranking of the highest CD rates with terms of 2–4 months below. In cases where more than one institution pays the same annual percentage yield, we've prioritized CDs by the shortest [term](https://www.investopedia.com/terms/t/term.asp), then the CD requiring a smaller [minimum deposit](https://www.investopedia.com/terms/m/minimum_deposit.asp), and if still a tie, alphabetically by institution name.
## Best 3-Month CD Rates
* TotalDirectBank – **5.51% APY**
* Dow Credit Union – **5.30% APY**
* Popular Direct – **5.30% APY**
* Merrick Bank – **5.30% APY**
* Merchants Bank of Indiana – **5.25% APY**
* Banesco USA – **5.25% APY**
* Financial Partners Credit Union – **5.25% APY**
* Digital Federal Credit Union – **5.13% APY**
* Brilliant Bank – **5.10% APY\***
* Beal Bank USA – **5.05% APY\***
* Farmers Insurance Federal Credit Union – **5.00% APY**
* Princeton Federal Credit Union – **4.86% APY**
* Great River Federal Credit Union – **4.80% APY**
* NexBank – **4.80% APY**
* Financial Resources Federal Credit Union – **4.59% APY**
Details on these top-paying nationally available three-month CDs are provided below, including their minimum required deposits and [early withdrawal penalties](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111). For credit union CDs, information on how to easily join each credit union is also provided.
[Best CD Rates for May 2024: Up to 5.51%](https://www.investopedia.com/best-cd-rates-4770214)
## [TotalDirectBank – 5.51% APY](https://www.totaldirectbank.com/personal/cds#main)
* **Term (months)**: 3
* **Minimum deposit**: $25,000
* **Early-withdrawal penalty**: 1 month of interest
* **Overview**: TotalDirectBank is an online-only operation of City National Bank of Florida, established in Miami in 1946.
## [Dow Credit Union – 5.30% APY](https://dowcreditunion.org/account/certificates-of-deposit)
* **Term (months):** 3
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 3 months of interest
* **Overview:** Anyone can join Dow Credit Union by making a $10 donation to the Midland Area Community Foundation scholarship fund during the membership application process. The credit union is based out of Midland, Michigan, and was chartered in 1937.
## [Popular Direct – 5.30% APY](https://www.populardirect.com/products/cds/)
* **Term (months)**: 3
* **Minimum deposit**: $10,000
* **Early-withdrawal penalty**: 3 months of interest
* **Overview**:Popular Direct is the online-only arm of Popular Bank, the U.S. banking subsidiary of Popular Inc., which serves banking customers in the U.S., Puerto Rico, and the Caribbean.
## [Merrick Bank - 5.30% APY](https://www.merrickbank.com/Products/CDs)
* **Term (months)**: 3
* **Minimum deposit**: $25,000
* **Early-withdrawal penalty**:3 months of interest
* **Overview**: While primarily a credit card issuer and consumer finance provider, Merrick Bank also offers online-only certificates of deposit.
## [Merchants Bank of Indiana – 5.25% APY](https://www.merchantsbankofindiana.com/certificates-of-deposit/)
* **Term (months):** 3
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** 3 months of interest
* **Overview:** FDIC-insured since 1934, Merchants Bank of Indiana operates six branches in the greater Indianapolis area, while serving online customers across the country. It is headquartered in Carmel, Indiana.
## [Banesco USA – 5.25% APY](https://banescousa.com/personal/products/banesmart-certificates-of-deposit/)
* **Term (months)**: 3
* **Minimum deposit**: $1,500
* **Early-withdrawal penalty**:3 months of interest
* **Overview**: Banesco USA was established in 2006 with offices in Florida and Puerto Rico. It serves customers nationwide through its online banking.
## [Financial Partners Credit Union – 5.25% APY](https://fpcu.org/money-saving-rates/certificates-ira-rates)
* **Term (months):** 4
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** 3 months of interest
* **Overview:** Anyone can join Financial Partners if they're a member of the American Consumer Council and if they keep $25 or more in a FPCU savings account. Financial Partners Credit Union was formed in 1937 to serve employees of North American Aviation. It is headquartered in Downey, California.
## [Digital Federal Credit Union – 5.13% APY](https://www.dcu.org/bank/certificates.html)
* **Term (months)**: 3–5 months
* **Minimum deposit**: $25,000
* **Early-withdrawal penalty**: 2 months of interest
* **Overview**: Membership is available to anyone nationwide who joins Reach Out for Schools at a cost of $10 and maintains a $5 balance in a savings account. Digital Federal Credit Union (DCU) was chartered in 1979. Its headquarters are in Massachusetts.
## [Brilliant Bank – 5.10% APY\*](https://www.brilliant.bank/cds/)
* **Term (months)**: 3
* **Minimum deposit**: $1,000
* **Early withdrawal penalty**: Half the interest that would have been earned if held to maturity
* **Overview**: Brilliant Bank is an online-only division of FDIC-insured Equity Bank, which operates branches in Arkansas, Kansas, Missouri, and Oklahoma.
*\*Online accounts from Brilliant Bank are not available to residents of Arkansas, Kansas, Missouri, and Oklahoma.*
## [Beal Bank USA – 5.05% APY\*](https://www.bealbank.com/bbusa/home)
* **Term (months):** 3
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** The greater of 1% of the amount withdrawn or 50% of the interest that would have been earned on the amount withdrawn
* **Overview:** Formerly Beal Bank Nevada, Beal Bank USA dates back to 2004 and is headquartered in Las Vegas. Its partner bank, Beal Bank, was founded in 1988 and is headquartered in Plano, Texas.
*\*Online account opening is not available to customers in Ohio or Texas.*
## [Farmers Insurance Federal Credit Union – 5.00% APY](https://figfcu.org/deposit-account-rates)
* **Term (months):** 3
* **Minimum deposit:** $1,000
* **Early-withdrawal penalty:** Complex formula with a minimum penalty of 3 months' interest
* **Overview:** Anyone can join Farmers Insurance Federal Credit Union by agreeing to a free membership in the nonprofit American Consumer Council and keeping at least $5 in a savings account. The credit union is based out of Burbank, California, and dates back to 1936.
## [Princeton Federal Credit Union – 4.86% APY](https://www.princetonfcu.org/home/rates/certificate)
* **Term (months):** 4
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** 3 months of interest
* **Overview:** Anyone nationwide is eligible to join Princeton FCU by agreeing to a complimentary membership with CrossState Credit Union Association. Princeton FCU was chartered in 1972 by faculty and staff at Princeton University. It is headquartered in Princeton, New Jersey.
## [Great River Federal Credit Union – 4.80% APY](https://www.greatriverfcu.org/money-market-and-share-certificates/)
* **Term (months):** 3
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** Anyone can join Great River by agreeing to a free membership in the nonprofit American Consumer Council and keeping at least $5 in a member savings account. Headquartered in Saint Cloud, Minnesota, Great River FCU originally was chartered in 1948 as Machinists Federal Credit Union.
## [NexBank – 4.80% APY](https://www.nexbankpersonal.com/certificates-of-deposit-cds)
* **Term (months)**: 3
* **Minimum deposit**: $10,000
* **Early-withdrawal penalty**: 1 month of interest
* **Overview**: Founded in 1934, NexBank operates three branches in Dallas and serves customers nationwide with online banking.
## [Financial Resources Federal Credit Union – 4.59% APY](https://myfinancialresources.org/home/borrow/rates/)
* **Term (months):** 3
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** Anyone can join Financial Resources by signing up for a free membership in the American Consumer Council and holding $10 or more in an FRFCU savings account. Headquartered in Bridgewater, New Jersey, Financial Resources FCU dates back more than a century.
### Important
The best-paying [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) today is 5.50% from Poppy Bank and guaranteed for 90 days from the date the account is opened. Be sure to consider the interest rates of 3-month CDs in comparison to high-yield savings accounts. Though traditional savings accounts generally pay minimal interest, high-yield savings accounts can pay rates higher than those of a 3-month CD while not requiring you to give up access to your funds.
## Pros and Cons of 3-Month CDs
Pros
* Extremely safe and predictable
* Can help deter spending temptations
* Gives you options after just a short commitment
* May pay a higher APY than a standard savings account
Cons
* Withdrawing early will trigger a penalty
* May pay a lower APY than high-yield accounts that allow withdrawals
* In a short time, you'll need to decide again about what to do with your funds
## Pros Explained
* **Extremely safe and predictable**: CDs opened at FDIC banks and NCUA credit unions are federally insured, protecting up to $250,000 of your deposit in the unlikely event that the institution fails. In addition, since the CD's rate is fixed for the 3-month term, your earnings are completely predictable.
* **Can help deter spending temptations**: Putting money in a 3-month CD instead of just keeping it in a savings account can be a useful tool for blocking the temptation to spend your savings on an unplanned purchase.
* **Gives you options** **after just a short commitment:** You only have to wait three months before you can access your funds again and make a new choice with your money. Perhaps rates have climbed and now you can open another CD with a higher APY. Or maybe you want to use the cash now or keep it in a liquid savings account for a near-term expense.
* **May pay a higher APY than a standard savings account**: You'll be able to earn more with a 3-month CD than by keeping money in your checking account, and you may be able to outearn your bank's savings account rate as well.
## Cons Explained
* **Withdrawing early will trigger a penalty**: Anytime you cash in a CD before maturity, you'll be hit with an early withdrawal penalty. Each bank and credit union has a stated policy on how they calculate their penalty, with the most typical practice being a number of months of forfeited interest.
* **May pay a lower APY than high-yield accounts that allow withdrawals**: Though longer-term CDs usually pay more than high-yield savings accounts, short 3-month CDs often do not. So if you can earn as much or more with a savings account, that may be a better option, as it keeps your money accessible.
* **In a short time, you'll need to decide again about what to do with your funds**: With a 3-month CD, you go through the process of opening the CD and then, in just three months, have to decide all over again where to put your money.
### Fast Fact
When asked in late April what they would invest in if they had an extra $10,000, [12% of Investopedia readers](https://www.investopedia.com/investors-aren-t-worried-right-now-but-they-re-not-buying-either-8642075) said they would open a CD. Back in December and January, 11% and 9% of readers (respectively) said they’d invest extra funds in CDs, with that share dipping even further to 8% in March. While CDs sit below individual stocks as the top response (at 19%), CDs are always a good option for those looking for safer investments.
## Compare the Best 3-Month CDs
| Institution | Rate (APY) | Term | Minimum Deposit | Early Withdrawal Penalty |
| --- | --- | --- | --- | --- |
| [MutualOne Bank](https://www.mutualone.com/client-services/rates-calculators/deposit-rates/#greyscale) | 5.65% | 3 months | $500 | All earned interest |
| [TotalDirectBank](https://www.totaldirectbank.com/personal/cds#main) | 5.51% | 3 months | $25,000 | 1 month of interest |
| [Dow Credit Union](https://dowcreditunion.org/account/certificates-of-deposit) | 5.30% | 3 months | $500 | 3 months of interest |
| [Popular Direct](https://www.populardirect.com/products/cds/) | 5.30% | 3 months | $10,000 | 3 months of interest |
| [Merrick Bank](https://www.merrickbank.com/Products/CDs) | 5.30% | 3 months | $25,000 | 3 months of interest |
| [Merchants Bank of Indiana](https://www.merchantsbankofindiana.com/certificates-of-deposit/) | 5.25% | 3 months | $1,000 | 3 months of interest |
| [Banesco USA](https://banescousa.com/personal/products/banesmart-certificates-of-deposit/) | 5.25% | 3 months | $1,500 | 3 months of interest |
| [Financial Partners Credit Union](https://fpcu.org/money-saving-rates/certificates-ira-rates) | 5.25% | 4 months | $1,000 | 3 months of interest |
| [Digital Federal Credit Union](https://www.dcu.org/bank/certificates.html) | 5.13% | 3–5 months | $25,000 | 2 months of interest |
| [Brilliant Bank](https://www.brilliant.bank/cds/) | 5.10% | 3 months | $1,000 | Half the interest that would have been earned if held to maturity |
| [Beal Bank USA](https://www.bealbank.com/bbusa/home) | 5.05% | 3 months | $1,000 | The greater of 1% of the amount withdrawn or 50% of the interest that would have been earned on the amount withdrawn |
| [Farmers Insurance Federal Credit Union](https://figfcu.org/deposit-account-rates) | 5.00% | 3 months | $1,000 | Complex formula with a minimum penalty of 3 months' interest |
| [Princeton Federal Credit Union](https://www.princetonfcu.org/home/rates/certificate) | 4.86% | 4 months | $1,000 | 3 months of interest |
| [Great River Federal Credit Union](https://www.greatriverfcu.org/money-market-and-share-certificates/) | 4.80% | 3 months | $500 | 6 months of interest |
| [NexBank](https://www.nexbankpersonal.com/certificates-of-deposit-cds) | 4.80% | 3 months | $10,000 | 1 month of interest |
| [Financial Resources Federal Credit Union](https://myfinancialresources.org/home/borrow/rates/) | 4.59% | 3 months | $500 | 6 months of interest |
## Alternatives to 3-Month CDs
### Savings or Money Market Accounts
Instead of locking up your funds in a 3-month CD, you could just hold them in a liquid savings or money market account. That way you can access the funds if you need them. Just be sure to shop around for a great high-yield rate that matches or beats what you can earn with a 3-month CD.
Also, be aware that the rates paid on savings and money market accounts are variable, meaning the bank can lower them anytime they want. A CD's rate, in contrast, is fixed for the full term, though in the case of a 3-month certificate, your return is not secured for very long.
### Longer-Term CDs
Instead of a 3-month CD, you could stretch to a 6-month or 1-year certificate, or an even longer term, depending on how long you feel you can live without your funds. The advantage is that you can almost always find a better rate on slightly longer CDs, since the 3-month term is typically the worst-paying CD duration.
### Treasury Bills
Another short-term option you can consider instead of a 3-month CD is a U.S. Treasury bill. [T-bills](https://www.investopedia.com/terms/t/treasurybill.asp) allow you to lend money to the U.S. government for a short, fixed amount of time. Considered one of the safest investments in the world, T-bills offer durations ranging from four weeks to one year.
## Frequently Asked Questions
* ### What Is a 3-Month CD?
A certificate of deposit is a type of bank account that involves an agreement between a financial institution and an individual. The individual agrees to deposit a sum of money and keep it at the institution for a predetermined number of months or years. In exchange, the bank or credit union agrees to pay the account holder a higher interest rate than if they put the funds into a simple savings account.
A 3-month CD is therefore a certificate for which the [maturity period](https://www.investopedia.com/terms/m/maturity.asp) or term is roughly 90 days. At most banks and credit unions, a 3-month term is the shortest certificate duration they offer, while some institutions don't offer any CDs shorter than six months.
* ### What Are the Differences Between CD, Savings, and Money Market Accounts?
[Savings accounts](https://www.investopedia.com/terms/s/savingsaccount.asp), money market accounts, and CDs are collectively called deposit accounts. All are intended as vehicles for holding cash [savings](https://www.investopedia.com/terms/s/savings.asp) at a bank or credit union. Savings accounts and money markets are more similar, while certificates of deposit are somewhat different.
A savings account allows you to withdraw funds at your convenience. The same is true for deposits: You can deposit a lump sum all at once, automate savings deposits on a regular cycle, or sporadically add funds when you have them available.
An account that allows you to deposit and withdraw funds at will is called a liquid account. [Money market accounts](https://www.investopedia.com/terms/m/moneymarketaccount.asp) are another type of liquid account, with the main difference being that money market accounts traditionally include check-writing privileges.
Certificates of deposit are quite a bit different. Because you must deposit a lump sum of funds at the outset and then not touch it until the term expires, they are the opposite of liquid accounts. But what you lose in access to the funds is traded for a higher interest rate, meaning you are compensated for giving up your at-will access.
* ### Who Benefits From a 3-Month CD the Most?
Theoretically, certificates of deposit are a good vehicle for someone who wants to earn more interest by committing their funds for a short time. But in the case of 3-month CDs, the time period is so brief that the interest rate premium can be quite slight, or even nonexistent. In fact, you can often earn more with a high-yield savings account, which doesn't require you to tie up your funds.
Still, some people may benefit from committing their savings to a CD instead of putting it in a liquid account. That's because making the funds inaccessible can be a benefit for savers who might otherwise be tempted to dip into their savings for an unplanned purchase.
* ### What Are the Typical Rates for a 3-Month CD?
Interest rates vary widely across the thousands of banks and credit unions that offer 3-month CDs. And rates across all deposit accounts change based on the Federal Reserve's [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp). So it pays to do your homework and shop around.
The FDIC national rate average for 3-month certificates is 1.53% APY. As you can see, our current ranking of the top-paying 3-month CDs far outperforms that average. It's not uncommon to earn three to five times as much—and sometimes more—than the national average when you shop for the best rates and are open to institutions with whom you may not already have a banking relationship.
* ### How Do I Join One of the Credit Unions on the List?
Credit unions differ from banks in that customers must be members of the credit union to open accounts there. Fortunately, joining a credit union is generally fairly easy to do, and it's often inexpensive or even free.
For the purposes of our nationwide rankings, all included credit unions must offer an avenue for any adult U.S. citizen to become a member regardless of where they live or work. Joining often involves making a small donation to an affiliated nonprofit organization—sometimes donating as little as $5—and keeping a small minimum balance in a member savings account (most typically $5). For some credit unions, joining incurs no fee or donation at all.
* ### Financial Institutions We Review
We researched and reviewed more than 250 banks, credit unions, and financial institutions to find the best CD rates you see above on this list. While we write individual reviews for most, we do not always write reviews for those we would not recommend. Below are the banks, credit unions, and financial institutions we researched along with links to individual company reviews to help you learn more before making a decision:
1st Source Bank, 5star Bank, ableBanking, Abound Credit Union, Achieva Credit Union, Affinity Federal Credit Union, Affinity Plus Federal Credit Union, Air Force Federal Credit Union, Alabama Credit Union, Allegacy Federal Credit Union, Alliant Credit Union, [Ally Bank](https://www.investopedia.com/ally-bank-cd-rates-7483690), Amerant Bank, American 1 Credit Union, American Express, American Heritage Credit Union, Andrews Federal Credit Union, Apple Federal Credit Union, Banco do Brasil Americas, Banesco USA, Bank of Baroda, Bank5 Connect, Bank7, Texas Capital Bank, bankESB (Easthampton Savings Bank), BankUnitedDirect, [Barclays](https://www.investopedia.com/barclays-bank-cd-rates-7481049), BBVA Bank, Bellco Credit Union, Blue Federal Credit Union, [BMO](https://www.investopedia.com/bmo-bank-cd-rates-7500022), BMO Alto, [BrioDirect](https://www.investopedia.com/briodirect-bank-review-5069892), Cadets Federal Credit Union, California Coast Credit Union, [Capital One](https://www.investopedia.com/capital-one-cd-rates-7480645), Capitol Federal Savings Bank, CD Bank, CFG Bank, [Chase Bank](https://www.investopedia.com/chase-cd-rates-7480360), Chevron Federal Credit Union, CIBC (Agility Banking), [CIT Bank](https://www.investopedia.com/cit-bank-cd-rates-7480633), [Citibank](https://www.investopedia.com/citibank-cd-rates-7482684), Citizens Access, Citizens Trust Bank, Colorado Federal Savings Bank, [Bread Savings](https://www.investopedia.com/bread-savings-cd-rates-7488944), Communitywide Federal Credit Union, ConnectOne Bank, Connexus Credit Union, Consumers Credit Union, Corporate America Federal Credit Union (CAFCU), Credit Union of Denver, Credit Union of the Rockies, Digital, Federal Credit Union, [Discover Bank](https://www.investopedia.com/discover-bank-review-5069129), DollarSavingsDirect, Dover Federal Credit Union, Dow Credit Union, Evergreen Bank Group, RocklandTrust Bank, Elements Financial, EmigrantDirect.com, Liberty Federal Credit Union, [Fidelity Investments](https://www.investopedia.com/fidelity-cd-rates-7496602), Financial Partners Credit Union, Financial Resources Federal Credit Union, First Financial Credit Union, First Financial Northwest Bank, First Internet Bank, First National Bank of America, First Technology Federal Credit Union, Fort Bragg Federal Credit Union, Garden Savings Federal Credit Union, Georgia Banking Company, Georgia's Own Credit Union, GreenState Credit Union, Greenwood Credit Union, Grow Financial Federal Credit Union, GTE Financial, Gulf Coast Bank & Trust Company, Hanscom Federal Credit Union, Heritage Bank, Hiway Federal Credit Union, Home Loan Investment Bank, Home Savings Bank, Hope Credit Union, HSBC Direct, Hughes Federal Credit Union, Hyperion Bank, Ideal Credit Union, iGObanking, Interior Federal Credit Union, Justice Federal Credit Union, Kinecta Federal Credit Union, KS State Bank, La Capitol Federal Credit Union, Lafayette Federal Credit Union, Lake Michigan Credit Union, Langley Federal Credit Union, Latino Community Credit Union, Limelight Bank, Live Oak Bank, Luther Burbank Savings, MYSB Direct, MAC Federal Credit Union, Main Street Bank, MainStreet Bank, MapleMark Bank, Marcus by Goldman Sachs, Market USA Federal Credit Union, Matadors Community Credit Union, MECU Credit Union, Merrick Bank, Michigan State University Federal Credit Union, Mills42 Federal Credit Union, Mountain America Credit Union, MTC Federal Credit Union, MutualOne Bank, My Banking Direct, My eBanc, My Savings Direct, NASA Federal Credit Union, Nationwide by [Axos Bank](https://www.investopedia.com/axos-bank-review-4802090), [Navy Federal Credit Union](https://www.investopedia.com/navy-federal-cd-rates-7499476), nbkc, NexBank, North Country Savings Bank, Northern Bank Direct, Northfield Bank, Northpointe Bank, Nuvision Federal Credit Union, Oklahoma Central Credit Union, One American Bank, OneUnited Bank, Pacific National Bank, Paramount Bank, PARDA Federal Credit Union, Partner Colorado Credit Union, Patelco Credit Union, Pen Air Federal Credit Union, [PenFed Credit Union](https://www.investopedia.com/penfed-cd-rates-7497239), People's Credit Union, First Service Credit Union, Pinnacle Federal Credit Union, [Popular Direct](https://www.investopedia.com/popular-direct-bank-review-5072550), Premier America Credit Union, Presidential Bank, FSB, Prime Alliance Bank, PSECU (Pennsylvania State Employees Credit Union), Quontic Bank, Quorum Federal Credit Union, Rising Bank, Merrimack Valley Credit Union, Salal Credit Union, [Sallie Mae Bank](https://www.investopedia.com/sallie-mae-bank-cd-rates-7485414), Santa Clara County Federal Credit Union, Signature Federal Credit Union, Spectrum Credit Union, SRP Federal Credit Union, State Bank of India Chicago, State Bank of India New York, State Bank of Texas, State Department Federal Credit Union, Summit Credit Union, Sun East Federal Credit Union, Superior Choice Credit Union, [Synchrony Bank](https://www.investopedia.com/synchrony-bank-cd-rates-7482657), TAB Bank, Teachers Federal Credit Union, Technology Credit Union, The Federal Savings Bank, [Third Federal Savings & Loan](https://www.investopedia.com/third-federal-cd-rates-7498126), [EverBank](https://www.investopedia.com/everbank-cd-rates-7483667), TotalDirectBank, Transportation Federal Credit Union, TruStone Financial Credit Union, UNIFY Financial Credit Union, Expedition Credit Union, United States Senate Federal Credit Union, United Texas Bank, University Federal Credit Union, [US Bank](https://www.investopedia.com/us-bank-cd-rates-7497336), USAlliance Financial, USPS Federal Credit Union, Velocity Credit Union, VeraBank, [Vio Bank](https://www.investopedia.com/vio-bank-review-4842261), Virtual Bank, WebBank, Webster Bank, [Wells Fargo](https://www.investopedia.com/wells-fargo-cd-rates-7483593), Western Vista Credit Union, Wings Financial Credit Union, XCEL Federal Credit Union, BankPurely, giantbank.com, CapEd Credit Union, Zeal Credit Union, Finworth, Coastal1 Credit Union, Service Credit Union, National Cooperative Bank, Premier Members Credit Union, [Bank of America](https://www.investopedia.com/bank-of-america-cd-rates-7498115), Flagstar Bank, 1st MidAmerica Credit Union, INOVA Federal Credit Union, Genisys Credit Union, Ivy Bank, Heartland Credit Union, Luana Savings Bank, Spectra Credit Union, Workers Credit Union, Credit Human, EFCU Financial, Poppy Bank, Credit One Bank, Vibrant Credit Union, CFBank, Department of Commerce Federal Credit Union, Seattle Bank, Crescent Bank, Pima Federal Credit Union, Cross River Bank, [USAA](https://www.investopedia.com/usaa-bank-cd-rates-7483875), Great River Federal Credit Union, Brilliant Bank, Merchants Bank of Indiana, [LendingClub](https://www.investopedia.com/lendingclub-banking-review-5071446), Chartway Credit Union, First Central Savings Bank, AgFed Credit Union, North American Savings Bank, Pelican State Credit Union, First Community Credit Union, Bask Bank, Skyla Credit Union, SkyOne Federal Credit Union, 3Rivers Federal Credit Union, Utah First Credit Union, Pasadena Federal Credit Union, Magnifi Financial, AloStar, Primis Bank, Farmers Insurance Federal Credit Union, Tampa Bay Federal Credit Union, Veridian Credit Union, Republic Bank, Salem Five Direct, All In Credit Union, Bethpage Federal Credit Union, Self-Help Federal Credit Union, Forbright Bank, Jovia Financial Credit Union, Sun Canyon Bank, Fortera Credit Union, Partners 1st Federal Credit Union, SouthEast Bank, American Bank, Newtek Bank, CBC Federal Credit Union, [Vanguard](https://www.investopedia.com/vanguard-cd-rates-7496300), All America Bank, Amalgamated Bank, Citizens State Bank, AmBoy Direct, Republic Bank of Chicago, Oklahoma Community Credit Union, BluPeak Credit Union, Valley Direct, Bayer Heritage Federal Credit Union, First Harvest Credit Union, Orion Federal Credit Union, Wellby Financial, FedChoice Federal Credit Union, CoVantage Credit Union, Choice First Bank, Sandia Area Federal Credit Union, OMB Bank, Minnequa Works Credit Union, Securityplus Federal Credit Union, Bank of South Texas, T Bank
[Best High-Yield Savings Accounts for May 2024—Up to 5.55%](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)
[Best Banks for Savings Accounts](https://www.investopedia.com/personal-finance/banks-pay-highest-interest-rates-savings-accounts/)
## How We Find the Best 3-Month CD Rates
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide, and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured ([FDIC](https://www.investopedia.com/terms/f/fdic-insured-account.asp) for banks, [NCUA](https://www.investopedia.com/terms/n/ncua-insured-institution.asp) for credit unions), and the CD's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, [read our full methodology](https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816).
:max_bytes(150000):strip_icc()/Best3-MonthCDrates-47c08f1e650642599b16aa52779f590f.jpg)
:max_bytes(150000):strip_icc()/Best3-MonthCDrates-47c08f1e650642599b16aa52779f590f.jpg)
Investopedia / Alice Morgan
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
[editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy)
1. Federal Reserve. "[Federal Reserve Issues FOMC Statement](https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm)."
2. Bureau of Labor Statistics. "[Consumer Price Index](https://www.bls.gov/news.release/cpi.nr0.htm)."
3. TotalDirectBank. "[About Us](https://www.totaldirectbank.com/about-us)."
4. Dow Credit Union. "[About](https://dowcreditunion.org/about)."
5. Popular Direct. "[Better Banking. Your Way](https://www.populardirect.com/why-popular-direct/)."
6. Merrick Bank. "[About Merrick Bank](https://www.merrickbank.com/About-Us)."
7. Merchants Bank of Indiana. "[About Merchants Bancorp](https://merchantsbankofindiana.com/about-merchants/)."
8. Banesco USA. "[About Us](https://banescousa.com/about/)."
9. Financial Partners Credit Union. "[Our Story](https://fpcu.org/why-join/our-story)."
10. Digital Federal Credit Union. "[Our Story](https://www.dcu.org/about/our-story.html)."
11. Brilliant Bank. "[About Brilliant Bank](https://www.brilliant.bank/about/)."
12. Beal Bank USA. "[About Beal Bank USA](https://www.bealbank.com/bbusa/about-us)."
13. Beal Bank. "[About Us](https://www.bealbank.com/about-us)."
14. Farmers Insurance Federal Credit Union. "[About Us](https://figfcu.org/about-us)."
15. Princeton Federal Credit Union. "[History and Mission](https://www.princetonfcu.org/home/about/historymission)."
16. Princeton Federal Credit Union. "[Location and Hours](https://www.princetonfcu.org/home/about/locations)."
17. National Credit Union Administration. "[Credit Union Details](https://mapping.ncua.gov/CreditUnionDetails/24632)."
18. Great River Federal Credit Union. "[About Us](https://www.greatriverfcu.org/about-us/)."
19. FDIC. "[NexBank](https://banks.data.fdic.gov/bankfind-suite/bankfind/details/29209)."
20. Financial Resources Federal Credit Union. "[Get to Know Us](https://myfinancialresources.org/home/about-us/)."
21. FDIC. "[National Rates and Rate Caps](https://www.fdic.gov/resources/bankers/national-rates/index.html)."
Related Terms
[What Is a Certificate of Deposit (CD) and What Can It Do for You?](https://www.investopedia.com/terms/c/certificateofdeposit.asp)
A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate on money held for an agreed upon period of time.
[more](https://www.investopedia.com/terms/c/certificateofdeposit.asp)
[Add-On CDs: Meaning, Pros and Cons, Example](https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169)
Add-on CDs are specialty CDs that allow you to add more funds to your CD after the initial deposit. Learn whether an add-on or standard CD is a better choice for you.
[more](https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169)
[No-Penalty Certificate of Deposit (CD): What It Is, How It Works](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp)
A no-penalty certificate of deposit, also known as a liquid CD, allows investors to make early withdrawals without paying a penalty. But it also pays lower interest rates.
[more](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp)
[Types of Specialty Certificates of Deposit (CDs) Explained](https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646)
Specialty CDs offer features such as the ability to add to the principal or avoid early withdrawal fees. Some options offer more flexibility but may have lower rates than standard CDs.
[more](https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646)
[Variable-Rate Certificate of Deposit (CD): Meaning, Example, FAQs](https://www.investopedia.com/terms/v/variable-rate-certificate-of-deposit.asp)
A variable-rate certificate of deposit is an investment product with relatively low risk, but its interest rate can fluctuate, unlike most standard CD, which have fixed rates.
[more](https://www.investopedia.com/terms/v/variable-rate-certificate-of-deposit.asp)
[CD Early Withdrawal Penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111)
You may have to pay an early withdrawal penalty to take money out of a certificate of deposit before its term ends. Here's what you need to know.
[more](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111)
|
The best rate on a 3-month certificate of deposit (CD) is 5.51% APY from TotalDirectBank. To find you the highest 3-month CD rates nationwide, we review CDs from hundreds of banks and credit unions every day. CD terms of 2–4 months are eligible for our 3-month rankings, with minimum deposit requirements of up to $25,000. A 3-month CD can be a useful financial tool if your time horizon is relatively short. Below are the top CD rates available from our partners, followed by the best CD rates that we've found from our research that are available to U.S. customers everywhere.
In the News
The Fed held rates steady for a sixth consecutive time at its meeting ending on May 1. The 5.25% to 5.50% range is the highest it has been since 2001, and Fed officials noted in a statement that there has been a lack of recent progress toward the committee's goal of lowering inflation. Consumer prices rose 3.5% over the year in March. Officials don't foresee reducing the target range until they are confident inflation is moving toward 2%.
CD yields closely follow the fed funds rate. Back in October, CD rates reached peaks not seen in more than 20 years. But now, the Fed’s holding pattern has caused CD rates to plateau. Once it appears the Fed is ready to make a rate cut, rates on new CDs will fall.
You can find our ranking of the highest CD rates with terms of 2–4 months below. In cases where more than one institution pays the same annual percentage yield, we've prioritized CDs by the shortest term, then the CD requiring a smaller minimum deposit, and if still a tie, alphabetically by institution name.
Best 3-Month CD Rates
TotalDirectBank – 5.51% APYDow Credit Union – 5.30% APYPopular Direct – 5.30% APYMerrick Bank – 5.30% APYMerchants Bank of Indiana – 5.25% APYBanesco USA – 5.25% APYFinancial Partners Credit Union – 5.25% APYDigital Federal Credit Union – 5.13% APYBrilliant Bank – 5.10% APY*Beal Bank USA – 5.05% APY*Farmers Insurance Federal Credit Union – 5.00% APYPrinceton Federal Credit Union – 4.86% APYGreat River Federal Credit Union – 4.80% APYNexBank – 4.80% APYFinancial Resources Federal Credit Union – 4.59% APY
Details on these top-paying nationally available three-month CDs are provided below, including their minimum required deposits and early withdrawal penalties. For credit union CDs, information on how to easily join each credit union is also provided.
Best CD Rates for May 2024: Up to 5.51%
TotalDirectBank – 5.51% APY
Term (months): 3Minimum deposit: $25,000Early-withdrawal penalty: 1 month of interestOverview: TotalDirectBank is an online-only operation of City National Bank of Florida, established in Miami in 1946.
Dow Credit Union – 5.30% APY
Term (months): 3Minimum deposit: $500Early withdrawal penalty: 3 months of interestOverview: Anyone can join Dow Credit Union by making a $10 donation to the Midland Area Community Foundation scholarship fund during the membership application process. The credit union is based out of Midland, Michigan, and was chartered in 1937.
Popular Direct – 5.30% APY
Term (months): 3Minimum deposit: $10,000Early-withdrawal penalty: 3 months of interestOverview: Popular Direct is the online-only arm of Popular Bank, the U.S. banking subsidiary of Popular Inc., which serves banking customers in the U.S., Puerto Rico, and the Caribbean.
Merrick Bank - 5.30% APY
Term (months): 3Minimum deposit: $25,000Early-withdrawal penalty: 3 months of interestOverview: While primarily a credit card issuer and consumer finance provider, Merrick Bank also offers online-only certificates of deposit.
Merchants Bank of Indiana – 5.25% APY
Term (months): 3Minimum deposit: $1,000Early withdrawal penalty: 3 months of interestOverview: FDIC-insured since 1934, Merchants Bank of Indiana operates six branches in the greater Indianapolis area, while serving online customers across the country. It is headquartered in Carmel, Indiana.
Banesco USA – 5.25% APY
Term (months): 3Minimum deposit: $1,500Early-withdrawal penalty: 3 months of interestOverview: Banesco USA was established in 2006 with offices in Florida and Puerto Rico. It serves customers nationwide through its online banking.
Financial Partners Credit Union – 5.25% APY
Term (months): 4Minimum deposit: $1,000Early withdrawal penalty: 3 months of interestOverview: Anyone can join Financial Partners if they're a member of the American Consumer Council and if they keep $25 or more in a FPCU savings account. Financial Partners Credit Union was formed in 1937 to serve employees of North American Aviation. It is headquartered in Downey, California.
Digital Federal Credit Union – 5.13% APY
Term (months): 3–5 monthsMinimum deposit: $25,000Early-withdrawal penalty: 2 months of interestOverview: Membership is available to anyone nationwide who joins Reach Out for Schools at a cost of $10 and maintains a $5 balance in a savings account. Digital Federal Credit Union (DCU) was chartered in 1979. Its headquarters are in Massachusetts.
Brilliant Bank – 5.10% APY*
Term (months): 3Minimum deposit: $1,000Early withdrawal penalty: Half the interest that would have been earned if held to maturityOverview: Brilliant Bank is an online-only division of FDIC-insured Equity Bank, which operates branches in Arkansas, Kansas, Missouri, and Oklahoma.
*Online accounts from Brilliant Bank are not available to residents of Arkansas, Kansas, Missouri, and Oklahoma.
Beal Bank USA – 5.05% APY*
Term (months): 3Minimum deposit: $1,000Early withdrawal penalty: The greater of 1% of the amount withdrawn or 50% of the interest that would have been earned on the amount withdrawnOverview: Formerly Beal Bank Nevada, Beal Bank USA dates back to 2004 and is headquartered in Las Vegas. Its partner bank, Beal Bank, was founded in 1988 and is headquartered in Plano, Texas.
*Online account opening is not available to customers in Ohio or Texas.
Farmers Insurance Federal Credit Union – 5.00% APY
Term (months): 3Minimum deposit: $1,000Early-withdrawal penalty: Complex formula with a minimum penalty of 3 months' interestOverview: Anyone can join Farmers Insurance Federal Credit Union by agreeing to a free membership in the nonprofit American Consumer Council and keeping at least $5 in a savings account. The credit union is based out of Burbank, California, and dates back to 1936.
Princeton Federal Credit Union – 4.86% APY
Term (months): 4Minimum deposit: $1,000Early withdrawal penalty: 3 months of interestOverview: Anyone nationwide is eligible to join Princeton FCU by agreeing to a complimentary membership with CrossState Credit Union Association. Princeton FCU was chartered in 1972 by faculty and staff at Princeton University. It is headquartered in Princeton, New Jersey.
Great River Federal Credit Union – 4.80% APY
Term (months): 3Minimum deposit: $500Early withdrawal penalty: 6 months of interestOverview: Anyone can join Great River by agreeing to a free membership in the nonprofit American Consumer Council and keeping at least $5 in a member savings account. Headquartered in Saint Cloud, Minnesota, Great River FCU originally was chartered in 1948 as Machinists Federal Credit Union.
NexBank – 4.80% APY
Term (months): 3Minimum deposit: $10,000Early-withdrawal penalty: 1 month of interestOverview: Founded in 1934, NexBank operates three branches in Dallas and serves customers nationwide with online banking.
Financial Resources Federal Credit Union – 4.59% APY
Term (months): 3Minimum deposit: $500Early withdrawal penalty: 6 months of interestOverview: Anyone can join Financial Resources by signing up for a free membership in the American Consumer Council and holding $10 or more in an FRFCU savings account. Headquartered in Bridgewater, New Jersey, Financial Resources FCU dates back more than a century.
Important
The best-paying high-yield savings account today is 5.50% from Poppy Bank and guaranteed for 90 days from the date the account is opened. Be sure to consider the interest rates of 3-month CDs in comparison to high-yield savings accounts. Though traditional savings accounts generally pay minimal interest, high-yield savings accounts can pay rates higher than those of a 3-month CD while not requiring you to give up access to your funds.
Pros and Cons of 3-Month CDs
Pros
Extremely safe and predictable
Can help deter spending temptations
Gives you options after just a short commitment
May pay a higher APY than a standard savings account
Cons
Withdrawing early will trigger a penalty
May pay a lower APY than high-yield accounts that allow withdrawals
In a short time, you'll need to decide again about what to do with your funds
Pros Explained
Extremely safe and predictable: CDs opened at FDIC banks and NCUA credit unions are federally insured, protecting up to $250,000 of your deposit in the unlikely event that the institution fails. In addition, since the CD's rate is fixed for the 3-month term, your earnings are completely predictable.Can help deter spending temptations: Putting money in a 3-month CD instead of just keeping it in a savings account can be a useful tool for blocking the temptation to spend your savings on an unplanned purchase.Gives you options after just a short commitment: You only have to wait three months before you can access your funds again and make a new choice with your money. Perhaps rates have climbed and now you can open another CD with a higher APY. Or maybe you want to use the cash now or keep it in a liquid savings account for a near-term expense.May pay a higher APY than a standard savings account: You'll be able to earn more with a 3-month CD than by keeping money in your checking account, and you may be able to outearn your bank's savings account rate as well.
Cons Explained
Withdrawing early will trigger a penalty: Anytime you cash in a CD before maturity, you'll be hit with an early withdrawal penalty. Each bank and credit union has a stated policy on how they calculate their penalty, with the most typical practice being a number of months of forfeited interest.May pay a lower APY than high-yield accounts that allow withdrawals: Though longer-term CDs usually pay more than high-yield savings accounts, short 3-month CDs often do not. So if you can earn as much or more with a savings account, that may be a better option, as it keeps your money accessible.In a short time, you'll need to decide again about what to do with your funds: With a 3-month CD, you go through the process of opening the CD and then, in just three months, have to decide all over again where to put your money.
Fast Fact
When asked in late April what they would invest in if they had an extra $10,000, 12% of Investopedia readers said they would open a CD. Back in December and January, 11% and 9% of readers (respectively) said they’d invest extra funds in CDs, with that share dipping even further to 8% in March. While CDs sit below individual stocks as the top response (at 19%), CDs are always a good option for those looking for safer investments.
Compare the Best 3-Month CDs
Institution
Rate (APY)
Term
Minimum Deposit
Early Withdrawal Penalty
MutualOne Bank
5.65%
3 months
$500
All earned interest
TotalDirectBank
5.51%
3 months
$25,000
1 month of interest
Dow Credit Union
5.30%
3 months
$500
3 months of interest
Popular Direct
5.30%
3 months
$10,000
3 months of interest
Merrick Bank
5.30%
3 months
$25,000
3 months of interest
Merchants Bank of Indiana
5.25%
3 months
$1,000
3 months of interest
Banesco USA
5.25%
3 months
$1,500
3 months of interest
Financial Partners Credit Union
5.25%
4 months
$1,000
3 months of interest
Digital Federal Credit Union
5.13%
3–5 months
$25,000
2 months of interest
Brilliant Bank
5.10%
3 months
$1,000
Half the interest that would have been earned if held to maturity
Beal Bank USA
5.05%
3 months
$1,000
The greater of 1% of the amount withdrawn or 50% of the interest that would have been earned on the amount withdrawn
Farmers Insurance Federal Credit Union
5.00%
3 months
$1,000
Complex formula with a minimum penalty of 3 months' interest
Princeton Federal Credit Union
4.86%
4 months
$1,000
3 months of interest
Great River Federal Credit Union
4.80%
3 months
$500
6 months of interest
NexBank
4.80%
3 months
$10,000
1 month of interest
Financial Resources Federal Credit Union
4.59%
3 months
$500
6 months of interest
Alternatives to 3-Month CDs
Savings or Money Market Accounts
Instead of locking up your funds in a 3-month CD, you could just hold them in a liquid savings or money market account. That way you can access the funds if you need them. Just be sure to shop around for a great high-yield rate that matches or beats what you can earn with a 3-month CD.
Also, be aware that the rates paid on savings and money market accounts are variable, meaning the bank can lower them anytime they want. A CD's rate, in contrast, is fixed for the full term, though in the case of a 3-month certificate, your return is not secured for very long.
Longer-Term CDs
Instead of a 3-month CD, you could stretch to a 6-month or 1-year certificate, or an even longer term, depending on how long you feel you can live without your funds. The advantage is that you can almost always find a better rate on slightly longer CDs, since the 3-month term is typically the worst-paying CD duration.
Treasury Bills
Another short-term option you can consider instead of a 3-month CD is a U.S. Treasury bill. T-bills allow you to lend money to the U.S. government for a short, fixed amount of time. Considered one of the safest investments in the world, T-bills offer durations ranging from four weeks to one year.
Frequently Asked Questions
What Is a 3-Month CD?
A certificate of deposit is a type of bank account that involves an agreement between a financial institution and an individual. The individual agrees to deposit a sum of money and keep it at the institution for a predetermined number of months or years. In exchange, the bank or credit union agrees to pay the account holder a higher interest rate than if they put the funds into a simple savings account.A 3-month CD is therefore a certificate for which the maturity period or term is roughly 90 days. At most banks and credit unions, a 3-month term is the shortest certificate duration they offer, while some institutions don't offer any CDs shorter than six months.
What Are the Differences Between CD, Savings, and Money Market Accounts?
Savings accounts, money market accounts, and CDs are collectively called deposit accounts. All are intended as vehicles for holding cash savings at a bank or credit union. Savings accounts and money markets are more similar, while certificates of deposit are somewhat different.A savings account allows you to withdraw funds at your convenience. The same is true for deposits: You can deposit a lump sum all at once, automate savings deposits on a regular cycle, or sporadically add funds when you have them available.An account that allows you to deposit and withdraw funds at will is called a liquid account. Money market accounts are another type of liquid account, with the main difference being that money market accounts traditionally include check-writing privileges.Certificates of deposit are quite a bit different. Because you must deposit a lump sum of funds at the outset and then not touch it until the term expires, they are the opposite of liquid accounts. But what you lose in access to the funds is traded for a higher interest rate, meaning you are compensated for giving up your at-will access.
Who Benefits From a 3-Month CD the Most?
Theoretically, certificates of deposit are a good vehicle for someone who wants to earn more interest by committing their funds for a short time. But in the case of 3-month CDs, the time period is so brief that the interest rate premium can be quite slight, or even nonexistent. In fact, you can often earn more with a high-yield savings account, which doesn't require you to tie up your funds.Still, some people may benefit from committing their savings to a CD instead of putting it in a liquid account. That's because making the funds inaccessible can be a benefit for savers who might otherwise be tempted to dip into their savings for an unplanned purchase.
What Are the Typical Rates for a 3-Month CD?
Interest rates vary widely across the thousands of banks and credit unions that offer 3-month CDs. And rates across all deposit accounts change based on the Federal Reserve's federal funds rate. So it pays to do your homework and shop around.The FDIC national rate average for 3-month certificates is 1.53% APY. As you can see, our current ranking of the top-paying 3-month CDs far outperforms that average. It's not uncommon to earn three to five times as much—and sometimes more—than the national average when you shop for the best rates and are open to institutions with whom you may not already have a banking relationship.
How Do I Join One of the Credit Unions on the List?
Credit unions differ from banks in that customers must be members of the credit union to open accounts there. Fortunately, joining a credit union is generally fairly easy to do, and it's often inexpensive or even free.For the purposes of our nationwide rankings, all included credit unions must offer an avenue for any adult U.S. citizen to become a member regardless of where they live or work. Joining often involves making a small donation to an affiliated nonprofit organization—sometimes donating as little as $5—and keeping a small minimum balance in a member savings account (most typically $5). For some credit unions, joining incurs no fee or donation at all.
Financial Institutions We Review
We researched and reviewed more than 250 banks, credit unions, and financial institutions to find the best CD rates you see above on this list. While we write individual reviews for most, we do not always write reviews for those we would not recommend. Below are the banks, credit unions, and financial institutions we researched along with links to individual company reviews to help you learn more before making a decision:1st Source Bank, 5star Bank, ableBanking, Abound Credit Union, Achieva Credit Union, Affinity Federal Credit Union, Affinity Plus Federal Credit Union, Air Force Federal Credit Union, Alabama Credit Union, Allegacy Federal Credit Union, Alliant Credit Union, Ally Bank, Amerant Bank, American 1 Credit Union, American Express, American Heritage Credit Union, Andrews Federal Credit Union, Apple Federal Credit Union, Banco do Brasil Americas, Banesco USA, Bank of Baroda, Bank5 Connect, Bank7, Texas Capital Bank, bankESB (Easthampton Savings Bank), BankUnitedDirect, Barclays, BBVA Bank, Bellco Credit Union, Blue Federal Credit Union, BMO, BMO Alto, BrioDirect, Cadets Federal Credit Union, California Coast Credit Union, Capital One, Capitol Federal Savings Bank, CD Bank, CFG Bank, Chase Bank, Chevron Federal Credit Union, CIBC (Agility Banking), CIT Bank, Citibank, Citizens Access, Citizens Trust Bank, Colorado Federal Savings Bank, Bread Savings, Communitywide Federal Credit Union, ConnectOne Bank, Connexus Credit Union, Consumers Credit Union, Corporate America Federal Credit Union (CAFCU), Credit Union of Denver, Credit Union of the Rockies, Digital, Federal Credit Union, Discover Bank, DollarSavingsDirect, Dover Federal Credit Union, Dow Credit Union, Evergreen Bank Group, RocklandTrust Bank, Elements Financial, EmigrantDirect.com, Liberty Federal Credit Union, Fidelity Investments, Financial Partners Credit Union, Financial Resources Federal Credit Union, First Financial Credit Union, First Financial Northwest Bank, First Internet Bank, First National Bank of America, First Technology Federal Credit Union, Fort Bragg Federal Credit Union, Garden Savings Federal Credit Union, Georgia Banking Company, Georgia's Own Credit Union, GreenState Credit Union, Greenwood Credit Union, Grow Financial Federal Credit Union, GTE Financial, Gulf Coast Bank & Trust Company, Hanscom Federal Credit Union, Heritage Bank, Hiway Federal Credit Union, Home Loan Investment Bank, Home Savings Bank, Hope Credit Union, HSBC Direct, Hughes Federal Credit Union, Hyperion Bank, Ideal Credit Union, iGObanking, Interior Federal Credit Union, Justice Federal Credit Union, Kinecta Federal Credit Union, KS State Bank, La Capitol Federal Credit Union, Lafayette Federal Credit Union, Lake Michigan Credit Union, Langley Federal Credit Union, Latino Community Credit Union, Limelight Bank, Live Oak Bank, Luther Burbank Savings, MYSB Direct, MAC Federal Credit Union, Main Street Bank, MainStreet Bank, MapleMark Bank, Marcus by Goldman Sachs, Market USA Federal Credit Union, Matadors Community Credit Union, MECU Credit Union, Merrick Bank, Michigan State University Federal Credit Union, Mills42 Federal Credit Union, Mountain America Credit Union, MTC Federal Credit Union, MutualOne Bank, My Banking Direct, My eBanc, My Savings Direct, NASA Federal Credit Union, Nationwide by Axos Bank, Navy Federal Credit Union, nbkc, NexBank, North Country Savings Bank, Northern Bank Direct, Northfield Bank, Northpointe Bank, Nuvision Federal Credit Union, Oklahoma Central Credit Union, One American Bank, OneUnited Bank, Pacific National Bank, Paramount Bank, PARDA Federal Credit Union, Partner Colorado Credit Union, Patelco Credit Union, Pen Air Federal Credit Union, PenFed Credit Union, People's Credit Union, First Service Credit Union, Pinnacle Federal Credit Union, Popular Direct, Premier America Credit Union, Presidential Bank, FSB, Prime Alliance Bank, PSECU (Pennsylvania State Employees Credit Union), Quontic Bank, Quorum Federal Credit Union, Rising Bank, Merrimack Valley Credit Union, Salal Credit Union, Sallie Mae Bank, Santa Clara County Federal Credit Union, Signature Federal Credit Union, Spectrum Credit Union, SRP Federal Credit Union, State Bank of India Chicago, State Bank of India New York, State Bank of Texas, State Department Federal Credit Union, Summit Credit Union, Sun East Federal Credit Union, Superior Choice Credit Union, Synchrony Bank, TAB Bank, Teachers Federal Credit Union, Technology Credit Union, The Federal Savings Bank, Third Federal Savings & Loan, EverBank, TotalDirectBank, Transportation Federal Credit Union, TruStone Financial Credit Union, UNIFY Financial Credit Union, Expedition Credit Union, United States Senate Federal Credit Union, United Texas Bank, University Federal Credit Union, US Bank, USAlliance Financial, USPS Federal Credit Union, Velocity Credit Union, VeraBank, Vio Bank, Virtual Bank, WebBank, Webster Bank, Wells Fargo, Western Vista Credit Union, Wings Financial Credit Union, XCEL Federal Credit Union, BankPurely, giantbank.com, CapEd Credit Union, Zeal Credit Union, Finworth, Coastal1 Credit Union, Service Credit Union, National Cooperative Bank, Premier Members Credit Union, Bank of America, Flagstar Bank, 1st MidAmerica Credit Union, INOVA Federal Credit Union, Genisys Credit Union, Ivy Bank, Heartland Credit Union, Luana Savings Bank, Spectra Credit Union, Workers Credit Union, Credit Human, EFCU Financial, Poppy Bank, Credit One Bank, Vibrant Credit Union, CFBank, Department of Commerce Federal Credit Union, Seattle Bank, Crescent Bank, Pima Federal Credit Union, Cross River Bank, USAA, Great River Federal Credit Union, Brilliant Bank, Merchants Bank of Indiana, LendingClub, Chartway Credit Union, First Central Savings Bank, AgFed Credit Union, North American Savings Bank, Pelican State Credit Union, First Community Credit Union, Bask Bank, Skyla Credit Union, SkyOne Federal Credit Union, 3Rivers Federal Credit Union, Utah First Credit Union, Pasadena Federal Credit Union, Magnifi Financial, AloStar, Primis Bank, Farmers Insurance Federal Credit Union, Tampa Bay Federal Credit Union, Veridian Credit Union, Republic Bank, Salem Five Direct, All In Credit Union, Bethpage Federal Credit Union, Self-Help Federal Credit Union, Forbright Bank, Jovia Financial Credit Union, Sun Canyon Bank, Fortera Credit Union, Partners 1st Federal Credit Union, SouthEast Bank, American Bank, Newtek Bank, CBC Federal Credit Union, Vanguard, All America Bank, Amalgamated Bank, Citizens State Bank, AmBoy Direct, Republic Bank of Chicago, Oklahoma Community Credit Union, BluPeak Credit Union, Valley Direct, Bayer Heritage Federal Credit Union, First Harvest Credit Union, Orion Federal Credit Union, Wellby Financial, FedChoice Federal Credit Union, CoVantage Credit Union, Choice First Bank, Sandia Area Federal Credit Union, OMB Bank, Minnequa Works Credit Union, Securityplus Federal Credit Union, Bank of South Texas, T Bank
Best High-Yield Savings Accounts for May 2024—Up to 5.55%
Best Banks for Savings Accounts
How We Find the Best 3-Month CD Rates
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide, and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
Investopedia / Alice Morgan
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
editorial policy.
Federal Reserve. "Federal Reserve Issues FOMC Statement."
Bureau of Labor Statistics. "Consumer Price Index."
TotalDirectBank. "About Us."
Dow Credit Union. "About."
Popular Direct. "Better Banking. Your Way."
Merrick Bank. "About Merrick Bank."
Merchants Bank of Indiana. "About Merchants Bancorp."
Banesco USA. "About Us."
Financial Partners Credit Union. "Our Story."
Digital Federal Credit Union. "Our Story."
Brilliant Bank. "About Brilliant Bank."
Beal Bank USA. "About Beal Bank USA."
Beal Bank. "About Us."
Farmers Insurance Federal Credit Union. "About Us."
Princeton Federal Credit Union. "History and Mission."
Princeton Federal Credit Union. "Location and Hours."
National Credit Union Administration. "Credit Union Details."
Great River Federal Credit Union. "About Us."
FDIC. "NexBank."
Financial Resources Federal Credit Union. "Get to Know Us."
FDIC. "National Rates and Rate Caps."
Related Terms
What Is a Certificate of Deposit (CD) and What Can It Do for You?
A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate on money held for an agreed upon period of time.
more
Add-On CDs: Meaning, Pros and Cons, Example
Add-on CDs are specialty CDs that allow you to add more funds to your CD after the initial deposit. Learn whether an add-on or standard CD is a better choice for you.
more
No-Penalty Certificate of Deposit (CD): What It Is, How It Works
A no-penalty certificate of deposit, also known as a liquid CD, allows investors to make early withdrawals without paying a penalty. But it also pays lower interest rates.
more
Types of Specialty Certificates of Deposit (CDs) Explained
Specialty CDs offer features such as the ability to add to the principal or avoid early withdrawal fees. Some options offer more flexibility but may have lower rates than standard CDs.
more
Variable-Rate Certificate of Deposit (CD): Meaning, Example, FAQs
A variable-rate certificate of deposit is an investment product with relatively low risk, but its interest rate can fluctuate, unlike most standard CD, which have fixed rates.
more
CD Early Withdrawal Penalty
You may have to pay an early withdrawal penalty to take money out of a certificate of deposit before its term ends. Here's what you need to know.
more
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https://www.investopedia.com/terms/l/lakshmi-mittal.asp | Lakshmi Mittal: Early Life, Accomplishments, Philanthropy | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Lakshmi N. Mittal is the executive chairman of ArcelorMittal, the world's largest steel and mining manufacturer. He previously served as the company's chief executive officer (CEO). One of the world's prominent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/billionaire.asp">billionaires</a>, Mittal is known as a global businessman who serves on the boards of various advisory councils, and as a philanthropist engaged in the fields of children's health and education. Mittal is a citizen of India and resides in the United Kingdom.
</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>Lakshmi Mittal is a billionaire, Indian citizen, and the executive chairman of ArcelorMittal.</li><li>Mittal started his own steel company in Indonesia and is recognized for restructuring the steel industry into a consolidated and globalized model.</li><li>He was awarded a Doctor Honoris Causa by the AGH University of Science and Technology in Krakow, Poland.<br/></li></ul></div></div></div>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Alison Czinkota / Investopedia</p></span>
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<span class="heading-toc" id="toc-early-life-and-education"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Early Life and Education </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Lakshmi Mittal was born in Sadulpur, Rajasthan, India in 1950. The family moved to the other side of the country. It was in their new home of Kolkata that Mittal's father opened up a steel mill.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Mittal worked at the mill while studying at St. Xavier’s College. He graduated with a bachelor of commerce degree in 1970 and continued working in the steelmaking business in India after completing his studies.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In 1976, he moved to Indonesia where he established his own steel company. This company would eventually become ArcelorMittal, one of the world's largest steel producers.<span class="ql-inline-citation" data-cite="1"></span>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Lakshmi Mittal's company has grown through a series of strategic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mergersandacquisitions.asp">mergers and acquisitions (M&A)</a>.</p></div></div></div>
<span class="heading-toc" id="toc-notable-accomplishments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Notable Accomplishments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> As noted above, Mittal started his own steel company in Indonesia in 1976. The company, called PT Ispat Indo, operated a greenfield steel <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/manufacturing.asp">manufacturing</a> plant.<span class="ql-inline-citation" data-cite="11"></span> Focusing on global consolidation, Mittal acquired and integrated steel companies globally.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In 2004, the Mittal Steel Company was formed after merging its companies, Ispat International and LNM Holdings, and acquiring the U.S. Ohio-based International Steel Group.<span class="ql-inline-citation" data-cite="1"></span> Two years later, Mittal Steel, which was part of his father's company, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/merger.asp">merged</a> with European steel producer, Arcelor. The newly formed company would assume the name ArcelorMittal in 2007.<span class="ql-inline-citation" data-cite="11"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> ArcelorMittal maintains operations that produce a wide range of steel for the mobility, construction, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/infrastructure.asp">infrastructure</a>, industrial, and energy sectors. At research centers stationed around the world, new steel products, processes, and solutions are envisioned, tested, improved, and deployed. ArcelorMittal is intensifying its commitment to decarbonize, recognizing that steel can make a significant contribution toward net-zero emissions.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The company reported <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operatingincome.asp">operating income</a> of $10.3 billion for the 2022 <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiscalyear.asp">fiscal year</a>. Sales came in for the year at $79.84 billion. That's an increase from the $76.57 reported in the previous year.<span class="ql-inline-citation" data-cite="12"></span><br/>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-subheading__text"> Wealth and Philanthropy </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Lakshmi Mittal is among the world's wealthiest people. According to Forbes, his <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> was $16.4 billion as of June 2023. He's the 93rd richest person in the world and the 15th wealthiest person in India to date.<span class="ql-inline-citation" data-cite="13"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The billionaire is also a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/philanthropy.asp">philanthropist</a>. He made significant donations to Harvard University, where he is a member of the Global Advisory Council. He's also given money to UNICEF to address child malnutrition in India. The Mittal family also contributed to the Great Ormond Street Hospital in the United Kingdom, supporting the Mittal Children’s Medical Centre which formally opened in January 2018.<span class="ql-inline-citation" data-cite="1"></span><br/>
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<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"> Honors and Awards </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Lakshmi Mittal gained international recognition as a leader in the steel <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/industry.asp">industry</a>. In 1996 he was awarded Steelmaker of the Year by New Steel in the United States. He was named Fortune magazine’s European Businessman of the Year in 2004, and Person of the Year by the Financial Times in 2006.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In October 2010, Mittal received the World Steel Association’s medal in recognition of his contribution to the sustainable development of the global steel industry. In January 2013, he received a Doctor Honoris Causa from the AGH University of Science and Technology in Krakow, Poland.<span class="ql-inline-citation" data-cite="1"></span>
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<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"> Legacy </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Lakshmi Mittal serves on advisory councils around the world. He is a member of the Foreign Investment Council in Kazakhstan, the National Investment Council of Ukraine, the Global CEO Council of the Chinese People’s Association for Friendship with Foreign Countries, and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/world-economic-forum.asp">World Economic Forum’s</a> International Business Council.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Mittal is also on the executive committee of the World Steel Association, the European Round Table of Industrialists, and the Indian School of Business. He is a member of the Board of Trustees of Cleveland Clinic.<span class="ql-inline-citation" data-cite="1"></span>
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<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"> Personal Life </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Lakshmi Mittal is married to Usha Mittal. The two have two children.<span class="ql-inline-citation" data-cite="1"></span> He ceded his position as CEO of ArcelorMittal to his son, Aditya, in February 2021.<span class="ql-inline-citation" data-cite="14"></span> His daughter, Vanisha Mittal Bhatia, is a non-independent director of the company.<span class="ql-inline-citation" data-cite="15"></span>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-in-how-many-countries-does-arcelormittal-manufacture-steel"></span> <h2 class="mntl-sc-block-questionandanswer__question">In How Many Countries Does ArcelorMittal Manufacture Steel?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>ArcelorMittal is one of the world's largest steel companies. It has steelmaking facilities in 16 countries and customers in 155 countries. The company has operations across the globe, spanning Africa, Europe, North and South America, Asia, and Australia.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="9"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-where-did-lakshmi-mittal-begin-his-career"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Did Lakshmi Mittal Begin His Career?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Lakshmi Mittal started his career by working at his family's steel company in India, which his father opened in Kolkata. After graduating with a bachelor of commerce from St. Xavier's College in Kolkata in 1970, Mittal continued working in the family business. He moved to Indonesia and started his own steel business in 1976. The company, called PT Ispat Indo, eventually became ArcelorMittal.<span class="ql-inline-citation" data-cite="1"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-where-did-lakshmi-mittal-attend-school"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Did Lakshmi Mittal Attend School?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Lakshmi Mittal attended St. Xavier's College in Kolkata, India. He graduated with a bachelor of commerce degree in 1970.<span class="ql-inline-citation" data-cite="1"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-what-is-lakshmi-mittals-net-worth"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Lakshmi Mittal's Net Worth?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Lakshmi Mittal is one of the richest individuals in the world. He's also the 15th richest person in India. According to Forbes, Mittal had an estimated net worth of $16.4 billion as of June 2023.<span class="ql-inline-citation" data-cite="13"></span></p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Lakshmi Mittal founded a small steel company in Indonesia which grew to become ArcelorMittal, one of the largest steel manufacturing companies in the world. Mittal, who is a philanthropist and one of the world's richest people, is viewed as a leader in the steel industry and is an active member of business and advisory councils around the world.<br>
</br></p></div> | Lakshmi N. Mittal is the executive chairman of ArcelorMittal, the world's largest steel and mining manufacturer. He previously served as the company's chief executive officer (CEO). One of the world's prominent [billionaires](https://www.investopedia.com/terms/b/billionaire.asp), Mittal is known as a global businessman who serves on the boards of various advisory councils, and as a philanthropist engaged in the fields of children's health and education. Mittal is a citizen of India and resides in the United Kingdom.
### Key Takeaways
* Lakshmi Mittal is a billionaire, Indian citizen, and the executive chairman of ArcelorMittal.
* Mittal started his own steel company in Indonesia and is recognized for restructuring the steel industry into a consolidated and globalized model.
* He was awarded a Doctor Honoris Causa by the AGH University of Science and Technology in Krakow, Poland.
![Lakshmi Mittal]()
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Alison Czinkota / Investopedia
## Early Life and Education
Lakshmi Mittal was born in Sadulpur, Rajasthan, India in 1950. The family moved to the other side of the country. It was in their new home of Kolkata that Mittal's father opened up a steel mill.
Mittal worked at the mill while studying at St. Xavier’s College. He graduated with a bachelor of commerce degree in 1970 and continued working in the steelmaking business in India after completing his studies.
In 1976, he moved to Indonesia where he established his own steel company. This company would eventually become ArcelorMittal, one of the world's largest steel producers.
###
Lakshmi Mittal's company has grown through a series of strategic [mergers and acquisitions (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp).
## Notable Accomplishments
As noted above, Mittal started his own steel company in Indonesia in 1976. The company, called PT Ispat Indo, operated a greenfield steel [manufacturing](https://www.investopedia.com/terms/m/manufacturing.asp) plant. Focusing on global consolidation, Mittal acquired and integrated steel companies globally.
In 2004, the Mittal Steel Company was formed after merging its companies, Ispat International and LNM Holdings, and acquiring the U.S. Ohio-based International Steel Group. Two years later, Mittal Steel, which was part of his father's company, [merged](https://www.investopedia.com/terms/m/merger.asp) with European steel producer, Arcelor. The newly formed company would assume the name ArcelorMittal in 2007.
ArcelorMittal maintains operations that produce a wide range of steel for the mobility, construction, [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp), industrial, and energy sectors. At research centers stationed around the world, new steel products, processes, and solutions are envisioned, tested, improved, and deployed. ArcelorMittal is intensifying its commitment to decarbonize, recognizing that steel can make a significant contribution toward net-zero emissions.
The company reported [operating income](https://www.investopedia.com/terms/o/operatingincome.asp) of $10.3 billion for the 2022 [fiscal year](https://www.investopedia.com/terms/f/fiscalyear.asp). Sales came in for the year at $79.84 billion. That's an increase from the $76.57 reported in the previous year.
### Wealth and Philanthropy
Lakshmi Mittal is among the world's wealthiest people. According to Forbes, his [net worth](https://www.investopedia.com/terms/n/networth.asp) was $16.4 billion as of June 2023. He's the 93rd richest person in the world and the 15th wealthiest person in India to date.
The billionaire is also a [philanthropist](https://www.investopedia.com/terms/p/philanthropy.asp). He made significant donations to Harvard University, where he is a member of the Global Advisory Council. He's also given money to UNICEF to address child malnutrition in India. The Mittal family also contributed to the Great Ormond Street Hospital in the United Kingdom, supporting the Mittal Children’s Medical Centre which formally opened in January 2018.
### Honors and Awards
Lakshmi Mittal gained international recognition as a leader in the steel [industry](https://www.investopedia.com/terms/i/industry.asp). In 1996 he was awarded Steelmaker of the Year by New Steel in the United States. He was named Fortune magazine’s European Businessman of the Year in 2004, and Person of the Year by the Financial Times in 2006.
In October 2010, Mittal received the World Steel Association’s medal in recognition of his contribution to the sustainable development of the global steel industry. In January 2013, he received a Doctor Honoris Causa from the AGH University of Science and Technology in Krakow, Poland.
### Legacy
Lakshmi Mittal serves on advisory councils around the world. He is a member of the Foreign Investment Council in Kazakhstan, the National Investment Council of Ukraine, the Global CEO Council of the Chinese People’s Association for Friendship with Foreign Countries, and the [World Economic Forum’s](https://www.investopedia.com/terms/w/world-economic-forum.asp) International Business Council.
Mittal is also on the executive committee of the World Steel Association, the European Round Table of Industrialists, and the Indian School of Business. He is a member of the Board of Trustees of Cleveland Clinic.
### Personal Life
Lakshmi Mittal is married to Usha Mittal. The two have two children. He ceded his position as CEO of ArcelorMittal to his son, Aditya, in February 2021. His daughter, Vanisha Mittal Bhatia, is a non-independent director of the company.
## In How Many Countries Does ArcelorMittal Manufacture Steel?
ArcelorMittal is one of the world's largest steel companies. It has steelmaking facilities in 16 countries and customers in 155 countries. The company has operations across the globe, spanning Africa, Europe, North and South America, Asia, and Australia.
## Where Did Lakshmi Mittal Begin His Career?
Lakshmi Mittal started his career by working at his family's steel company in India, which his father opened in Kolkata. After graduating with a bachelor of commerce from St. Xavier's College in Kolkata in 1970, Mittal continued working in the family business. He moved to Indonesia and started his own steel business in 1976. The company, called PT Ispat Indo, eventually became ArcelorMittal.
## Where Did Lakshmi Mittal Attend School?
Lakshmi Mittal attended St. Xavier's College in Kolkata, India. He graduated with a bachelor of commerce degree in 1970.
## What Is Lakshmi Mittal's Net Worth?
Lakshmi Mittal is one of the richest individuals in the world. He's also the 15th richest person in India. According to Forbes, Mittal had an estimated net worth of $16.4 billion as of June 2023.
## The Bottom Line
Lakshmi Mittal founded a small steel company in Indonesia which grew to become ArcelorMittal, one of the largest steel manufacturing companies in the world. Mittal, who is a philanthropist and one of the world's richest people, is viewed as a leader in the steel industry and is an active member of business and advisory councils around the world.
| Lakshmi N. Mittal is the executive chairman of ArcelorMittal, the world's largest steel and mining manufacturer. He previously served as the company's chief executive officer (CEO). One of the world's prominent billionaires, Mittal is known as a global businessman who serves on the boards of various advisory councils, and as a philanthropist engaged in the fields of children's health and education. Mittal is a citizen of India and resides in the United Kingdom.
Key Takeaways
Lakshmi Mittal is a billionaire, Indian citizen, and the executive chairman of ArcelorMittal.Mittal started his own steel company in Indonesia and is recognized for restructuring the steel industry into a consolidated and globalized model.He was awarded a Doctor Honoris Causa by the AGH University of Science and Technology in Krakow, Poland.
Alison Czinkota / Investopedia
Early Life and Education
Lakshmi Mittal was born in Sadulpur, Rajasthan, India in 1950. The family moved to the other side of the country. It was in their new home of Kolkata that Mittal's father opened up a steel mill.
Mittal worked at the mill while studying at St. Xavier’s College. He graduated with a bachelor of commerce degree in 1970 and continued working in the steelmaking business in India after completing his studies.
In 1976, he moved to Indonesia where he established his own steel company. This company would eventually become ArcelorMittal, one of the world's largest steel producers.
Lakshmi Mittal's company has grown through a series of strategic mergers and acquisitions (M&A).
Notable Accomplishments
As noted above, Mittal started his own steel company in Indonesia in 1976. The company, called PT Ispat Indo, operated a greenfield steel manufacturing plant. Focusing on global consolidation, Mittal acquired and integrated steel companies globally.
In 2004, the Mittal Steel Company was formed after merging its companies, Ispat International and LNM Holdings, and acquiring the U.S. Ohio-based International Steel Group. Two years later, Mittal Steel, which was part of his father's company, merged with European steel producer, Arcelor. The newly formed company would assume the name ArcelorMittal in 2007.
ArcelorMittal maintains operations that produce a wide range of steel for the mobility, construction, infrastructure, industrial, and energy sectors. At research centers stationed around the world, new steel products, processes, and solutions are envisioned, tested, improved, and deployed. ArcelorMittal is intensifying its commitment to decarbonize, recognizing that steel can make a significant contribution toward net-zero emissions.
The company reported operating income of $10.3 billion for the 2022 fiscal year. Sales came in for the year at $79.84 billion. That's an increase from the $76.57 reported in the previous year.
Wealth and Philanthropy
Lakshmi Mittal is among the world's wealthiest people. According to Forbes, his net worth was $16.4 billion as of June 2023. He's the 93rd richest person in the world and the 15th wealthiest person in India to date.
The billionaire is also a philanthropist. He made significant donations to Harvard University, where he is a member of the Global Advisory Council. He's also given money to UNICEF to address child malnutrition in India. The Mittal family also contributed to the Great Ormond Street Hospital in the United Kingdom, supporting the Mittal Children’s Medical Centre which formally opened in January 2018.
Honors and Awards
Lakshmi Mittal gained international recognition as a leader in the steel industry. In 1996 he was awarded Steelmaker of the Year by New Steel in the United States. He was named Fortune magazine’s European Businessman of the Year in 2004, and Person of the Year by the Financial Times in 2006.
In October 2010, Mittal received the World Steel Association’s medal in recognition of his contribution to the sustainable development of the global steel industry. In January 2013, he received a Doctor Honoris Causa from the AGH University of Science and Technology in Krakow, Poland.
Legacy
Lakshmi Mittal serves on advisory councils around the world. He is a member of the Foreign Investment Council in Kazakhstan, the National Investment Council of Ukraine, the Global CEO Council of the Chinese People’s Association for Friendship with Foreign Countries, and the World Economic Forum’s International Business Council.
Mittal is also on the executive committee of the World Steel Association, the European Round Table of Industrialists, and the Indian School of Business. He is a member of the Board of Trustees of Cleveland Clinic.
Personal Life
Lakshmi Mittal is married to Usha Mittal. The two have two children. He ceded his position as CEO of ArcelorMittal to his son, Aditya, in February 2021. His daughter, Vanisha Mittal Bhatia, is a non-independent director of the company.
In How Many Countries Does ArcelorMittal Manufacture Steel?
ArcelorMittal is one of the world's largest steel companies. It has steelmaking facilities in 16 countries and customers in 155 countries. The company has operations across the globe, spanning Africa, Europe, North and South America, Asia, and Australia.
Where Did Lakshmi Mittal Begin His Career?
Lakshmi Mittal started his career by working at his family's steel company in India, which his father opened in Kolkata. After graduating with a bachelor of commerce from St. Xavier's College in Kolkata in 1970, Mittal continued working in the family business. He moved to Indonesia and started his own steel business in 1976. The company, called PT Ispat Indo, eventually became ArcelorMittal.
Where Did Lakshmi Mittal Attend School?
Lakshmi Mittal attended St. Xavier's College in Kolkata, India. He graduated with a bachelor of commerce degree in 1970.
What Is Lakshmi Mittal's Net Worth?
Lakshmi Mittal is one of the richest individuals in the world. He's also the 15th richest person in India. According to Forbes, Mittal had an estimated net worth of $16.4 billion as of June 2023.
The Bottom Line
Lakshmi Mittal founded a small steel company in Indonesia which grew to become ArcelorMittal, one of the largest steel manufacturing companies in the world. Mittal, who is a philanthropist and one of the world's richest people, is viewed as a leader in the steel industry and is an active member of business and advisory councils around the world.
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https://www.investopedia.com/ask/answers/05/economicmoat.asp | How an Economic Moat Provides a Competitive Advantage | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-economic-moat"></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 Economic Moat? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term "economic moat," popularized by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/01/071801.asp">Warren Buffett</a>, refers to a business's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketshare.asp">market share</a>. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.
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<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>"Economic moat" is a term that refers to a business's ability to maintain a competitive edge over its competitors.</li><li>The analogy relates to the moats that would surround medieval castles and act as a barrier of protection.</li><li>Ways in which a company can create an economic moat include creating advantages in size, intangibles, cost, and high switching costs.</li><li>The term economic moat was made popular by legendary investor Warren Buffett.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-economic-moats"></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 Economic Moats </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Remember that a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/competitive_advantage.asp">competitive advantage</a> is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outperform.asp">outperform</a> those competitors in profits.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A good example of a competitive advantage would be a low-cost advantage, such as cheap access to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rawmaterials.asp">raw materials</a>. Very successful investors such as Buffett have been adept at finding companies with solid economic moats but relatively low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/061615/how-companys-share-price-determined.asp">share prices</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> One of the basic tenets of modern <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economics.asp">economics</a>, however, is that, given time, competition will erode any competitive advantages enjoyed by a firm.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> This effect occurs because once a firm establishes competitive advantages, its superior operations generate boosted profits for itself, thus providing a strong incentive for competing firms to duplicate the methods of the leading firm or find even better operating methods.
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<span class="heading-toc" id="toc-example-of-an-economic-moat"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Example of an Economic Moat </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Let's return to the example of a low-cost advantage. Suppose you have decided to make your fortune by running a lemonade stand. You realize that if you buy your lemons in bulk once a week instead of every morning, you can reduce your expenses by 30%, allowing you to undercut the prices of competing lemonade stands.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Your low prices lead to an increase in the number of customers buying lemonade from you (and not from your competitors).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> As a result, you see an increase in profits; however, it probably wouldn't take very long for your competitors to notice your method and employ it themselves. Therefore, in a short period of time, your large profits would erode, and the local lemonade industry would return to normal conditions again.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Other common financial analogies include referring to the stock market as a casino, bonds being the anchor of a portfolio, and having no financial plan is like skydiving without a parachute.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> However, suppose you develop and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/patent.asp">patent</a> a juicing technology that allows you to get 30% more juice out of the average lemon. This would have the same effect of reducing your average cost per glass of lemonade.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> This time, your competitors will have no way of duplicating your methods, as your competitive advantage is protected by your patent. In this example, your economic moat is the patent that you hold on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proprietarytechnology.asp">proprietary technology</a>. In this case, if your lemonade company was a public firm, your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commonstock.asp">common stock</a> would probably outperform that of your competition in the long run.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> As you can see, a company's economic moat represents a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualitativeanalysis.asp">qualitative measurement</a> of its ability to keep competitors at bay for an extended period of time. This translates into prolonged profits in the future.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Economic moats are difficult to express <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quantitativeanalysis.asp">quantitatively</a> because they have no obvious dollar <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/value.asp">value</a>, but are a vital qualitative factor in a company's long-term success or failure and in the selection of stocks.
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<span class="heading-toc" id="toc-creating-an-economic-moat"></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"> Creating an Economic Moat </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> There are several ways in which a company creates an economic moat that allows it to have a significant advantage over its competitors. Below, we will explore some different ways in which moats are created.
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<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"> Cost Advantage </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As discussed in the lemonade stand example, a cost advantage that competitors cannot replicate can be a very effective economic moat.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry, either forcing the competitor to leave the industry or at least impeding its growth.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Companies with sustainable cost advantages can maintain a very large market share of their industry by squeezing out any new competitors who try to move in.
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<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"> Size Advantage </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Being big can sometimes, in itself, create an economic moat for a company. At a certain size, a firm achieves <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economiesofscale.asp">economies of scale</a>. This is when more units of a good or service can be produced on a larger scale with lower input costs. This reduces overhead costs in areas such as financing, advertising, production, etc.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Large companies that compete in a given industry tend to dominate the core market share of that industry, while smaller players are forced to either leave the industry or occupy smaller "niche" roles.
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<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"> High Switching Costs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Being the big fish in the pond has other advantages. When a company is able to establish itself in an industry, suppliers and customers can be subject to high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/switchingcosts.asp">switching costs</a> should they choose to do business with a new competitor. Competitors have a very difficult time taking market share away from the industry leader because of these cumbersome switching costs.
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<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"> Intangibles </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Another type of economic moat can be created through a firm's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intangibleasset.asp">intangible assets</a>, which include items such as patents, brand recognition, government licenses, and others. Strong brand name recognition allows these types of companies to charge a premium for their products over other competitors' goods, which boosts profits.
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<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"> Soft Moats </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Some of the reasons a company might have an economic moat are more difficult to identify. For example, soft moats may be created by exceptional management or a unique corporate culture. While difficult to describe, a unique leadership and corporate environment may partially contribute to a corporation's prolonged economic success.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Economic moats are generally difficult to pinpoint at the time they are being created. Their effects are much more easily observed in hindsight once a company has risen to great heights.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> From an investor's view, it is ideal to invest in growing companies just as they begin to reap the benefits of a wide and sustainable economic moat. In this case, the most important factor is the longevity of the moat. The longer a company can harvest profits, the greater the benefits for itself and its shareholders.
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-what-is-an-example-of-an-economic-moat"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of an Economic Moat?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>One example of an economic moat is economies of scale. As a company achieves economies of scale, it can produce each unit for less than it could before, meaning that it can charge less for that product in the marketplace, which would attract customers and undercut competitors.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_62-0"><span class="heading-toc" id="toc-what-are-some-ways-to-identify-an-economic-moat"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Ways to Identify an Economic Moat?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>When evaluating a company and its economic moat, a few questions should be considered, such as, what are the sources of revenue for the company?; of these sources, which is the cash cow?; what is the industry of the company?; who are the competitors in this industry?; and what is the company doing to stand out out from its competitors?</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-what-is-apples-economic-moat"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Apple's Economic Moat?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Apple has a few economic moats, the primary one being creating products that did not exist before, such as the iPod, the iPhone, and the iPad. After the creation of those products, Apple's economic moat has consisted of its marketing, its design, and its user-friendly interface.</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"> An economic moat is a metaphor that refers to businesses being able to maintain a competitive advantage over their competitors in order to preserve market share and profits. Any method that a company uses to maintain a competitive edge can be considered an economic moat.
</p></div> | ## What Is an Economic Moat?
The term "economic moat," popularized by [Warren Buffett](https://www.investopedia.com/articles/01/071801.asp), refers to a business's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and [market share](https://www.investopedia.com/terms/m/marketshare.asp). Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.
### Key Takeaways
* "Economic moat" is a term that refers to a business's ability to maintain a competitive edge over its competitors.
* The analogy relates to the moats that would surround medieval castles and act as a barrier of protection.
* Ways in which a company can create an economic moat include creating advantages in size, intangibles, cost, and high switching costs.
* The term economic moat was made popular by legendary investor Warren Buffett.
## Understanding Economic Moats
Remember that a [competitive advantage](https://www.investopedia.com/terms/c/competitive_advantage.asp) is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, [outperform](https://www.investopedia.com/terms/o/outperform.asp) those competitors in profits.
A good example of a competitive advantage would be a low-cost advantage, such as cheap access to [raw materials](https://www.investopedia.com/terms/r/rawmaterials.asp). Very successful investors such as Buffett have been adept at finding companies with solid economic moats but relatively low [share prices](https://www.investopedia.com/ask/answers/061615/how-companys-share-price-determined.asp).
One of the basic tenets of modern [economics](https://www.investopedia.com/terms/e/economics.asp), however, is that, given time, competition will erode any competitive advantages enjoyed by a firm.
This effect occurs because once a firm establishes competitive advantages, its superior operations generate boosted profits for itself, thus providing a strong incentive for competing firms to duplicate the methods of the leading firm or find even better operating methods.
## Example of an Economic Moat
Let's return to the example of a low-cost advantage. Suppose you have decided to make your fortune by running a lemonade stand. You realize that if you buy your lemons in bulk once a week instead of every morning, you can reduce your expenses by 30%, allowing you to undercut the prices of competing lemonade stands.
Your low prices lead to an increase in the number of customers buying lemonade from you (and not from your competitors).
As a result, you see an increase in profits; however, it probably wouldn't take very long for your competitors to notice your method and employ it themselves. Therefore, in a short period of time, your large profits would erode, and the local lemonade industry would return to normal conditions again.
###
Other common financial analogies include referring to the stock market as a casino, bonds being the anchor of a portfolio, and having no financial plan is like skydiving without a parachute.
However, suppose you develop and [patent](https://www.investopedia.com/terms/p/patent.asp) a juicing technology that allows you to get 30% more juice out of the average lemon. This would have the same effect of reducing your average cost per glass of lemonade.
This time, your competitors will have no way of duplicating your methods, as your competitive advantage is protected by your patent. In this example, your economic moat is the patent that you hold on your [proprietary technology](https://www.investopedia.com/terms/p/proprietarytechnology.asp). In this case, if your lemonade company was a public firm, your [common stock](https://www.investopedia.com/terms/c/commonstock.asp) would probably outperform that of your competition in the long run.
As you can see, a company's economic moat represents a [qualitative measurement](https://www.investopedia.com/terms/q/qualitativeanalysis.asp) of its ability to keep competitors at bay for an extended period of time. This translates into prolonged profits in the future.
Economic moats are difficult to express [quantitatively](https://www.investopedia.com/terms/q/quantitativeanalysis.asp) because they have no obvious dollar [value](https://www.investopedia.com/terms/v/value.asp), but are a vital qualitative factor in a company's long-term success or failure and in the selection of stocks.
## Creating an Economic Moat
There are several ways in which a company creates an economic moat that allows it to have a significant advantage over its competitors. Below, we will explore some different ways in which moats are created.
### Cost Advantage
As discussed in the lemonade stand example, a cost advantage that competitors cannot replicate can be a very effective economic moat.
Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry, either forcing the competitor to leave the industry or at least impeding its growth.
Companies with sustainable cost advantages can maintain a very large market share of their industry by squeezing out any new competitors who try to move in.
### Size Advantage
Being big can sometimes, in itself, create an economic moat for a company. At a certain size, a firm achieves [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp). This is when more units of a good or service can be produced on a larger scale with lower input costs. This reduces overhead costs in areas such as financing, advertising, production, etc.
Large companies that compete in a given industry tend to dominate the core market share of that industry, while smaller players are forced to either leave the industry or occupy smaller "niche" roles.
### High Switching Costs
Being the big fish in the pond has other advantages. When a company is able to establish itself in an industry, suppliers and customers can be subject to high [switching costs](https://www.investopedia.com/terms/s/switchingcosts.asp) should they choose to do business with a new competitor. Competitors have a very difficult time taking market share away from the industry leader because of these cumbersome switching costs.
### Intangibles
Another type of economic moat can be created through a firm's [intangible assets](https://www.investopedia.com/terms/i/intangibleasset.asp), which include items such as patents, brand recognition, government licenses, and others. Strong brand name recognition allows these types of companies to charge a premium for their products over other competitors' goods, which boosts profits.
### Soft Moats
Some of the reasons a company might have an economic moat are more difficult to identify. For example, soft moats may be created by exceptional management or a unique corporate culture. While difficult to describe, a unique leadership and corporate environment may partially contribute to a corporation's prolonged economic success.
Economic moats are generally difficult to pinpoint at the time they are being created. Their effects are much more easily observed in hindsight once a company has risen to great heights.
From an investor's view, it is ideal to invest in growing companies just as they begin to reap the benefits of a wide and sustainable economic moat. In this case, the most important factor is the longevity of the moat. The longer a company can harvest profits, the greater the benefits for itself and its shareholders.
## What Is an Example of an Economic Moat?
One example of an economic moat is economies of scale. As a company achieves economies of scale, it can produce each unit for less than it could before, meaning that it can charge less for that product in the marketplace, which would attract customers and undercut competitors.
## What Are Some Ways to Identify an Economic Moat?
When evaluating a company and its economic moat, a few questions should be considered, such as, what are the sources of revenue for the company?; of these sources, which is the cash cow?; what is the industry of the company?; who are the competitors in this industry?; and what is the company doing to stand out out from its competitors?
## What Is Apple's Economic Moat?
Apple has a few economic moats, the primary one being creating products that did not exist before, such as the iPod, the iPhone, and the iPad. After the creation of those products, Apple's economic moat has consisted of its marketing, its design, and its user-friendly interface.
## The Bottom Line
An economic moat is a metaphor that refers to businesses being able to maintain a competitive advantage over their competitors in order to preserve market share and profits. Any method that a company uses to maintain a competitive edge can be considered an economic moat.
| What Is an Economic Moat?
The term "economic moat," popularized by Warren Buffett, refers to a business's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.
Key Takeaways
"Economic moat" is a term that refers to a business's ability to maintain a competitive edge over its competitors.The analogy relates to the moats that would surround medieval castles and act as a barrier of protection.Ways in which a company can create an economic moat include creating advantages in size, intangibles, cost, and high switching costs.The term economic moat was made popular by legendary investor Warren Buffett.
Understanding Economic Moats
Remember that a competitive advantage is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, outperform those competitors in profits.
A good example of a competitive advantage would be a low-cost advantage, such as cheap access to raw materials. Very successful investors such as Buffett have been adept at finding companies with solid economic moats but relatively low share prices.
One of the basic tenets of modern economics, however, is that, given time, competition will erode any competitive advantages enjoyed by a firm.
This effect occurs because once a firm establishes competitive advantages, its superior operations generate boosted profits for itself, thus providing a strong incentive for competing firms to duplicate the methods of the leading firm or find even better operating methods.
Example of an Economic Moat
Let's return to the example of a low-cost advantage. Suppose you have decided to make your fortune by running a lemonade stand. You realize that if you buy your lemons in bulk once a week instead of every morning, you can reduce your expenses by 30%, allowing you to undercut the prices of competing lemonade stands.
Your low prices lead to an increase in the number of customers buying lemonade from you (and not from your competitors).
As a result, you see an increase in profits; however, it probably wouldn't take very long for your competitors to notice your method and employ it themselves. Therefore, in a short period of time, your large profits would erode, and the local lemonade industry would return to normal conditions again.
Other common financial analogies include referring to the stock market as a casino, bonds being the anchor of a portfolio, and having no financial plan is like skydiving without a parachute.
However, suppose you develop and patent a juicing technology that allows you to get 30% more juice out of the average lemon. This would have the same effect of reducing your average cost per glass of lemonade.
This time, your competitors will have no way of duplicating your methods, as your competitive advantage is protected by your patent. In this example, your economic moat is the patent that you hold on your proprietary technology. In this case, if your lemonade company was a public firm, your common stock would probably outperform that of your competition in the long run.
As you can see, a company's economic moat represents a qualitative measurement of its ability to keep competitors at bay for an extended period of time. This translates into prolonged profits in the future.
Economic moats are difficult to express quantitatively because they have no obvious dollar value, but are a vital qualitative factor in a company's long-term success or failure and in the selection of stocks.
Creating an Economic Moat
There are several ways in which a company creates an economic moat that allows it to have a significant advantage over its competitors. Below, we will explore some different ways in which moats are created.
Cost Advantage
As discussed in the lemonade stand example, a cost advantage that competitors cannot replicate can be a very effective economic moat.
Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry, either forcing the competitor to leave the industry or at least impeding its growth.
Companies with sustainable cost advantages can maintain a very large market share of their industry by squeezing out any new competitors who try to move in.
Size Advantage
Being big can sometimes, in itself, create an economic moat for a company. At a certain size, a firm achieves economies of scale. This is when more units of a good or service can be produced on a larger scale with lower input costs. This reduces overhead costs in areas such as financing, advertising, production, etc.
Large companies that compete in a given industry tend to dominate the core market share of that industry, while smaller players are forced to either leave the industry or occupy smaller "niche" roles.
High Switching Costs
Being the big fish in the pond has other advantages. When a company is able to establish itself in an industry, suppliers and customers can be subject to high switching costs should they choose to do business with a new competitor. Competitors have a very difficult time taking market share away from the industry leader because of these cumbersome switching costs.
Intangibles
Another type of economic moat can be created through a firm's intangible assets, which include items such as patents, brand recognition, government licenses, and others. Strong brand name recognition allows these types of companies to charge a premium for their products over other competitors' goods, which boosts profits.
Soft Moats
Some of the reasons a company might have an economic moat are more difficult to identify. For example, soft moats may be created by exceptional management or a unique corporate culture. While difficult to describe, a unique leadership and corporate environment may partially contribute to a corporation's prolonged economic success.
Economic moats are generally difficult to pinpoint at the time they are being created. Their effects are much more easily observed in hindsight once a company has risen to great heights.
From an investor's view, it is ideal to invest in growing companies just as they begin to reap the benefits of a wide and sustainable economic moat. In this case, the most important factor is the longevity of the moat. The longer a company can harvest profits, the greater the benefits for itself and its shareholders.
What Is an Example of an Economic Moat?
One example of an economic moat is economies of scale. As a company achieves economies of scale, it can produce each unit for less than it could before, meaning that it can charge less for that product in the marketplace, which would attract customers and undercut competitors.
What Are Some Ways to Identify an Economic Moat?
When evaluating a company and its economic moat, a few questions should be considered, such as, what are the sources of revenue for the company?; of these sources, which is the cash cow?; what is the industry of the company?; who are the competitors in this industry?; and what is the company doing to stand out out from its competitors?
What Is Apple's Economic Moat?
Apple has a few economic moats, the primary one being creating products that did not exist before, such as the iPod, the iPhone, and the iPad. After the creation of those products, Apple's economic moat has consisted of its marketing, its design, and its user-friendly interface.
The Bottom Line
An economic moat is a metaphor that refers to businesses being able to maintain a competitive advantage over their competitors in order to preserve market share and profits. Any method that a company uses to maintain a competitive edge can be considered an economic moat.
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https://www.investopedia.com/how-to-accept-credit-card-payments-5078027 | How to Accept Credit Card Payments | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Running a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/start-business-in-depressed-economy.asp">small business</a> means keeping a tight handle on cash flow. One way to facilitate the movement of money in and out of your business is to expand your payment options to include <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">credit cards</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Allowing customers to pay via credit card can make managing cash flow less stressful, eliminate the delays associated with waiting for check payments, and potentially boost sales. If your business isn’t yet accepting credit card payments, changing that may be easier than you think.
</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>Accepting credit card payments for your business can make managing cash flow easier and potentially boost sales. </li><li>More Americans are relying on credit and debit cards as a payment method instead of cash or checks. </li><li>You can accept credit card payments whether you run a large business or a small one. </li><li>Setting up your business to accept credit card payments doesn’t have to be complicated.</li></ul></div></div></div>
<span class="heading-toc" id="toc-benefits-of-accepting-credit-card-payments"></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 Accepting Credit Card Payments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Allowing your customers to pay with credit cards can yield a number of advantages for your business that could lead to greater growth. Major reasons to accept credit cards include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <li>Improving cash flow, since it can speed up payment times and reduce delays</li><li>Legitimizing your business in the eyes of customers</li><li>Potentially boosting sales volume, since your customers will have more ways to pay<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_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’re still not sold on the idea of accepting cards, consider the growth of credit card payments. More and more people are choosing to pay for things with plastic rather than cash. According to the Federal Reserve Payments Study, published in 2023, there were 51.1 billion credit card transactions in the U.S. in 2021, up from 33.7 billion in 2015.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> A more recent study from Forbes confirmed that trend. At the end of 2023, according to its research, 37% of purchases in the U.S. were made with either a physical or virtual credit card.<span class="ql-inline-citation" data-cite="7"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> This switch to cards is being fueled by a combination of factors, including more people shopping online and all-round convenience. According to the Federal Reserve, 82% of U.S. adults had a credit card in 2022. Companies that don't accept this method of payment risk losing business.<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_17-0"></div>
<span class="heading-toc" id="toc-what-types-of-businesses-can-accept-credit-card-payments"></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 Types of Businesses Can Accept Credit Card Payments? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Virtually any kind of business can accept credit cards. For example, you could choose to accept credit cards if:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0">
<li>You run a brick-and-mortar business</li>
<li>Your business operates completely online</li>
<li>You have a traditional small business with employees</li>
<li>You’re a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/soleproprietorship.asp">sole proprietor</a> with zero employees</li>
<li>You’re an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/independent-contractor.asp">independent contractor</a> or freelancer </li>
<li>You have a mobile business (such as a food truck or dog grooming service)</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"> In any of those scenarios, accepting credit card payments could work in your favor if it makes it easier for customers to pay. Deciding not to accept credit cards in your business usually comes down to personal choice rather than the type of business that you run.
</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 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 decide to accept credit card payments, federal law requires that you verify that those payments are authorized by the customer before processing them. That is typically done behind the scenes, and virtually instantaneously, by a payment processing service.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-to-accept-credit-card-payments"></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 Accept Credit Card Payments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you’re ready to accept credit card payments for your small business, you’ll need to follow a few steps. But once you get a system set up, it’s relatively easy to oversee and manage.
</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"> 1. Decide How You’ll Accept Credit Card Payments </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The first step is determining when and how to accept credit card payments. For example, you can take credit card payments:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <li>Online</li><li>In person</li><li>Using a mobile card reader</li><li>Over the phone</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"> The option you choose may depend on the type of business that you run. For example, if you have a brick-and-mortar retail store, you may accept credit cards in person at checkout or online if you’ve set up an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecommerce.asp">e-commerce</a> store. Alternatively, if you run a mobile business, using a mobile card reader may be the best option.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_38-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You’ll also need to decide which of the major credit card networks (Visa, Mastercard, Discover, or American Express) you want to accept.</p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> 2. Choose a Payment Processing System </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> When a customer gives you their credit card to pay, there’s more to it than simply swiping or inserting the card. The customer’s card and account details have to be reviewed and processed electronically so that the payment to you can be authorized. All of this happens digitally behind the scenes in a matter of seconds, but you need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-card-processing-companies-5080522">hire a payment processor</a> to make it all work.
</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 want to accept credit card payments, you can do it in one of two ways: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/merchant-account.asp">merchant accounts</a> or payment service providers. A merchant account is an account that you open with a bank to accept credit card payments. Payment service providers are companies that allow you to accept credit card payments without setting up a merchant account.
</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"> Of the two, a payment service provider may charge lower processing and transaction fees. So it may work well for you if you have a newer business or relatively small credit card payment volumes. But if you do a large volume of sales from credit cards, then a merchant account could be an easier way to manage your credit card payments.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_46-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_47-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>When comparing merchant accounts and payment service providers, consider whether you have to sign a long-term contract and what fees you’ll pay for credit card processing.</p></div></div></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"> 3. Get Your Credit Card Payment Software and Hardware in Place </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Once you have a method in place for processing credit card payments, you may need to update your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/point-of-sale.asp">point of sale</a> software and hardware to actually accept them.
</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"> For example, if you run a brick-and-mortar business, you may need to purchase checkout software to accept card payments or install a card reader that’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emv.asp">EMV chip</a>–enabled at checkout. Some payment service providers will also supply the equipment that you need to get set up for accepting credit card payments in-store or via a mobile card reader.
</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-how-to-accept-credit-card-payments-online"></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"> How to Accept Credit Card Payments Online </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Many small businesses are now online-first, or even online-only. Whatever type of business you own, giving your customers the ability to pay with their credit card online provides them with more convenience and can boost sales. E-commerce shops, restaurants that accept orders online, and digital services companies wouldn’t be able to function without this capability.
</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"> Providing this service to your customers is not difficult. If you plan to accept credit cards online, then you’ll also need to set up a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payment-gateway.asp">payment gateway</a> for that. Again, this may be included with your merchant account or payment service provider plan.
</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"> You will need a digital storefront, and the most common way of obtaining one is to sign up for an account with an e-commerce platform provider. Credit card payments are such an important part of contemporary e-commerce that all of the major e-commerce platform providers will allow you to take credit cards as a form of payment.
</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"> Just be aware that there is generally a cost associated with this. Online credit card transactions typically have higher processing fees than in-person transactions.<br/>
</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-disadvantages-of-accepting-credit-card-payments"></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"> Disadvantages of Accepting Credit Card Payments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Despite the advantages of accepting credit cards for your small business, some risks are involved in giving customers this option. The most prominent are:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0">
<li><strong>Fraud</strong>:<strong> </strong>Some credit card systems are safer than others, and there have been instances in which businesses have been affected by credit card fraud.</li>
<li><strong>Processing fees</strong>: If your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp">profit margins</a> are very small, the processing fees associated with accepting credit cards can easily add up to a major business expense. Small businesses with thin margins will need to assess whether accepting credit cards makes business sense.</li>
<li><strong>Chargebacks</strong>: A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chargeback.asp">chargeback</a> is a disputed transaction that customers initiate when they aren’t satisfied with a purchase. Even if you’re in the right and the customer is not, it’s difficult and costly to dispute chargebacks.</li>
</ul>
<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-using-credit-cards-safely-tips-for-small-businesses"></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"> Using Credit Cards Safely: Tips for Small Businesses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Small businesses that want to accept credit cards but also want to avoid the risks outlined above should consider the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <li><strong>Only use approved, well-known software and equipment</strong>. There are lots of different payment processors on the market today. Make sure to check the credentials of the company that you choose to work with.</li><li><strong>Don’t store customer credit card data</strong>. Although you are allowed to do so, it makes you very vulnerable. It’s better to adopt a use-and-delete process.</li><li><strong>Train your employees to handle credit card data and spot potentially fraudulent transactions</strong>. This can save you a lot of time in the long run.</li><li><strong>Verify shipping and billing addresses</strong>. This can dramatically reduce the potential for fraud.</li><li><strong>Be extra vigilant when accepting credit card payments online</strong>. With this kind of payment, if your company accepts a bad or stolen credit or debit card, the total liability for the loss is yours.</li>
</ul>
<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-pay-attention-to-credit-card-payment-processing-fees"></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"> Pay Attention to Credit Card Payment Processing Fees </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Accepting credit cards through a merchant account or a payment service provider isn’t free; each charges service fees to facilitate those payments. As you get ready to accept credit card payments, consider how those fees factor into your operating and overhead costs.
</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"> If the fees are going to take a serious bite out of profits, you might compensate by increasing prices for your products or services. Alternatively, you could add on a surcharge or convenience fee for processing credit card transactions below a certain dollar amount.
</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"> Be sure that you’re aware of state and federal regulations on credit card surcharges to avoid any illegal practices. In some states, it is illegal to charge credit card fees. And where it is legal, there are limits to how much you can charge and rules about being transparent.<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_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-can-companies-refuse-to-accept-credit-cards"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Companies Refuse to Accept Credit Cards?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes. However, it’s not a great idea for the business. Any business is within its rights to refuse a method of payment. The question is whether this will affect their customer base by doing so, especially as the use of non-cash payments is growing fast.</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-can-you-accept-credit-card-payments-without-a-merchant-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Accept Credit Card Payments Without a Merchant Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes. You can accept credit card payments without a merchant account by using a third-party processor. Third-party processors work through a different business model, which allows you to accept these payments into a standard business account. This can provide an easy way for small businesses to accept credit card payments.</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-much-do-small-businesses-pay-in-credit-card-fees"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Do Small Businesses Pay in Credit Card Fees?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Credit card processing fees will typically cost a business 1.5% to 3.5% of each transaction’s total.<span class="ql-inline-citation" data-cite="4"></span> For a sale of $100, that means you could pay anywhere from $1.50 to $3.50 in credit card processing fees. For a small business, these fees can be a significant expense. However, most businesses find that this is more than made up for by the increase in sales associated with accepting credit card payments.</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"> Nowadays, it’s unusual to find a small business that doesn’t accept credit cards. This is because giving customers as many options as possible when it comes to payment can drive sales and boost customer satisfaction. And while there are some risks and costs associated with accepting credit card payments, these generally are more than made up for by an increase in convenience and sales.
</p></div> | Running a [small business](https://www.investopedia.com/articles/pf/09/start-business-in-depressed-economy.asp) means keeping a tight handle on cash flow. One way to facilitate the movement of money in and out of your business is to expand your payment options to include [credit cards](https://www.investopedia.com/terms/c/creditcard.asp).
Allowing customers to pay via credit card can make managing cash flow less stressful, eliminate the delays associated with waiting for check payments, and potentially boost sales. If your business isn’t yet accepting credit card payments, changing that may be easier than you think.
### Key Takeaways
* Accepting credit card payments for your business can make managing cash flow easier and potentially boost sales.
* More Americans are relying on credit and debit cards as a payment method instead of cash or checks.
* You can accept credit card payments whether you run a large business or a small one.
* Setting up your business to accept credit card payments doesn’t have to be complicated.
## Benefits of Accepting Credit Card Payments
Allowing your customers to pay with credit cards can yield a number of advantages for your business that could lead to greater growth. Major reasons to accept credit cards include:
* Improving cash flow, since it can speed up payment times and reduce delays
* Legitimizing your business in the eyes of customers
* Potentially boosting sales volume, since your customers will have more ways to pay
If you’re still not sold on the idea of accepting cards, consider the growth of credit card payments. More and more people are choosing to pay for things with plastic rather than cash. According to the Federal Reserve Payments Study, published in 2023, there were 51.1 billion credit card transactions in the U.S. in 2021, up from 33.7 billion in 2015.
A more recent study from Forbes confirmed that trend. At the end of 2023, according to its research, 37% of purchases in the U.S. were made with either a physical or virtual credit card.
This switch to cards is being fueled by a combination of factors, including more people shopping online and all-round convenience. According to the Federal Reserve, 82% of U.S. adults had a credit card in 2022. Companies that don't accept this method of payment risk losing business.
## What Types of Businesses Can Accept Credit Card Payments?
Virtually any kind of business can accept credit cards. For example, you could choose to accept credit cards if:
* You run a brick-and-mortar business
* Your business operates completely online
* You have a traditional small business with employees
* You’re a [sole proprietor](https://www.investopedia.com/terms/s/soleproprietorship.asp) with zero employees
* You’re an [independent contractor](https://www.investopedia.com/terms/i/independent-contractor.asp) or freelancer
* You have a mobile business (such as a food truck or dog grooming service)
In any of those scenarios, accepting credit card payments could work in your favor if it makes it easier for customers to pay. Deciding not to accept credit cards in your business usually comes down to personal choice rather than the type of business that you run.
###
If you decide to accept credit card payments, federal law requires that you verify that those payments are authorized by the customer before processing them. That is typically done behind the scenes, and virtually instantaneously, by a payment processing service.
## How to Accept Credit Card Payments
If you’re ready to accept credit card payments for your small business, you’ll need to follow a few steps. But once you get a system set up, it’s relatively easy to oversee and manage.
### 1. Decide How You’ll Accept Credit Card Payments
The first step is determining when and how to accept credit card payments. For example, you can take credit card payments:
* Online
* In person
* Using a mobile card reader
* Over the phone
The option you choose may depend on the type of business that you run. For example, if you have a brick-and-mortar retail store, you may accept credit cards in person at checkout or online if you’ve set up an [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp) store. Alternatively, if you run a mobile business, using a mobile card reader may be the best option.
###
You’ll also need to decide which of the major credit card networks (Visa, Mastercard, Discover, or American Express) you want to accept.
### 2. Choose a Payment Processing System
When a customer gives you their credit card to pay, there’s more to it than simply swiping or inserting the card. The customer’s card and account details have to be reviewed and processed electronically so that the payment to you can be authorized. All of this happens digitally behind the scenes in a matter of seconds, but you need to [hire a payment processor](https://www.investopedia.com/best-credit-card-processing-companies-5080522) to make it all work.
If you want to accept credit card payments, you can do it in one of two ways: [merchant accounts](https://www.investopedia.com/terms/m/merchant-account.asp) or payment service providers. A merchant account is an account that you open with a bank to accept credit card payments. Payment service providers are companies that allow you to accept credit card payments without setting up a merchant account.
Of the two, a payment service provider may charge lower processing and transaction fees. So it may work well for you if you have a newer business or relatively small credit card payment volumes. But if you do a large volume of sales from credit cards, then a merchant account could be an easier way to manage your credit card payments.
###
When comparing merchant accounts and payment service providers, consider whether you have to sign a long-term contract and what fees you’ll pay for credit card processing.
### 3. Get Your Credit Card Payment Software and Hardware in Place
Once you have a method in place for processing credit card payments, you may need to update your [point of sale](https://www.investopedia.com/terms/p/point-of-sale.asp) software and hardware to actually accept them.
For example, if you run a brick-and-mortar business, you may need to purchase checkout software to accept card payments or install a card reader that’s [EMV chip](https://www.investopedia.com/terms/e/emv.asp)–enabled at checkout. Some payment service providers will also supply the equipment that you need to get set up for accepting credit card payments in-store or via a mobile card reader.
## How to Accept Credit Card Payments Online
Many small businesses are now online-first, or even online-only. Whatever type of business you own, giving your customers the ability to pay with their credit card online provides them with more convenience and can boost sales. E-commerce shops, restaurants that accept orders online, and digital services companies wouldn’t be able to function without this capability.
Providing this service to your customers is not difficult. If you plan to accept credit cards online, then you’ll also need to set up a [payment gateway](https://www.investopedia.com/terms/p/payment-gateway.asp) for that. Again, this may be included with your merchant account or payment service provider plan.
You will need a digital storefront, and the most common way of obtaining one is to sign up for an account with an e-commerce platform provider. Credit card payments are such an important part of contemporary e-commerce that all of the major e-commerce platform providers will allow you to take credit cards as a form of payment.
Just be aware that there is generally a cost associated with this. Online credit card transactions typically have higher processing fees than in-person transactions.
## Disadvantages of Accepting Credit Card Payments
Despite the advantages of accepting credit cards for your small business, some risks are involved in giving customers this option. The most prominent are:
* **Fraud**:Some credit card systems are safer than others, and there have been instances in which businesses have been affected by credit card fraud.
* **Processing fees**: If your [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp) are very small, the processing fees associated with accepting credit cards can easily add up to a major business expense. Small businesses with thin margins will need to assess whether accepting credit cards makes business sense.
* **Chargebacks**: A [chargeback](https://www.investopedia.com/terms/c/chargeback.asp) is a disputed transaction that customers initiate when they aren’t satisfied with a purchase. Even if you’re in the right and the customer is not, it’s difficult and costly to dispute chargebacks.
## Using Credit Cards Safely: Tips for Small Businesses
Small businesses that want to accept credit cards but also want to avoid the risks outlined above should consider the following:
* **Only use approved, well-known software and equipment**. There are lots of different payment processors on the market today. Make sure to check the credentials of the company that you choose to work with.
* **Don’t store customer credit card data**. Although you are allowed to do so, it makes you very vulnerable. It’s better to adopt a use-and-delete process.
* **Train your employees to handle credit card data and spot potentially fraudulent transactions**. This can save you a lot of time in the long run.
* **Verify shipping and billing addresses**. This can dramatically reduce the potential for fraud.
* **Be extra vigilant when accepting credit card payments online**. With this kind of payment, if your company accepts a bad or stolen credit or debit card, the total liability for the loss is yours.
## Pay Attention to Credit Card Payment Processing Fees
Accepting credit cards through a merchant account or a payment service provider isn’t free; each charges service fees to facilitate those payments. As you get ready to accept credit card payments, consider how those fees factor into your operating and overhead costs.
If the fees are going to take a serious bite out of profits, you might compensate by increasing prices for your products or services. Alternatively, you could add on a surcharge or convenience fee for processing credit card transactions below a certain dollar amount.
Be sure that you’re aware of state and federal regulations on credit card surcharges to avoid any illegal practices. In some states, it is illegal to charge credit card fees. And where it is legal, there are limits to how much you can charge and rules about being transparent.
## Can Companies Refuse to Accept Credit Cards?
Yes. However, it’s not a great idea for the business. Any business is within its rights to refuse a method of payment. The question is whether this will affect their customer base by doing so, especially as the use of non-cash payments is growing fast.
## Can You Accept Credit Card Payments Without a Merchant Account?
Yes. You can accept credit card payments without a merchant account by using a third-party processor. Third-party processors work through a different business model, which allows you to accept these payments into a standard business account. This can provide an easy way for small businesses to accept credit card payments.
## How Much Do Small Businesses Pay in Credit Card Fees?
Credit card processing fees will typically cost a business 1.5% to 3.5% of each transaction’s total. For a sale of $100, that means you could pay anywhere from $1.50 to $3.50 in credit card processing fees. For a small business, these fees can be a significant expense. However, most businesses find that this is more than made up for by the increase in sales associated with accepting credit card payments.
## The Bottom Line
Nowadays, it’s unusual to find a small business that doesn’t accept credit cards. This is because giving customers as many options as possible when it comes to payment can drive sales and boost customer satisfaction. And while there are some risks and costs associated with accepting credit card payments, these generally are more than made up for by an increase in convenience and sales.
| Running a small business means keeping a tight handle on cash flow. One way to facilitate the movement of money in and out of your business is to expand your payment options to include credit cards.
Allowing customers to pay via credit card can make managing cash flow less stressful, eliminate the delays associated with waiting for check payments, and potentially boost sales. If your business isn’t yet accepting credit card payments, changing that may be easier than you think.
Key Takeaways
Accepting credit card payments for your business can make managing cash flow easier and potentially boost sales. More Americans are relying on credit and debit cards as a payment method instead of cash or checks. You can accept credit card payments whether you run a large business or a small one. Setting up your business to accept credit card payments doesn’t have to be complicated.
Benefits of Accepting Credit Card Payments
Allowing your customers to pay with credit cards can yield a number of advantages for your business that could lead to greater growth. Major reasons to accept credit cards include:
Improving cash flow, since it can speed up payment times and reduce delaysLegitimizing your business in the eyes of customersPotentially boosting sales volume, since your customers will have more ways to pay
If you’re still not sold on the idea of accepting cards, consider the growth of credit card payments. More and more people are choosing to pay for things with plastic rather than cash. According to the Federal Reserve Payments Study, published in 2023, there were 51.1 billion credit card transactions in the U.S. in 2021, up from 33.7 billion in 2015.
A more recent study from Forbes confirmed that trend. At the end of 2023, according to its research, 37% of purchases in the U.S. were made with either a physical or virtual credit card.
This switch to cards is being fueled by a combination of factors, including more people shopping online and all-round convenience. According to the Federal Reserve, 82% of U.S. adults had a credit card in 2022. Companies that don't accept this method of payment risk losing business.
What Types of Businesses Can Accept Credit Card Payments?
Virtually any kind of business can accept credit cards. For example, you could choose to accept credit cards if:
You run a brick-and-mortar business
Your business operates completely online
You have a traditional small business with employees
You’re a sole proprietor with zero employees
You’re an independent contractor or freelancer
You have a mobile business (such as a food truck or dog grooming service)
In any of those scenarios, accepting credit card payments could work in your favor if it makes it easier for customers to pay. Deciding not to accept credit cards in your business usually comes down to personal choice rather than the type of business that you run.
If you decide to accept credit card payments, federal law requires that you verify that those payments are authorized by the customer before processing them. That is typically done behind the scenes, and virtually instantaneously, by a payment processing service.
How to Accept Credit Card Payments
If you’re ready to accept credit card payments for your small business, you’ll need to follow a few steps. But once you get a system set up, it’s relatively easy to oversee and manage.
1. Decide How You’ll Accept Credit Card Payments
The first step is determining when and how to accept credit card payments. For example, you can take credit card payments:
OnlineIn personUsing a mobile card readerOver the phone
The option you choose may depend on the type of business that you run. For example, if you have a brick-and-mortar retail store, you may accept credit cards in person at checkout or online if you’ve set up an e-commerce store. Alternatively, if you run a mobile business, using a mobile card reader may be the best option.
You’ll also need to decide which of the major credit card networks (Visa, Mastercard, Discover, or American Express) you want to accept.
2. Choose a Payment Processing System
When a customer gives you their credit card to pay, there’s more to it than simply swiping or inserting the card. The customer’s card and account details have to be reviewed and processed electronically so that the payment to you can be authorized. All of this happens digitally behind the scenes in a matter of seconds, but you need to hire a payment processor to make it all work.
If you want to accept credit card payments, you can do it in one of two ways: merchant accounts or payment service providers. A merchant account is an account that you open with a bank to accept credit card payments. Payment service providers are companies that allow you to accept credit card payments without setting up a merchant account.
Of the two, a payment service provider may charge lower processing and transaction fees. So it may work well for you if you have a newer business or relatively small credit card payment volumes. But if you do a large volume of sales from credit cards, then a merchant account could be an easier way to manage your credit card payments.
When comparing merchant accounts and payment service providers, consider whether you have to sign a long-term contract and what fees you’ll pay for credit card processing.
3. Get Your Credit Card Payment Software and Hardware in Place
Once you have a method in place for processing credit card payments, you may need to update your point of sale software and hardware to actually accept them.
For example, if you run a brick-and-mortar business, you may need to purchase checkout software to accept card payments or install a card reader that’s EMV chip–enabled at checkout. Some payment service providers will also supply the equipment that you need to get set up for accepting credit card payments in-store or via a mobile card reader.
How to Accept Credit Card Payments Online
Many small businesses are now online-first, or even online-only. Whatever type of business you own, giving your customers the ability to pay with their credit card online provides them with more convenience and can boost sales. E-commerce shops, restaurants that accept orders online, and digital services companies wouldn’t be able to function without this capability.
Providing this service to your customers is not difficult. If you plan to accept credit cards online, then you’ll also need to set up a payment gateway for that. Again, this may be included with your merchant account or payment service provider plan.
You will need a digital storefront, and the most common way of obtaining one is to sign up for an account with an e-commerce platform provider. Credit card payments are such an important part of contemporary e-commerce that all of the major e-commerce platform providers will allow you to take credit cards as a form of payment.
Just be aware that there is generally a cost associated with this. Online credit card transactions typically have higher processing fees than in-person transactions.
Disadvantages of Accepting Credit Card Payments
Despite the advantages of accepting credit cards for your small business, some risks are involved in giving customers this option. The most prominent are:
Fraud: Some credit card systems are safer than others, and there have been instances in which businesses have been affected by credit card fraud.
Processing fees: If your profit margins are very small, the processing fees associated with accepting credit cards can easily add up to a major business expense. Small businesses with thin margins will need to assess whether accepting credit cards makes business sense.
Chargebacks: A chargeback is a disputed transaction that customers initiate when they aren’t satisfied with a purchase. Even if you’re in the right and the customer is not, it’s difficult and costly to dispute chargebacks.
Using Credit Cards Safely: Tips for Small Businesses
Small businesses that want to accept credit cards but also want to avoid the risks outlined above should consider the following:
Only use approved, well-known software and equipment. There are lots of different payment processors on the market today. Make sure to check the credentials of the company that you choose to work with.Don’t store customer credit card data. Although you are allowed to do so, it makes you very vulnerable. It’s better to adopt a use-and-delete process.Train your employees to handle credit card data and spot potentially fraudulent transactions. This can save you a lot of time in the long run.Verify shipping and billing addresses. This can dramatically reduce the potential for fraud.Be extra vigilant when accepting credit card payments online. With this kind of payment, if your company accepts a bad or stolen credit or debit card, the total liability for the loss is yours.
Pay Attention to Credit Card Payment Processing Fees
Accepting credit cards through a merchant account or a payment service provider isn’t free; each charges service fees to facilitate those payments. As you get ready to accept credit card payments, consider how those fees factor into your operating and overhead costs.
If the fees are going to take a serious bite out of profits, you might compensate by increasing prices for your products or services. Alternatively, you could add on a surcharge or convenience fee for processing credit card transactions below a certain dollar amount.
Be sure that you’re aware of state and federal regulations on credit card surcharges to avoid any illegal practices. In some states, it is illegal to charge credit card fees. And where it is legal, there are limits to how much you can charge and rules about being transparent.
Can Companies Refuse to Accept Credit Cards?
Yes. However, it’s not a great idea for the business. Any business is within its rights to refuse a method of payment. The question is whether this will affect their customer base by doing so, especially as the use of non-cash payments is growing fast.
Can You Accept Credit Card Payments Without a Merchant Account?
Yes. You can accept credit card payments without a merchant account by using a third-party processor. Third-party processors work through a different business model, which allows you to accept these payments into a standard business account. This can provide an easy way for small businesses to accept credit card payments.
How Much Do Small Businesses Pay in Credit Card Fees?
Credit card processing fees will typically cost a business 1.5% to 3.5% of each transaction’s total. For a sale of $100, that means you could pay anywhere from $1.50 to $3.50 in credit card processing fees. For a small business, these fees can be a significant expense. However, most businesses find that this is more than made up for by the increase in sales associated with accepting credit card payments.
The Bottom Line
Nowadays, it’s unusual to find a small business that doesn’t accept credit cards. This is because giving customers as many options as possible when it comes to payment can drive sales and boost customer satisfaction. And while there are some risks and costs associated with accepting credit card payments, these generally are more than made up for by an increase in convenience and sales.
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https://www.investopedia.com/terms/c/concurrent-causation.asp | Concurrent Causation: What it is, How it Works, Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-concurrent-causation"></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 Concurrent Causation? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Concurrent causation is a method used in insurance claims for handling losses or damages that occur from more than one cause. The roots of concurrent causation stem from court rulings and opinions, which form a body of legal precedent, which becomes useful when parties in a dispute require the decision of a court.
</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 insurance, concurrent causation happens when a property experiences a loss from two separate causes when one has policy coverage, and the other does not. Depending on the specific situations, the type of policy in effect, and the state court in which disagreements will be heard, the damages from both causes are likely to be covered. Concurrent causation may also be a factor in liability insurance policies.
</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>Concurrent causation refers to identifying a loss that results from multiple causes; for instance, a windstorm that causes roof damage that also leads to rainwater damage, which in turn, causes mold.</li><li>Many insurance policies today contain anti-concurrent causation (ACC) clauses that protect an insurer from paying out the same claim more than once, but which can be detrimental to some policyholders.</li><li>While common in property and casualty policies, ACC clauses are also found in liability insurance policies.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-concurrent-causation"></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 Concurrent Causation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> With a concurrent causation loss, the events that cause the loss may happen one after the other or be simultaneous events. Today, most insurance policies will include an anti-concurrent causation (ACC) provision.
</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"> Concurrent causation legal precedents resulted from California's lower court decisions. These courts ruled that claims for damages from concurrent events were valid. The judgment said if a covered hazard added to the losses from an excluded risk, the entire loss is claimable by the policyholder.<span class="ql-inline-citation" data-cite="1"></span> As an example, an earthquake causes a split in the foundation of a home, and a fire begins from a candle that fell onto the floor during the shaking. The property has a policy covering fire damage but excludes damage from an earthquake. According to the court's ruling, the entire claim is valid.
</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-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Example </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> A concurrent causation example could be when a tropical storm hits a commercial warehouse. Strong winds cause damage to structures while the heavy rain causes flooding. The door leading into the warehouse lobby is blown open by high winds. Floodwaters further damaged the floor of the front lobby.
</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"> It is impossible to separate the damage caused by the flood from the damage caused by wind. The building has a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercial-property-insurance.asp" rel="noopener noreferrer">commercial property policy</a> which covers damage from wind but excludes damage from floodwaters. Under concurrent causation, coverage benefits will be due to the policyholder.
</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-insurance-policies-adapt-to-concurrent-causation"></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"> Insurance Policies Adapt to Concurrent Causation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Insurance providers disagreed with this view, claiming the court rulings increased their liability and cost. Also, they argued, the decision ignored the existing exclusion clauses. Insurance companies revised the wording in homeowners and commercial property policies, adding an anti-concurrent causation clause.
</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 added anti-concurrent causation wording would exclude damages from listed perils even if a second, covered peril contributed to the damages. Also, the exclusion applies whether the two hazards happen at the same time or one occurred in sequence. Many commercial property policies thus apply anti-concurrent causation language to specific exclusions, including law and ordinance, earth movement, government action, nuclear hazard, utility services, water, flood, fungus, and mold.
</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"> Not all state courts will apply concurrent causation. Instead, they determine which peril was the proximate or predominant cause of a loss. Returning to our warehouse example, if the court decides the proximate cause was the wind, then the damage should be covered.
</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 doctrine of concurrent causation applies primarily to an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/all-risks-coverage.asp">all-risk policy</a>, which covers a broader scope of perils than a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/named_perils.asp">named perils policy</a>. Named perils policy covers losses from only those perils listed in the policy. However, a named perils policy may still contain wording for anti-concurrent causation.
</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-concurrent-causation-and-liability-insurance"></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"> Concurrent Causation and Liability Insurance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liability_insurance.asp" rel="noopener noreferrer">Liability insurance</a> protects against claims resulting from injuries and damage to people and property and pays legal costs and adjudged payouts for events where the policyholder is found legally liable. Some complaints may have two or more actions by the policyholder, which, by themselves, make them liable. Even if the insurance policy does not include coverage for all of the policyholder's actions, the insurance provider must still defend the entire claim.
</p></div> | ## What Is Concurrent Causation?
Concurrent causation is a method used in insurance claims for handling losses or damages that occur from more than one cause. The roots of concurrent causation stem from court rulings and opinions, which form a body of legal precedent, which becomes useful when parties in a dispute require the decision of a court.
In insurance, concurrent causation happens when a property experiences a loss from two separate causes when one has policy coverage, and the other does not. Depending on the specific situations, the type of policy in effect, and the state court in which disagreements will be heard, the damages from both causes are likely to be covered. Concurrent causation may also be a factor in liability insurance policies.
### Key Takeaways
* Concurrent causation refers to identifying a loss that results from multiple causes; for instance, a windstorm that causes roof damage that also leads to rainwater damage, which in turn, causes mold.
* Many insurance policies today contain anti-concurrent causation (ACC) clauses that protect an insurer from paying out the same claim more than once, but which can be detrimental to some policyholders.
* While common in property and casualty policies, ACC clauses are also found in liability insurance policies.
## Understanding Concurrent Causation
With a concurrent causation loss, the events that cause the loss may happen one after the other or be simultaneous events. Today, most insurance policies will include an anti-concurrent causation (ACC) provision.
Concurrent causation legal precedents resulted from California's lower court decisions. These courts ruled that claims for damages from concurrent events were valid. The judgment said if a covered hazard added to the losses from an excluded risk, the entire loss is claimable by the policyholder. As an example, an earthquake causes a split in the foundation of a home, and a fire begins from a candle that fell onto the floor during the shaking. The property has a policy covering fire damage but excludes damage from an earthquake. According to the court's ruling, the entire claim is valid.
## Example
A concurrent causation example could be when a tropical storm hits a commercial warehouse. Strong winds cause damage to structures while the heavy rain causes flooding. The door leading into the warehouse lobby is blown open by high winds. Floodwaters further damaged the floor of the front lobby.
It is impossible to separate the damage caused by the flood from the damage caused by wind. The building has a [commercial property policy](https://www.investopedia.com/terms/c/commercial-property-insurance.asp) which covers damage from wind but excludes damage from floodwaters. Under concurrent causation, coverage benefits will be due to the policyholder.
## Insurance Policies Adapt to Concurrent Causation
Insurance providers disagreed with this view, claiming the court rulings increased their liability and cost. Also, they argued, the decision ignored the existing exclusion clauses. Insurance companies revised the wording in homeowners and commercial property policies, adding an anti-concurrent causation clause.
The added anti-concurrent causation wording would exclude damages from listed perils even if a second, covered peril contributed to the damages. Also, the exclusion applies whether the two hazards happen at the same time or one occurred in sequence. Many commercial property policies thus apply anti-concurrent causation language to specific exclusions, including law and ordinance, earth movement, government action, nuclear hazard, utility services, water, flood, fungus, and mold.
Not all state courts will apply concurrent causation. Instead, they determine which peril was the proximate or predominant cause of a loss. Returning to our warehouse example, if the court decides the proximate cause was the wind, then the damage should be covered.
The doctrine of concurrent causation applies primarily to an [all-risk policy](https://www.investopedia.com/terms/a/all-risks-coverage.asp), which covers a broader scope of perils than a [named perils policy](https://www.investopedia.com/terms/n/named_perils.asp). Named perils policy covers losses from only those perils listed in the policy. However, a named perils policy may still contain wording for anti-concurrent causation.
## Concurrent Causation and Liability Insurance
[Liability insurance](https://www.investopedia.com/terms/l/liability_insurance.asp) protects against claims resulting from injuries and damage to people and property and pays legal costs and adjudged payouts for events where the policyholder is found legally liable. Some complaints may have two or more actions by the policyholder, which, by themselves, make them liable. Even if the insurance policy does not include coverage for all of the policyholder's actions, the insurance provider must still defend the entire claim.
| What Is Concurrent Causation?
Concurrent causation is a method used in insurance claims for handling losses or damages that occur from more than one cause. The roots of concurrent causation stem from court rulings and opinions, which form a body of legal precedent, which becomes useful when parties in a dispute require the decision of a court.
In insurance, concurrent causation happens when a property experiences a loss from two separate causes when one has policy coverage, and the other does not. Depending on the specific situations, the type of policy in effect, and the state court in which disagreements will be heard, the damages from both causes are likely to be covered. Concurrent causation may also be a factor in liability insurance policies.
Key Takeaways
Concurrent causation refers to identifying a loss that results from multiple causes; for instance, a windstorm that causes roof damage that also leads to rainwater damage, which in turn, causes mold.Many insurance policies today contain anti-concurrent causation (ACC) clauses that protect an insurer from paying out the same claim more than once, but which can be detrimental to some policyholders.While common in property and casualty policies, ACC clauses are also found in liability insurance policies.
Understanding Concurrent Causation
With a concurrent causation loss, the events that cause the loss may happen one after the other or be simultaneous events. Today, most insurance policies will include an anti-concurrent causation (ACC) provision.
Concurrent causation legal precedents resulted from California's lower court decisions. These courts ruled that claims for damages from concurrent events were valid. The judgment said if a covered hazard added to the losses from an excluded risk, the entire loss is claimable by the policyholder. As an example, an earthquake causes a split in the foundation of a home, and a fire begins from a candle that fell onto the floor during the shaking. The property has a policy covering fire damage but excludes damage from an earthquake. According to the court's ruling, the entire claim is valid.
Example
A concurrent causation example could be when a tropical storm hits a commercial warehouse. Strong winds cause damage to structures while the heavy rain causes flooding. The door leading into the warehouse lobby is blown open by high winds. Floodwaters further damaged the floor of the front lobby.
It is impossible to separate the damage caused by the flood from the damage caused by wind. The building has a commercial property policy which covers damage from wind but excludes damage from floodwaters. Under concurrent causation, coverage benefits will be due to the policyholder.
Insurance Policies Adapt to Concurrent Causation
Insurance providers disagreed with this view, claiming the court rulings increased their liability and cost. Also, they argued, the decision ignored the existing exclusion clauses. Insurance companies revised the wording in homeowners and commercial property policies, adding an anti-concurrent causation clause.
The added anti-concurrent causation wording would exclude damages from listed perils even if a second, covered peril contributed to the damages. Also, the exclusion applies whether the two hazards happen at the same time or one occurred in sequence. Many commercial property policies thus apply anti-concurrent causation language to specific exclusions, including law and ordinance, earth movement, government action, nuclear hazard, utility services, water, flood, fungus, and mold.
Not all state courts will apply concurrent causation. Instead, they determine which peril was the proximate or predominant cause of a loss. Returning to our warehouse example, if the court decides the proximate cause was the wind, then the damage should be covered.
The doctrine of concurrent causation applies primarily to an all-risk policy, which covers a broader scope of perils than a named perils policy. Named perils policy covers losses from only those perils listed in the policy. However, a named perils policy may still contain wording for anti-concurrent causation.
Concurrent Causation and Liability Insurance
Liability insurance protects against claims resulting from injuries and damage to people and property and pays legal costs and adjudged payouts for events where the policyholder is found legally liable. Some complaints may have two or more actions by the policyholder, which, by themselves, make them liable. Even if the insurance policy does not include coverage for all of the policyholder's actions, the insurance provider must still defend the entire claim.
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https://www.investopedia.com/best-time-to-buy-a-cd-5270059 | When Is the Best Time To Buy a CD? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The best time to buy a certificate of deposit (CD) is usually when interest rates are at their highest, although it could make sense to buy at other times.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Certificates of deposit are designed to help savers grow their money over a set time period. The money in a CD earns interest until it's withdrawn at maturity or rolled over to a new CD account. When buying CDs, it's important to consider the timing and how that might affect the interest rate you could earn.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The best time to buy a CD is typically when interest rates are at their highest, though there are other times when opening a CD could make sense.</li><li>Certificates of deposit are time deposit accounts designed to help grow your savings safely.</li><li>The interest rate on a CD account determines how much your money increases until the CD reaches maturity.<br/></li><li>A CD ladder is a savings strategy that could help you make the most of changing interest rates.</li></ul></div></div></div>
<span class="heading-toc" id="toc-when-is-the-best-time-to-buy-a-cd"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> When Is the Best Time to Buy a CD? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The best time to buy a CD is when interest rates are high or when you have a specific savings goal that would be suited to a CD. The higher the interest rate on a CD, the more your money can grow during the maturity term. When rates are low, you earn less interest.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> So, how do CD rates work? The simple answer is that banks typically set them based on movements in a benchmark rate. For many banks, 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> serves as the benchmark. This is the rate at which banks lend money to one another overnight.<span class="ql-inline-citation" data-cite="4"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The Federal Reserve makes adjustments to the federal funds rate in order to direct monetary policy.<span class="ql-inline-citation" data-cite="6"></span> For example, if inflation is increasing at a rapid pace or the economy is growing too quickly, the Fed may raise the federal funds rate. This is intended to have a "cooling" effect because it discourages consumers from borrowing money or spending excessively.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> On the other hand, if the economy is sluggish because of a recession and a decline in consumer spending, the Fed may lower interest rates. This makes borrowing less expensive and, in turn, can encourage consumers to take out loans and spend.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The federal funds rate doesn't directly affect CD rates or rates for other savings accounts. But banks can use the federal funds rate to decide how to price deposit accounts and set interest rates for loans.<span class="ql-inline-citation" data-cite="6"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> CD providers also offer higher promotional rates on certain CD terms. If you find a promotional term that works for your financial strategy, you can earn much higher rates than average. We rank the top 15 APYs in every major CD term and category to help you find a CD that meets your needs, including:<br/>
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<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-month-cd-rates-5272288">Best 3-Month CD Rates</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267">Best 6-Month CD Rates</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650">Best 1-Year CD Rates</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-jumbo-cd-rates-4797766">Best Jumbo CD Rates</a></li>
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<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Julie Bang</p></span>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When banks adjust CD rates following changes to the federal funds rate, those changes only affect new accounts, not existing accounts.</p></div></div></div>
<span class="heading-toc" id="toc-how-to-make-the-most-of-cd-rates"></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 Make the Most of CD Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Savers have no control over what happens with CD rates, unfortunately. But there are some things you can do to maximize interest earnings with CDs in a changing rate environment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> One option is to consider CDs that offer a higher rate if rates go up during your maturity term. These CDs can go by different names, including:
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<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bumpupcd.asp">Bump-up CDs</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/step-up-certificate-of-deposit-5271710">Step-up CDs</a></li>
<li>Raise Your Rate CDs</li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> If you open one of these CD accounts and interest rates rise afterward, you may be eligible to increase your rate once or twice during the maturity term. The bank may make a rate adjustment for you automatically or allow you to request a rate increase.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The advantage of this type of CD is that you can earn more interest if rates change during the term. The downside is that banks may offer a lower rate initially for these CDs, so if rates don't increase, then you're left with a relatively low rate for the full term duration.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Online banks tend to offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bank-cd-rates-4801462">higher interest rates on CDs</a> than traditional banks.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> You can also consider <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">no-penalty CDs</a>. This type of CD allows you to withdraw money before maturity without paying an early withdrawal penalty. If you have this kind of CD and rates go up, you could pull your money out and use it to open a new CD at a higher rate without being penalized.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Finally, you could build a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cd-ladder.asp">CD ladder</a>. A CD ladder strategy involves opening multiple CDs with different interest rates and maturity terms. This gives you periodic access to your money, rather than locking it all up in a single CD. Whenever a CD matures, you can decide whether it makes sense to keep the money or roll it over into a new CD.<br/>
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<span class="heading-toc" id="toc-how-cds-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> How CDs Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit</a> are time deposit accounts that earn interest. Unlike regular <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">savings accounts</a>, which allow you to add and withdraw money as needed, CDs typically let you make an initial deposit but then your money is locked up until later, when the account matures.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If you want to take your money out of a CD before maturity, you'll typically pay an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">early withdrawal penalty</a>. Depending on the bank's policy, the penalty might be a flat fee or some or all of the interest earned.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> The interest rate and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-apy-on-a-cd-5268101">annual percentage yield (APY) for a CD</a> are usually tied to the term.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="1"></span> CD terms can be as short as 28 or 30 days or last as long as 10 years. A longer CD term typically corresponds to a higher interest rate and APY, while shorter maturity terms usually carry lower interest rates, although this isn't always true.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Overall, CDs are considered to be some of the safest places to save because there's very little risk of losing money. You're also protected by Federal Deposit Insurance Corp. (FDIC) coverage. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp.</a> insures deposit accounts at member banks in the event of a bank failure. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.<br/>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Certain types of CDs, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokered-cd.asp">brokered CDs</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yankeecd.asp">Yankee CDs</a>, can carry more risk than standard bank-issued CDs.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<span class="heading-toc" id="toc-frequently-asked-questions-faqs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> Frequently Asked Questions (FAQs) </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-which-bank-offers-the-highest-cd-rates"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Bank Offers the Highest CD Rates?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>CD rates are constantly changing. But in general, you're more likely to find higher rates for CD accounts at online banks compared to traditional banks and credit unions. Every business day we track hundreds of nationally available CDs to find the highest rates; see the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates available here</a>.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_56-0"><span class="heading-toc" id="toc-are-cds-a-good-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are CDs a Good Investment?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A CD <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/are-cds-worth-it-5223941">could be a good investment</a> if you want a safe place to keep money you don't need to spend right away. Some CDs, such as brokered CDs, may offer higher returns if you're comfortable taking on more risk with your money.</p></div>
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<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-are-cds-a-safe-way-to-save"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are CDs a Safe Way To Save?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>CDs are some of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060616/can-certificates-deposit-cds-lose-value.asp">safest savings vehicles</a> because there's very little risk of losing money. When you hold CDs at an FDIC member bank, your money is also insured against the possibility of a bank failure.<span class="ql-inline-citation" data-cite="3"></span> The National Credit Union Administration (NCUA) provides similar protection for CD accounts held at member credit unions.<span class="ql-inline-citation" data-cite="5"></span></p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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 best time to buy a CD for most people is when they're able to get the highest interest rate. But you may consider opening a CD account anytime you want to save money for an extended period and won't need to withdraw it before maturity. When researching banks to open a CD, start by comparing the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates</a>. Then consider what maturity term might be best for reaching your savings goals.
</p></div> | The best time to buy a certificate of deposit (CD) is usually when interest rates are at their highest, although it could make sense to buy at other times.
Certificates of deposit are designed to help savers grow their money over a set time period. The money in a CD earns interest until it's withdrawn at maturity or rolled over to a new CD account. When buying CDs, it's important to consider the timing and how that might affect the interest rate you could earn.
### Key Takeaways
* The best time to buy a CD is typically when interest rates are at their highest, though there are other times when opening a CD could make sense.
* Certificates of deposit are time deposit accounts designed to help grow your savings safely.
* The interest rate on a CD account determines how much your money increases until the CD reaches maturity.
* A CD ladder is a savings strategy that could help you make the most of changing interest rates.
## When Is the Best Time to Buy a CD?
The best time to buy a CD is when interest rates are high or when you have a specific savings goal that would be suited to a CD. The higher the interest rate on a CD, the more your money can grow during the maturity term. When rates are low, you earn less interest.
So, how do CD rates work? The simple answer is that banks typically set them based on movements in a benchmark rate. For many banks, the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) serves as the benchmark. This is the rate at which banks lend money to one another overnight.
The Federal Reserve makes adjustments to the federal funds rate in order to direct monetary policy. For example, if inflation is increasing at a rapid pace or the economy is growing too quickly, the Fed may raise the federal funds rate. This is intended to have a "cooling" effect because it discourages consumers from borrowing money or spending excessively.
On the other hand, if the economy is sluggish because of a recession and a decline in consumer spending, the Fed may lower interest rates. This makes borrowing less expensive and, in turn, can encourage consumers to take out loans and spend.
The federal funds rate doesn't directly affect CD rates or rates for other savings accounts. But banks can use the federal funds rate to decide how to price deposit accounts and set interest rates for loans.
CD providers also offer higher promotional rates on certain CD terms. If you find a promotional term that works for your financial strategy, you can earn much higher rates than average. We rank the top 15 APYs in every major CD term and category to help you find a CD that meets your needs, including:
* [Best 3-Month CD Rates](https://www.investopedia.com/best-3-month-cd-rates-5272288)
* [Best 6-Month CD Rates](https://www.investopedia.com/best-6-month-cd-rates-4783267)
* [Best 1-Year CD Rates](https://www.investopedia.com/best-1-year-cd-rates-4796650)
* [Best Jumbo CD Rates](https://www.investopedia.com/best-jumbo-cd-rates-4797766)
![When Is the Best Time to Buy a Certificate of Deposit]()
:max_bytes(150000):strip_icc()/best-time-to-buy-a-cd-5270059-final-0bb177070b444ce1aa41e779abcda283.png)
Investopedia / Julie Bang
### Note
When banks adjust CD rates following changes to the federal funds rate, those changes only affect new accounts, not existing accounts.
## How To Make the Most of CD Rates
Savers have no control over what happens with CD rates, unfortunately. But there are some things you can do to maximize interest earnings with CDs in a changing rate environment.
One option is to consider CDs that offer a higher rate if rates go up during your maturity term. These CDs can go by different names, including:
* [Bump-up CDs](https://www.investopedia.com/terms/b/bumpupcd.asp)
* [Step-up CDs](https://www.investopedia.com/step-up-certificate-of-deposit-5271710)
* Raise Your Rate CDs
If you open one of these CD accounts and interest rates rise afterward, you may be eligible to increase your rate once or twice during the maturity term. The bank may make a rate adjustment for you automatically or allow you to request a rate increase.
The advantage of this type of CD is that you can earn more interest if rates change during the term. The downside is that banks may offer a lower rate initially for these CDs, so if rates don't increase, then you're left with a relatively low rate for the full term duration.
###
Online banks tend to offer [higher interest rates on CDs](https://www.investopedia.com/best-bank-cd-rates-4801462) than traditional banks.
You can also consider [no-penalty CDs](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp). This type of CD allows you to withdraw money before maturity without paying an early withdrawal penalty. If you have this kind of CD and rates go up, you could pull your money out and use it to open a new CD at a higher rate without being penalized.
Finally, you could build a [CD ladder](https://www.investopedia.com/terms/c/cd-ladder.asp). A CD ladder strategy involves opening multiple CDs with different interest rates and maturity terms. This gives you periodic access to your money, rather than locking it all up in a single CD. Whenever a CD matures, you can decide whether it makes sense to keep the money or roll it over into a new CD.
## How CDs Work
[Certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) are time deposit accounts that earn interest. Unlike regular [savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633), which allow you to add and withdraw money as needed, CDs typically let you make an initial deposit but then your money is locked up until later, when the account matures.
If you want to take your money out of a CD before maturity, you'll typically pay an [early withdrawal penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111). Depending on the bank's policy, the penalty might be a flat fee or some or all of the interest earned.
The interest rate and [annual percentage yield (APY) for a CD](https://www.investopedia.com/what-is-apy-on-a-cd-5268101) are usually tied to the term. CD terms can be as short as 28 or 30 days or last as long as 10 years. A longer CD term typically corresponds to a higher interest rate and APY, while shorter maturity terms usually carry lower interest rates, although this isn't always true.
Overall, CDs are considered to be some of the safest places to save because there's very little risk of losing money. You're also protected by Federal Deposit Insurance Corp. (FDIC) coverage. The [Federal Deposit Insurance Corp.](https://www.investopedia.com/terms/f/fdic.asp) insures deposit accounts at member banks in the event of a bank failure. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
###
Certain types of CDs, including [brokered CDs](https://www.investopedia.com/terms/b/brokered-cd.asp) and [Yankee CDs](https://www.investopedia.com/terms/y/yankeecd.asp), can carry more risk than standard bank-issued CDs.
## Frequently Asked Questions (FAQs)
## Which Bank Offers the Highest CD Rates?
CD rates are constantly changing. But in general, you're more likely to find higher rates for CD accounts at online banks compared to traditional banks and credit unions. Every business day we track hundreds of nationally available CDs to find the highest rates; see the [best CD rates available here](https://www.investopedia.com/best-cd-rates-4770214).
## Are CDs a Good Investment?
A CD [could be a good investment](https://www.investopedia.com/are-cds-worth-it-5223941) if you want a safe place to keep money you don't need to spend right away. Some CDs, such as brokered CDs, may offer higher returns if you're comfortable taking on more risk with your money.
## Are CDs a Safe Way To Save?
CDs are some of the [safest savings vehicles](https://www.investopedia.com/ask/answers/060616/can-certificates-deposit-cds-lose-value.asp) because there's very little risk of losing money. When you hold CDs at an FDIC member bank, your money is also insured against the possibility of a bank failure. The National Credit Union Administration (NCUA) provides similar protection for CD accounts held at member credit unions.
## The Bottom Line
The best time to buy a CD for most people is when they're able to get the highest interest rate. But you may consider opening a CD account anytime you want to save money for an extended period and won't need to withdraw it before maturity. When researching banks to open a CD, start by comparing the [best CD rates](https://www.investopedia.com/best-cd-rates-4770214). Then consider what maturity term might be best for reaching your savings goals.
| The best time to buy a certificate of deposit (CD) is usually when interest rates are at their highest, although it could make sense to buy at other times.
Certificates of deposit are designed to help savers grow their money over a set time period. The money in a CD earns interest until it's withdrawn at maturity or rolled over to a new CD account. When buying CDs, it's important to consider the timing and how that might affect the interest rate you could earn.
Key Takeaways
The best time to buy a CD is typically when interest rates are at their highest, though there are other times when opening a CD could make sense.Certificates of deposit are time deposit accounts designed to help grow your savings safely.The interest rate on a CD account determines how much your money increases until the CD reaches maturity.A CD ladder is a savings strategy that could help you make the most of changing interest rates.
When Is the Best Time to Buy a CD?
The best time to buy a CD is when interest rates are high or when you have a specific savings goal that would be suited to a CD. The higher the interest rate on a CD, the more your money can grow during the maturity term. When rates are low, you earn less interest.
So, how do CD rates work? The simple answer is that banks typically set them based on movements in a benchmark rate. For many banks, the federal funds rate serves as the benchmark. This is the rate at which banks lend money to one another overnight.
The Federal Reserve makes adjustments to the federal funds rate in order to direct monetary policy. For example, if inflation is increasing at a rapid pace or the economy is growing too quickly, the Fed may raise the federal funds rate. This is intended to have a "cooling" effect because it discourages consumers from borrowing money or spending excessively.
On the other hand, if the economy is sluggish because of a recession and a decline in consumer spending, the Fed may lower interest rates. This makes borrowing less expensive and, in turn, can encourage consumers to take out loans and spend.
The federal funds rate doesn't directly affect CD rates or rates for other savings accounts. But banks can use the federal funds rate to decide how to price deposit accounts and set interest rates for loans.
CD providers also offer higher promotional rates on certain CD terms. If you find a promotional term that works for your financial strategy, you can earn much higher rates than average. We rank the top 15 APYs in every major CD term and category to help you find a CD that meets your needs, including:
Best 3-Month CD Rates
Best 6-Month CD Rates
Best 1-Year CD Rates
Best Jumbo CD Rates
Investopedia / Julie Bang
Note
When banks adjust CD rates following changes to the federal funds rate, those changes only affect new accounts, not existing accounts.
How To Make the Most of CD Rates
Savers have no control over what happens with CD rates, unfortunately. But there are some things you can do to maximize interest earnings with CDs in a changing rate environment.
One option is to consider CDs that offer a higher rate if rates go up during your maturity term. These CDs can go by different names, including:
Bump-up CDs
Step-up CDs
Raise Your Rate CDs
If you open one of these CD accounts and interest rates rise afterward, you may be eligible to increase your rate once or twice during the maturity term. The bank may make a rate adjustment for you automatically or allow you to request a rate increase.
The advantage of this type of CD is that you can earn more interest if rates change during the term. The downside is that banks may offer a lower rate initially for these CDs, so if rates don't increase, then you're left with a relatively low rate for the full term duration.
Online banks tend to offer higher interest rates on CDs than traditional banks.
You can also consider no-penalty CDs. This type of CD allows you to withdraw money before maturity without paying an early withdrawal penalty. If you have this kind of CD and rates go up, you could pull your money out and use it to open a new CD at a higher rate without being penalized.
Finally, you could build a CD ladder. A CD ladder strategy involves opening multiple CDs with different interest rates and maturity terms. This gives you periodic access to your money, rather than locking it all up in a single CD. Whenever a CD matures, you can decide whether it makes sense to keep the money or roll it over into a new CD.
How CDs Work
Certificates of deposit are time deposit accounts that earn interest. Unlike regular savings accounts, which allow you to add and withdraw money as needed, CDs typically let you make an initial deposit but then your money is locked up until later, when the account matures.
If you want to take your money out of a CD before maturity, you'll typically pay an early withdrawal penalty. Depending on the bank's policy, the penalty might be a flat fee or some or all of the interest earned.
The interest rate and annual percentage yield (APY) for a CD are usually tied to the term. CD terms can be as short as 28 or 30 days or last as long as 10 years. A longer CD term typically corresponds to a higher interest rate and APY, while shorter maturity terms usually carry lower interest rates, although this isn't always true.
Overall, CDs are considered to be some of the safest places to save because there's very little risk of losing money. You're also protected by Federal Deposit Insurance Corp. (FDIC) coverage. The Federal Deposit Insurance Corp. insures deposit accounts at member banks in the event of a bank failure. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
Certain types of CDs, including brokered CDs and Yankee CDs, can carry more risk than standard bank-issued CDs.
Frequently Asked Questions (FAQs)
Which Bank Offers the Highest CD Rates?
CD rates are constantly changing. But in general, you're more likely to find higher rates for CD accounts at online banks compared to traditional banks and credit unions. Every business day we track hundreds of nationally available CDs to find the highest rates; see the best CD rates available here.
Are CDs a Good Investment?
A CD could be a good investment if you want a safe place to keep money you don't need to spend right away. Some CDs, such as brokered CDs, may offer higher returns if you're comfortable taking on more risk with your money.
Are CDs a Safe Way To Save?
CDs are some of the safest savings vehicles because there's very little risk of losing money. When you hold CDs at an FDIC member bank, your money is also insured against the possibility of a bank failure. The National Credit Union Administration (NCUA) provides similar protection for CD accounts held at member credit unions.
The Bottom Line
The best time to buy a CD for most people is when they're able to get the highest interest rate. But you may consider opening a CD account anytime you want to save money for an extended period and won't need to withdraw it before maturity. When researching banks to open a CD, start by comparing the best CD rates. Then consider what maturity term might be best for reaching your savings goals.
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https://www.investopedia.com/does-the-federal-government-offer-personal-loans-7693193 | Does the Federal Government Offer Personal Loans? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> While the federal government does not specifically offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loan-5076027">personal loans</a>, it does offer or guarantee other loans for specific purposes. These include loans to pay for education, housing, or building a small businesses.
</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 how you will need to meet eligibility requirements to qualify for these government loans and more about the loan types that the federal government offers.
</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 federal government does not offer personal loans.</li><li>The federal government offers loans for specific purposes, including education, housing, and business.</li><li>In most cases, the federal government does not loan money directly, but works with private lenders to provide funding.</li></ul></div></div></div>
<span class="heading-toc" id="toc-federal-government-offers-loans-for-a-purpose"></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"> Federal Government Offers Loans for a Purpose </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The federal government does not offer personal loans that borrowers could use for any reason, such as to consolidate credit card debt, buy a car, or pay for a wedding. Instead, the U.S. government offers or guarantees loans for a specific purpose like paying for education, buying housing, or starting a business.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Although not a traditional personal loan, 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> provides installment payment plans for those not able to pay their tax obligations in full by the due date. IRS installment loans include setup fees, interest charges, and penalties.<span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Also, while some loans are made direct, the federal government doesn’t fund every type of government loan. Instead, it guarantees loans that are funded by private <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lenders</a>. <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-loans-offered-by-the-government"></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"> Loans Offered by the Government </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> There are numerous government loans available for a variety of purposes, including student loans and mortgages. Let’s look in more detail at the types of loan that the government provides.
</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"> Education </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The federal government offers both <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/">subsidized and unsubsidized loans</a> to help students and parents pay for tuition at two- and four-year colleges and universities, community colleges, and trade and technical schools.
</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"> With subsidized loans, a third party pays the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> on the loan for a set period of time. With unsubsidized loans, the borrower pays the interest on the loan for the life of the loan.<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_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Government loans for education include:<br>
</br></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><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stafford-loan.asp">Stafford loans</a> </li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/perkins-loan.asp">Federal Perkins Loans</a> </li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/direct-consolidation-loan.asp">Education consolidation loans</a> </li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/plus-loan.asp">Direct PLUS (Parent Loan for Undergraduate Students) loans for parents</a><span class="ql-inline-citation" data-cite="8"></span><br/></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-note" 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 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>Most universities and schools use the <a data-component="link" data-ordinal="1" 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 (FAFSA)</a> to award federal aid along with state- and college-funded student aid.<span class="ql-inline-citation" data-cite="3"></span> A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loan-good-choice-student-7971557">student may want to consider a personal loan</a> if they've exhausted all of their financial aid options and other sources of funding.</p></div></div></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"> Housing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The U.S. government offers a number of mortgages to help borrowers buy a home or improve the home they own. These include:<br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhaloan.asp">Federal Housing Administration (FHA) loans</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fha-203k-loan.asp">FHA 203(k) loans for home rehabilitation</a> </li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valoan.asp">U.S. Department of Veterans Affairs (VA) loans</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rhsloan.asp">Rural housing loans</a> </li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/firsttimehomebuyer.asp">First-time homebuyer loans</a><span class="ql-inline-citation" data-cite="4"></span><br/></li>
</ul>
<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’re shopping for a mortgage, review the eligibility requirements to see <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-30-year-mortgage-rates-5096821">which loan is the best fit</a> for your financial needs. For example, if you are a military veteran, you would likely qualify for a VA loan with more favorable terms than an FHA loan.<br/>
</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"> Agriculture </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> To help farmers and ranchers, the U.S. government offers loans to purchase or expand a farm or ranch and improve facilities. There are also loans to help those operating fishing vessels or fisheries facilities.
</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"> Agriculture loans include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <li>Farm ownership loans</li><li>Farm operating loans</li><li>Farm storage facility loans</li><li>Fisheries Finance Program<span class="ql-inline-citation" data-cite="5"></span><br/></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_42-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_43-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Agricultural loans also may have loan requirements based on your agricultural experience, the location of the property, and the commodities involved.</p></div></div></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"> Business </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The federal government has loans for borrowers looking to start, buy, improve, or expand a business. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/091514/expanding-your-small-business-sba-loan.asp">Small Business Administration (SBA)</a> loans are for all businesses, from small businesses to midsize businesses to large conglomerates.<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_46-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> They include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> <li>Small business loans</li><li>Microloans</li><li>Disaster loans<span class="ql-inline-citation" data-cite="10"></span></li><li>Economic injury loans</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<span class="heading-toc" id="toc-federal-vs-private-loans"></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"> Federal vs. Private Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> The primary difference between federal and private loans is that federal loans are backed or provided by the U.S. government, while private loans are provided by private lenders such as banks and credit unions. But there are other differences as well.
</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"> With federal loans, you may find it easier to get approved due to lower <a class="pseudoStyle" 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> requirements, if any. You also typically pay a lower or no <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/down_payment.asp">down payment</a> and can receive lower <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a>. Other benefits could include deferred payment options and no prepayment penalties.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> However, due to their qualification requirements, federal loans may not be as easy to get as private loans.<br>
</br></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-what-to-consider-when-choosing-a-loan"></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"> What to Consider When Choosing a Loan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> When considering a government loan, it’s important to first determine if there is a federal loan that meets your needs for financial assistance. Do you need the loan for education, business, or housing? If not, then a government loan may not be the right choice.
</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"> If a government loan could be the right choice, you will need to review the qualification requirements to see if you meet them. This could range from credit score to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> level to location and other requirements specific to the loan.
</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-tip" 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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>You can use the U.S. government’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.govloans.gov/loan-finder/">Loan Finder</a> tool to check if there is a government loan that is right for you.</p></div></div></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-does-the-government-offer-personal-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the Government Offer Personal Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Although the government doesn’t offer unsecured personal loans for needs such as buying a car or paying for a wedding, the government does offer loans to help pay for education, buy housing, or start a business.<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_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-bank-is-easiest-to-get-a-personal-loan-from"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Bank Is Easiest to Get a Personal Loan from?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While there are some standard requirements for certain personal loans, many banks have their own requirements as well. It’s important to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">shop around to find a personal loan</a> that you can qualify for without jumping through a lot of hoops.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-what-is-the-easiest-government-loan-to-get"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Easiest Government Loan to Get?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The easiest government loan to get depends on the type of loan needed. Each government loan comes with its own list of requirements for approval.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-what-credit-score-do-you-need-for-a-government-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Credit Score Do You Need for a Government Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Credit score requirements vary by government loan. Some don’t require a credit check, so your credit score won’t matter. Others have varying minimum credit score requirements.</p></div>
</div>
<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-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> While the federal government doesn’t offer personal loans, it does offer a variety of loans for specific purposes. If you need financial assistance to pay for education, housing, a small business, or other needs, then a government loan could be the right choice.
</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"> You would need to meet all eligibility requirements. If you do, you could get a loan with favorable terms such as low interest rates and flexible <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repayment.asp">repayment</a> terms.
</p></div> | While the federal government does not specifically offer [personal loans](https://www.investopedia.com/personal-loan-5076027), it does offer or guarantee other loans for specific purposes. These include loans to pay for education, housing, or building a small businesses.
Learn how you will need to meet eligibility requirements to qualify for these government loans and more about the loan types that the federal government offers.
### Key Takeaways
* The federal government does not offer personal loans.
* The federal government offers loans for specific purposes, including education, housing, and business.
* In most cases, the federal government does not loan money directly, but works with private lenders to provide funding.
## Federal Government Offers Loans for a Purpose
The federal government does not offer personal loans that borrowers could use for any reason, such as to consolidate credit card debt, buy a car, or pay for a wedding. Instead, the U.S. government offers or guarantees loans for a specific purpose like paying for education, buying housing, or starting a business.
Although not a traditional personal loan, the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) provides installment payment plans for those not able to pay their tax obligations in full by the due date. IRS installment loans include setup fees, interest charges, and penalties.
Also, while some loans are made direct, the federal government doesn’t fund every type of government loan. Instead, it guarantees loans that are funded by private [lenders](https://www.investopedia.com/terms/l/lender.asp).
## Loans Offered by the Government
There are numerous government loans available for a variety of purposes, including student loans and mortgages. Let’s look in more detail at the types of loan that the government provides.
### Education
The federal government offers both [subsidized and unsubsidized loans](https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/) to help students and parents pay for tuition at two- and four-year colleges and universities, community colleges, and trade and technical schools.
With subsidized loans, a third party pays the [interest](https://www.investopedia.com/terms/i/interest.asp) on the loan for a set period of time. With unsubsidized loans, the borrower pays the interest on the loan for the life of the loan.
Government loans for education include:
* [Stafford loans](https://www.investopedia.com/terms/s/stafford-loan.asp)
* [Federal Perkins Loans](https://www.investopedia.com/terms/p/perkins-loan.asp)
* [Education consolidation loans](https://www.investopedia.com/terms/d/direct-consolidation-loan.asp)
* [Direct PLUS (Parent Loan for Undergraduate Students) loans for parents](https://www.investopedia.com/terms/p/plus-loan.asp)
### Note
Most universities and schools use the [Free Application for Federal Student Aid (FAFSA)](https://www.investopedia.com/terms/f/federal-application-of-student-aid-fafsa.asp) to award federal aid along with state- and college-funded student aid. A [student may want to consider a personal loan](https://www.investopedia.com/personal-loan-good-choice-student-7971557) if they've exhausted all of their financial aid options and other sources of funding.
### Housing
The U.S. government offers a number of mortgages to help borrowers buy a home or improve the home they own. These include:
* [Federal Housing Administration (FHA) loans](https://www.investopedia.com/terms/f/fhaloan.asp)
* [FHA 203(k) loans for home rehabilitation](https://www.investopedia.com/terms/f/fha-203k-loan.asp)
* [U.S. Department of Veterans Affairs (VA) loans](https://www.investopedia.com/terms/v/valoan.asp)
* [Rural housing loans](https://www.investopedia.com/terms/r/rhsloan.asp)
* [First-time homebuyer loans](https://www.investopedia.com/terms/f/firsttimehomebuyer.asp)
If you’re shopping for a mortgage, review the eligibility requirements to see [which loan is the best fit](https://www.investopedia.com/best-30-year-mortgage-rates-5096821) for your financial needs. For example, if you are a military veteran, you would likely qualify for a VA loan with more favorable terms than an FHA loan.
### Agriculture
To help farmers and ranchers, the U.S. government offers loans to purchase or expand a farm or ranch and improve facilities. There are also loans to help those operating fishing vessels or fisheries facilities.
Agriculture loans include:
* Farm ownership loans
* Farm operating loans
* Farm storage facility loans
* Fisheries Finance Program
###
Agricultural loans also may have loan requirements based on your agricultural experience, the location of the property, and the commodities involved.
### Business
The federal government has loans for borrowers looking to start, buy, improve, or expand a business. [Small Business Administration (SBA)](https://www.investopedia.com/articles/personal-finance/091514/expanding-your-small-business-sba-loan.asp) loans are for all businesses, from small businesses to midsize businesses to large conglomerates.
They include:
* Small business loans
* Microloans
* Disaster loans
* Economic injury loans
## Federal vs. Private Loans
The primary difference between federal and private loans is that federal loans are backed or provided by the U.S. government, while private loans are provided by private lenders such as banks and credit unions. But there are other differences as well.
With federal loans, you may find it easier to get approved due to lower [credit score](https://www.investopedia.com/terms/c/credit_score.asp) requirements, if any. You also typically pay a lower or no [down payment](https://www.investopedia.com/terms/d/down_payment.asp) and can receive lower [interest rates](https://www.investopedia.com/terms/i/interestrate.asp). Other benefits could include deferred payment options and no prepayment penalties.
However, due to their qualification requirements, federal loans may not be as easy to get as private loans.
## What to Consider When Choosing a Loan
When considering a government loan, it’s important to first determine if there is a federal loan that meets your needs for financial assistance. Do you need the loan for education, business, or housing? If not, then a government loan may not be the right choice.
If a government loan could be the right choice, you will need to review the qualification requirements to see if you meet them. This could range from credit score to [income](https://www.investopedia.com/terms/i/income.asp) level to location and other requirements specific to the loan.
###
You can use the U.S. government’s [Loan Finder](https://www.govloans.gov/loan-finder/) tool to check if there is a government loan that is right for you.
## Does the Government Offer Personal Loans?
Although the government doesn’t offer unsecured personal loans for needs such as buying a car or paying for a wedding, the government does offer loans to help pay for education, buy housing, or start a business.
## Which Bank Is Easiest to Get a Personal Loan from?
While there are some standard requirements for certain personal loans, many banks have their own requirements as well. It’s important to [shop around to find a personal loan](https://www.investopedia.com/best-personal-loans-4773300) that you can qualify for without jumping through a lot of hoops.
## What Is the Easiest Government Loan to Get?
The easiest government loan to get depends on the type of loan needed. Each government loan comes with its own list of requirements for approval.
## What Credit Score Do You Need for a Government Loan?
Credit score requirements vary by government loan. Some don’t require a credit check, so your credit score won’t matter. Others have varying minimum credit score requirements.
## The Bottom Line
While the federal government doesn’t offer personal loans, it does offer a variety of loans for specific purposes. If you need financial assistance to pay for education, housing, a small business, or other needs, then a government loan could be the right choice.
You would need to meet all eligibility requirements. If you do, you could get a loan with favorable terms such as low interest rates and flexible [repayment](https://www.investopedia.com/terms/r/repayment.asp) terms.
| While the federal government does not specifically offer personal loans, it does offer or guarantee other loans for specific purposes. These include loans to pay for education, housing, or building a small businesses.
Learn how you will need to meet eligibility requirements to qualify for these government loans and more about the loan types that the federal government offers.
Key Takeaways
The federal government does not offer personal loans.The federal government offers loans for specific purposes, including education, housing, and business.In most cases, the federal government does not loan money directly, but works with private lenders to provide funding.
Federal Government Offers Loans for a Purpose
The federal government does not offer personal loans that borrowers could use for any reason, such as to consolidate credit card debt, buy a car, or pay for a wedding. Instead, the U.S. government offers or guarantees loans for a specific purpose like paying for education, buying housing, or starting a business.
Although not a traditional personal loan, the Internal Revenue Service (IRS) provides installment payment plans for those not able to pay their tax obligations in full by the due date. IRS installment loans include setup fees, interest charges, and penalties.
Also, while some loans are made direct, the federal government doesn’t fund every type of government loan. Instead, it guarantees loans that are funded by private lenders.
Loans Offered by the Government
There are numerous government loans available for a variety of purposes, including student loans and mortgages. Let’s look in more detail at the types of loan that the government provides.
Education
The federal government offers both subsidized and unsubsidized loans to help students and parents pay for tuition at two- and four-year colleges and universities, community colleges, and trade and technical schools.
With subsidized loans, a third party pays the interest on the loan for a set period of time. With unsubsidized loans, the borrower pays the interest on the loan for the life of the loan.
Government loans for education include:
Stafford loans
Federal Perkins Loans
Education consolidation loans
Direct PLUS (Parent Loan for Undergraduate Students) loans for parents
Note
Most universities and schools use the Free Application for Federal Student Aid (FAFSA) to award federal aid along with state- and college-funded student aid. A student may want to consider a personal loan if they've exhausted all of their financial aid options and other sources of funding.
Housing
The U.S. government offers a number of mortgages to help borrowers buy a home or improve the home they own. These include:
Federal Housing Administration (FHA) loans
FHA 203(k) loans for home rehabilitation
U.S. Department of Veterans Affairs (VA) loans
Rural housing loans
First-time homebuyer loans
If you’re shopping for a mortgage, review the eligibility requirements to see which loan is the best fit for your financial needs. For example, if you are a military veteran, you would likely qualify for a VA loan with more favorable terms than an FHA loan.
Agriculture
To help farmers and ranchers, the U.S. government offers loans to purchase or expand a farm or ranch and improve facilities. There are also loans to help those operating fishing vessels or fisheries facilities.
Agriculture loans include:
Farm ownership loansFarm operating loansFarm storage facility loansFisheries Finance Program
Agricultural loans also may have loan requirements based on your agricultural experience, the location of the property, and the commodities involved.
Business
The federal government has loans for borrowers looking to start, buy, improve, or expand a business. Small Business Administration (SBA) loans are for all businesses, from small businesses to midsize businesses to large conglomerates.
They include:
Small business loansMicroloansDisaster loansEconomic injury loans
Federal vs. Private Loans
The primary difference between federal and private loans is that federal loans are backed or provided by the U.S. government, while private loans are provided by private lenders such as banks and credit unions. But there are other differences as well.
With federal loans, you may find it easier to get approved due to lower credit score requirements, if any. You also typically pay a lower or no down payment and can receive lower interest rates. Other benefits could include deferred payment options and no prepayment penalties.
However, due to their qualification requirements, federal loans may not be as easy to get as private loans.
What to Consider When Choosing a Loan
When considering a government loan, it’s important to first determine if there is a federal loan that meets your needs for financial assistance. Do you need the loan for education, business, or housing? If not, then a government loan may not be the right choice.
If a government loan could be the right choice, you will need to review the qualification requirements to see if you meet them. This could range from credit score to income level to location and other requirements specific to the loan.
You can use the U.S. government’s Loan Finder tool to check if there is a government loan that is right for you.
Does the Government Offer Personal Loans?
Although the government doesn’t offer unsecured personal loans for needs such as buying a car or paying for a wedding, the government does offer loans to help pay for education, buy housing, or start a business.
Which Bank Is Easiest to Get a Personal Loan from?
While there are some standard requirements for certain personal loans, many banks have their own requirements as well. It’s important to shop around to find a personal loan that you can qualify for without jumping through a lot of hoops.
What Is the Easiest Government Loan to Get?
The easiest government loan to get depends on the type of loan needed. Each government loan comes with its own list of requirements for approval.
What Credit Score Do You Need for a Government Loan?
Credit score requirements vary by government loan. Some don’t require a credit check, so your credit score won’t matter. Others have varying minimum credit score requirements.
The Bottom Line
While the federal government doesn’t offer personal loans, it does offer a variety of loans for specific purposes. If you need financial assistance to pay for education, housing, a small business, or other needs, then a government loan could be the right choice.
You would need to meet all eligibility requirements. If you do, you could get a loan with favorable terms such as low interest rates and flexible repayment terms.
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https://www.investopedia.com/articles/personal-finance/112415/5-states-without-sales-tax.asp | Which States Have the Lowest Sales Tax? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> As of 2024, five states impose a 0.000% sales tax including Alaska, Delaware, Montana, New Hampshire, and Oregon. Each of these states, however, may have individual municipalities that impose excise taxes, income taxes, and taxes imposed on tourist locations.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The sales tax laws within the United States are not subject to federal regulation and each state has control over its base sales tax. Sales taxes are imposed on retail transactions and certain services.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Whether or not a state imposes a state <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/salestax.asp">sales tax</a>, local municipalities and counties may impose excise or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/surtax.asp">surtaxes</a>. For example, the sales tax in New York state is 4%, but New York City has additional taxes, increasing the rate to 8.875%.<span class="ql-inline-citation" data-cite="1"></span> <br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<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>State sales tax can factor into making purchases, both large and small, by increasing the cost you pay above the sticker price.</li><li>Sales tax generates revenue for state-wide operations, but five states currently do not impose a state sales tax including Alaska, Delaware, Montana, New Hampshire, and Oregon.<span class="ql-inline-citation" data-cite="2"></span></li><li>California has the highest sales tax in the nation.</li></ul></div></div></div>
<span class="heading-toc" id="toc-1-alaska"></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. Alaska </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> While there is no imposed state sales tax in Alaska, local governments can levy taxes on certain goods and services. The sales tax is 5% in Juneau, while Anchorage and Fairbanks do not have sales taxes, and the average rate statewide for municipalities is 1.76%.<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>
<span class="heading-toc" id="toc-2-delaware"></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"> 2. Delaware </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Instead of imposing a sales tax, Delaware assesses a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gross-receipts.asp">gross receipts</a> tax on certain businesses.<span class="ql-inline-citation" data-cite="8"></span> Delaware makes extensive use of excise taxes levied as a flat rate per gallon on goods such as motor fuel and alcohol.<span class="ql-inline-citation" data-cite="25"></span><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_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The state has relatively high corporate income taxes and imposes additional taxation on specific distributors of goods and services, allowing the state to have a 0% <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/propertytax.asp">property tax</a> and sales tax.<span class="ql-inline-citation" data-cite="26"></span><span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">7.25%</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The sales tax in California is the highest tax imposed by any state in America.<span class="ql-inline-citation" data-cite="30"></span> Puerto Rico, which is a non-state territory, levies an 11.5% sales tax.<span class="ql-inline-citation" data-cite="31"></span></p></div></div></div>
<span class="heading-toc" id="toc-3-montana"></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"> 3. Montana </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Overall, the state of Montana levies a 0% sales tax, however, localities of Montana that attract many tourists charge low sales taxes of up to 3%, referred to as a resort and local option tax to support infrastructure frequented by tourists. To qualify for this tax, a city must have a permanent population of under 5,500 and these locations include Whitefish, Red Lodge, Big Sky, and West Yellowstone.<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_21-0"></div>
<span class="heading-toc" id="toc-4-new-hampshire"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> 4. New Hampshire </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> New Hampshire does not impose a state sales tax, however, a meals and rentals tax of 8.5% exists for prepared meals in restaurants, short-term room rentals, and car rentals. A timber tax is imposed at the time of cutting at 10% of the value of the wood, excluding cutting for personal use.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="18"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Local governments cannot declare sales taxes in light of the statewide 0% sales tax so excise taxes are imposed on sales of tobacco and electricity.<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_26-0"></div>
<span class="heading-toc" id="toc-5-oregon"></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"> 5. Oregon </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> With a zero statewide sales tax, municipalities in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/102015/taxes-oregon-small-business-basics.asp">Oregon</a> impose taxes on certain goods such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tobacco-tax.asp">tobacco</a> and prepackaged alcoholic beverages. Some local governments implement sales taxes such as Ashland’s 5% tax on prepared foods.<span class="ql-inline-citation" data-cite="21"></span><span class="ql-inline-citation" data-cite="20"></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_29-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Oregon has a high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personalincome.asp">personal income tax</a> relative to other states, but it does not tax intangible properties like stock accounts and bonds.<span class="ql-inline-citation" data-cite="35"></span><span class="ql-inline-citation" data-cite="28"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-which-us-states-have-no-sales-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which U.S. States Have No Sales Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that have no sales tax.<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_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-most-tax-friendly-state"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Most Tax-Friendly State?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Various states have favorable tax treatments, from sales tax to income tax. For example, Delaware has no sales tax and has the country's seventh-lowest median property tax rate. Like Delaware, Alaska has no state sales tax, although Juneau has a 5% local sales tax rate. In addition, there's no income tax across the state. Meanwhile, Wyoming offers low sales tax, property tax, and no income tax—making it one of the most tax-friendly states in America.<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_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-which-us-states-have-the-highest-sales-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which U.S. States Have the Highest Sales Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>California has the highest sales tax in the nation, at 7.25%. Following California are Indiana, Mississippi, Rhode Island, and Tennessee, all with 7% sales tax rates.<span class="ql-inline-citation" data-cite="30"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-which-states-have-minimal-sales-tax-rates"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which States Have Minimal Sales Tax Rates?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The following 11 states have a sales tax between 2% and 5%: Alabama (4%), Colorado (2.9%), Georgia (4%), Hawaii (4%), Louisiana (4.45%), Missouri (4.23%), New York (4%), North Carolina (4.75%), Oklahoma (4.5%), South Dakota (4.5%), and Wyoming (4%).<span class="ql-inline-citation" data-cite="30"></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-which-states-have-the-highest-combined-state-and-local-sales-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which States Have the Highest Combined State and Local Sales Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Statewide sale taxes are found in 45 U.S. states, while local sales taxes are found in 38 states. States with the highest combined state and local sales tax include Alabama (9.25%), Arkansas (9.46%), Louisiana (9.55%), Tennessee (9.55%), and Oklahoma (8.98%).<span class="ql-inline-citation" data-cite="35"></span></p></div>
</div>
<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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Because state tax laws are unregulated, each state can decide how much to charge for its base sales tax. States like New York and California have high sales tax rates, while Delaware, Montana, and New Hampshire have lower rates. Depending on where you live and travel, the paying (or not paying) sales tax will become part of your<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/budget-qs.asp"> overall budget</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"> Sales taxes pay for services like schools and infrastructure, so living in a state without a high sales tax means that money will come from other taxes.
</p></div> | As of 2024, five states impose a 0.000% sales tax including Alaska, Delaware, Montana, New Hampshire, and Oregon. Each of these states, however, may have individual municipalities that impose excise taxes, income taxes, and taxes imposed on tourist locations.
The sales tax laws within the United States are not subject to federal regulation and each state has control over its base sales tax. Sales taxes are imposed on retail transactions and certain services.
Whether or not a state imposes a state [sales tax](https://www.investopedia.com/terms/s/salestax.asp), local municipalities and counties may impose excise or [surtaxes](https://www.investopedia.com/terms/s/surtax.asp). For example, the sales tax in New York state is 4%, but New York City has additional taxes, increasing the rate to 8.875%.
### Key Takeaways
* State sales tax can factor into making purchases, both large and small, by increasing the cost you pay above the sticker price.
* Sales tax generates revenue for state-wide operations, but five states currently do not impose a state sales tax including Alaska, Delaware, Montana, New Hampshire, and Oregon.
* California has the highest sales tax in the nation.
## 1. Alaska
While there is no imposed state sales tax in Alaska, local governments can levy taxes on certain goods and services. The sales tax is 5% in Juneau, while Anchorage and Fairbanks do not have sales taxes, and the average rate statewide for municipalities is 1.76%.
## 2. Delaware
Instead of imposing a sales tax, Delaware assesses a [gross receipts](https://www.investopedia.com/terms/g/gross-receipts.asp) tax on certain businesses. Delaware makes extensive use of excise taxes levied as a flat rate per gallon on goods such as motor fuel and alcohol.
The state has relatively high corporate income taxes and imposes additional taxation on specific distributors of goods and services, allowing the state to have a 0% [property tax](https://www.investopedia.com/terms/p/propertytax.asp) and sales tax.
### 7.25%
The sales tax in California is the highest tax imposed by any state in America. Puerto Rico, which is a non-state territory, levies an 11.5% sales tax.
## 3. Montana
Overall, the state of Montana levies a 0% sales tax, however, localities of Montana that attract many tourists charge low sales taxes of up to 3%, referred to as a resort and local option tax to support infrastructure frequented by tourists. To qualify for this tax, a city must have a permanent population of under 5,500 and these locations include Whitefish, Red Lodge, Big Sky, and West Yellowstone.
## 4. New Hampshire
New Hampshire does not impose a state sales tax, however, a meals and rentals tax of 8.5% exists for prepared meals in restaurants, short-term room rentals, and car rentals. A timber tax is imposed at the time of cutting at 10% of the value of the wood, excluding cutting for personal use.
Local governments cannot declare sales taxes in light of the statewide 0% sales tax so excise taxes are imposed on sales of tobacco and electricity.
## 5. Oregon
With a zero statewide sales tax, municipalities in [Oregon](https://www.investopedia.com/articles/personal-finance/102015/taxes-oregon-small-business-basics.asp) impose taxes on certain goods such as [tobacco](https://www.investopedia.com/terms/t/tobacco-tax.asp) and prepackaged alcoholic beverages. Some local governments implement sales taxes such as Ashland’s 5% tax on prepared foods.
Oregon has a high [personal income tax](https://www.investopedia.com/terms/p/personalincome.asp) relative to other states, but it does not tax intangible properties like stock accounts and bonds.
## Which U.S. States Have No Sales Tax?
Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that have no sales tax.
## What Is the Most Tax-Friendly State?
Various states have favorable tax treatments, from sales tax to income tax. For example, Delaware has no sales tax and has the country's seventh-lowest median property tax rate. Like Delaware, Alaska has no state sales tax, although Juneau has a 5% local sales tax rate. In addition, there's no income tax across the state. Meanwhile, Wyoming offers low sales tax, property tax, and no income tax—making it one of the most tax-friendly states in America.
## Which U.S. States Have the Highest Sales Tax?
California has the highest sales tax in the nation, at 7.25%. Following California are Indiana, Mississippi, Rhode Island, and Tennessee, all with 7% sales tax rates.
## Which States Have Minimal Sales Tax Rates?
The following 11 states have a sales tax between 2% and 5%: Alabama (4%), Colorado (2.9%), Georgia (4%), Hawaii (4%), Louisiana (4.45%), Missouri (4.23%), New York (4%), North Carolina (4.75%), Oklahoma (4.5%), South Dakota (4.5%), and Wyoming (4%).
## Which States Have the Highest Combined State and Local Sales Tax?
Statewide sale taxes are found in 45 U.S. states, while local sales taxes are found in 38 states. States with the highest combined state and local sales tax include Alabama (9.25%), Arkansas (9.46%), Louisiana (9.55%), Tennessee (9.55%), and Oklahoma (8.98%).
## The Bottom Line
Because state tax laws are unregulated, each state can decide how much to charge for its base sales tax. States like New York and California have high sales tax rates, while Delaware, Montana, and New Hampshire have lower rates. Depending on where you live and travel, the paying (or not paying) sales tax will become part of your [overall budget](https://www.investopedia.com/articles/pf/07/budget-qs.asp).
Sales taxes pay for services like schools and infrastructure, so living in a state without a high sales tax means that money will come from other taxes.
| As of 2024, five states impose a 0.000% sales tax including Alaska, Delaware, Montana, New Hampshire, and Oregon. Each of these states, however, may have individual municipalities that impose excise taxes, income taxes, and taxes imposed on tourist locations.
The sales tax laws within the United States are not subject to federal regulation and each state has control over its base sales tax. Sales taxes are imposed on retail transactions and certain services.
Whether or not a state imposes a state sales tax, local municipalities and counties may impose excise or surtaxes. For example, the sales tax in New York state is 4%, but New York City has additional taxes, increasing the rate to 8.875%.
Key Takeaways
State sales tax can factor into making purchases, both large and small, by increasing the cost you pay above the sticker price.Sales tax generates revenue for state-wide operations, but five states currently do not impose a state sales tax including Alaska, Delaware, Montana, New Hampshire, and Oregon.California has the highest sales tax in the nation.
1. Alaska
While there is no imposed state sales tax in Alaska, local governments can levy taxes on certain goods and services. The sales tax is 5% in Juneau, while Anchorage and Fairbanks do not have sales taxes, and the average rate statewide for municipalities is 1.76%.
2. Delaware
Instead of imposing a sales tax, Delaware assesses a gross receipts tax on certain businesses. Delaware makes extensive use of excise taxes levied as a flat rate per gallon on goods such as motor fuel and alcohol.
The state has relatively high corporate income taxes and imposes additional taxation on specific distributors of goods and services, allowing the state to have a 0% property tax and sales tax.
7.25%
The sales tax in California is the highest tax imposed by any state in America. Puerto Rico, which is a non-state territory, levies an 11.5% sales tax.
3. Montana
Overall, the state of Montana levies a 0% sales tax, however, localities of Montana that attract many tourists charge low sales taxes of up to 3%, referred to as a resort and local option tax to support infrastructure frequented by tourists. To qualify for this tax, a city must have a permanent population of under 5,500 and these locations include Whitefish, Red Lodge, Big Sky, and West Yellowstone.
4. New Hampshire
New Hampshire does not impose a state sales tax, however, a meals and rentals tax of 8.5% exists for prepared meals in restaurants, short-term room rentals, and car rentals. A timber tax is imposed at the time of cutting at 10% of the value of the wood, excluding cutting for personal use.
Local governments cannot declare sales taxes in light of the statewide 0% sales tax so excise taxes are imposed on sales of tobacco and electricity.
5. Oregon
With a zero statewide sales tax, municipalities in Oregon impose taxes on certain goods such as tobacco and prepackaged alcoholic beverages. Some local governments implement sales taxes such as Ashland’s 5% tax on prepared foods.
Oregon has a high personal income tax relative to other states, but it does not tax intangible properties like stock accounts and bonds.
Which U.S. States Have No Sales Tax?
Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that have no sales tax.
What Is the Most Tax-Friendly State?
Various states have favorable tax treatments, from sales tax to income tax. For example, Delaware has no sales tax and has the country's seventh-lowest median property tax rate. Like Delaware, Alaska has no state sales tax, although Juneau has a 5% local sales tax rate. In addition, there's no income tax across the state. Meanwhile, Wyoming offers low sales tax, property tax, and no income tax—making it one of the most tax-friendly states in America.
Which U.S. States Have the Highest Sales Tax?
California has the highest sales tax in the nation, at 7.25%. Following California are Indiana, Mississippi, Rhode Island, and Tennessee, all with 7% sales tax rates.
Which States Have Minimal Sales Tax Rates?
The following 11 states have a sales tax between 2% and 5%: Alabama (4%), Colorado (2.9%), Georgia (4%), Hawaii (4%), Louisiana (4.45%), Missouri (4.23%), New York (4%), North Carolina (4.75%), Oklahoma (4.5%), South Dakota (4.5%), and Wyoming (4%).
Which States Have the Highest Combined State and Local Sales Tax?
Statewide sale taxes are found in 45 U.S. states, while local sales taxes are found in 38 states. States with the highest combined state and local sales tax include Alabama (9.25%), Arkansas (9.46%), Louisiana (9.55%), Tennessee (9.55%), and Oklahoma (8.98%).
The Bottom Line
Because state tax laws are unregulated, each state can decide how much to charge for its base sales tax. States like New York and California have high sales tax rates, while Delaware, Montana, and New Hampshire have lower rates. Depending on where you live and travel, the paying (or not paying) sales tax will become part of your overall budget.
Sales taxes pay for services like schools and infrastructure, so living in a state without a high sales tax means that money will come from other taxes.
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https://www.investopedia.com/personal-finance/what-do-if-you-have-problems-your-student-loan-servicer/ | Student Loan Help: Free and Low-Cost Solutions to Out-of-Control Loans | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 falling behind on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loans-4689727">student loans</a>, you need to get help fast. Miss enough payments and you could face serious consequences, including damage to 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>, having your wages <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/garnishment.asp">garnished</a>, getting sued, or having your tax refund seized.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Fortunately, both federal and private <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> have ways to help borrowers get back on track. Nonprofit organizations can assist, too. And if those options don’t work, then hiring a knowledgeable attorney could be money well spent.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>If you’re struggling to pay back your student loan debt, you can apply for an income-driven repayment (IDR) plan for long-term relief.</li><li>You can also seek deferment or forbearance for a short-term break.</li><li>If you’ve defaulted on your student loans, you can rehabilitate or consolidate them.</li><li>You may be able to refinance any private student loans you have.</li><li>You can also get advice from a nonprofit credit counseling agency.</li></ul></div></div></div>
<span class="heading-toc" id="toc-income-driven-repayment-idr"></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"> Income-Driven Repayment (IDR) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> If you can’t afford your current monthly student loan payments, but a lower payment might be doable, then you have several options.
</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 you have federal student loans, consider applying for an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/income-driven-repayment-plans-7562851">income-driven repayment (IDR) plan</a>. That can be a good choice if your current income is low relative to your student loan debt. Your payment under an IDR plan could be as low as $0. Each year, you will need to recertify your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> with the federal government, and your monthly payment will be adjusted based on your income and family size.
</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"> There are four different IDR plans; the ones available to you will depend on the type of federal student loans you have.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> When you choose an IDR plan, you’ll probably pay more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> in the long run, as you’ll owe money for a longer period and be paying down 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> more slowly than if you were on a standard 10-year repayment plan.
</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"> IDR plans forgive your remaining balance after 20 or 25 years of payments, but you may owe federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incometax.asp">income tax</a> on the forgiven sum.<span class="ql-inline-citation" data-cite="4"></span> It’s a good idea to set aside a little money each year so you’ll be able to pay that bill one day.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Income-driven repayment plans are free to apply for (although some private companies will try to get you to pay a fee). You can complete the paperwork yourself in about 10 minutes.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Income-driven repayment won’t solve everyone’s student loan problems. Some borrowers find that they have so many mandatory expenses, such as taxes and child care, that they still can’t afford the payments.
</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"> And if your loans are in default, then you aren’t eligible for IDR (or for deferment or forbearance, for that matter). You’ll first need to fix the default through loan rehabilitation or consolidation, as explained below.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<span class="heading-toc" id="toc-deferment-and-forbearance"></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"> Deferment and Forbearance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-student-loan-deferment-4771251">Deferment</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-forbearance-pros-and-cons-4771305">forbearance</a> are two ways to temporarily stop making payments or lower your payments on federal student loans. Some private lenders offer one or both, with different rules.
</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"> Borrowers with subsidized federal loans or federal Perkins loans don’t have to pay the interest that accrues during deferment.
</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"> Forbearance, on the other hand, does not stop interest from accruing on any type of federal student loan.<span class="ql-inline-citation" data-cite="3"></span> Private lenders decide how to handle interest accrual under deferment or forbearance.
</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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>In November 2022, the U.S. Department of Education extended the pause on federal student loan payments in response to a federal court order blocking the White House’s student loan forgiveness plan. However, the plan was never approved, and student loan payments and interest relief ended in September 2023 and resumed in October 2023.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/find-student-loan-servicer-5322700">Your lender or loan servicer</a> will require you to meet certain conditions before it approves your request for deferment or forbearance. For example, federal student loan borrowers may be able to take a break from making payments if they are unemployed, experiencing economic hardship, undergoing or recovering from cancer treatment, or serving on active military duty.<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>
<span class="heading-toc" id="toc-delinquency-and-default"></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"> Delinquency and Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Either deferment or forbearance may be better than letting your loans become <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/delinquent.asp">delinquent</a>. Once your payment is 90 days late, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-servicers-customer-service-5323796">your loan servicer</a> will report your delinquent payments to the three major credit bureaus, which can hurt your credit score. That will make it harder to get other forms of credit or do anything else that requires a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-inquiry.asp">credit check</a>, such as renting an apartment or getting a job.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Going into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> is even worse. The timing varies by loan type, but for federal direct loans and Federal Family Education Loans, the debt is in default if it is 270 days late. For private student loans, default usually happens as soon as you miss a single payment.
</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 consequences of default will be defined in your loan agreement. Your entire balance can become due immediately, your lender can sue you, and your wages can be garnished, among other consequences.<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_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"> If Student Loans Are Part of a Bigger Financial Problem </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> A nonprofit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-counseling.asp">credit counseling</a> organization can work with you to come up with a personalized plan to repay your student loans and any other debts. You may have to pay a fee for this help.
</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 reputable place to search for help is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/national-foundation-for-consumer-credit.asp">National Foundation for Credit Counseling</a>. A credit counselor can offer guidance on your entire financial picture, not just getting your student loans under control.<br/>
</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-when-your-federal-student-loans-are-in-default"></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"> When Your Federal Student Loans Are in Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> If your federal student loans are in default, you can either enter the federal student loan rehabilitation program or try loan consolidation.<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_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"> Loan Rehabilitation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The federal student loan rehabilitation program requires you to make nine payments within 10 consecutive months. You’ll need to work with your loan servicer to determine your required payment, which will be based on your disposable income.<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_52-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> You’ll also need to provide proof of your income and possibly your expenses. The Federal Student Aid website says your payments could be as low as $5 per month under a rehabilitation plan.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Once your loan is rehabilitated, you can apply for deferment, forbearance, or income-driven repayment. 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> will no longer show a default, though it will still show the late payments that led to your default.
</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 only get one chance to rehabilitate a loan. In addition, your loan will continue to accrue interest during rehabilitation, and you may have to pay collection fees as well.<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_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"> Loan Consolidation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Loan consolidation is another option for getting out of default. You may be able to use a federal <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 loan</a> to pay off your defaulted loan. You can then set up an income-driven repayment plan for your new consolidation loan if you need to.
</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"> You’ll need to make three consecutive monthly payments on your defaulted loan before you can consolidate it. Your loan servicer will base the amount of the payments on your current financial circumstances, so they may be less than you were required to pay in the past.
</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"> Consolidation will get you out of default sooner, but it won’t remove the default from your credit report. It also comes with possible collection fees and additional accrued interest.<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>
<span class="heading-toc" id="toc-when-your-private-student-loans-are-in-default"></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"> When Your Private Student Loans Are in Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> There’s no simple path for getting out of default when it comes to private student loans. You’ll have to work out something with your lender or hire an attorney. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/settle-student-loan-debt-guide-8547140">Negotiating a settlement</a> for less than you owe may be an option. To find an attorney, try the American Bar Association’s website, the National Association of Consumer Advocates, or LawHelp.org.
</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 you can’t afford to have an attorney represent you, consider paying for an hour or two of advice so you can learn what you need to do to represent yourself. You can expect to pay a few hundred dollars for this service vs. several thousand to have an attorney represent you.
</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"> Also, be careful to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/worst-student-loan-servicers-going-2018/">avoid student loan scams</a> when you’re looking for help.
</p>
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<span class="heading-toc" id="toc-student-loan-refinancing"></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"> Student Loan Refinancing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> If you have multiple federal student loans, you can apply for a consolidation loan, as noted above. 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> will be based on your loans’ original interest rates.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Unfortunately, you can’t consolidate your loans into a new loan with a lower interest rate, even if rates are lower now. To get that lower rate, you would need to refinance your federal student loans into a private student loan. You can also refinance private student loans into a new private student 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_77-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/refinance-student-loans-5323837">It can make sense to refinance</a> if doing so will significantly lower your interest rate and make your monthly payment more affordable. It can also help you repay your loan faster and pay less interest over the life of the loan.
</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"> However, if you refinance a federal loan into a private loan, you will lose the unique options available with federal loans: income-driven repayment, loan forgiveness, loan rehabilitation, and possibly deferment and forbearance. So, think carefully before giving up these benefits.
</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"> Refinancing might also mean paying an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination-fee.asp">origination fee</a>, which will vary depending on the lender. Many private student lenders don’t charge them, but if they do, the fee will usually be added to your loan balance or subtracted from your loan proceeds.
</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"> Private student refinance loans can have fixed or variable interest rates. If you’re struggling with your current payments, it may be tempting to refinance into a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variableinterestrate.asp">variable-rate</a> loan because it will probably have a lower interest rate than a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed-rate</a> one. Before you do, find out how often the loan’s rate can increase and by how much. Also, find out what the floor and ceiling are on the variable interest rate. You’ll need to consider whether you would be able to afford the payments if the rate goes up.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> You’ll have to have good credit to refinance at a favorable interest rate. If you’ve already fallen far behind and your credit score has plunged, then <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-refinancing-8599202">refinancing might not be an option</a> for you.
</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"> You also need to have a steady income to refinance, so if you’re unemployed, you’ll have to look at other options.<br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_90-0"><span class="heading-toc" id="toc-how-can-i-get-help-with-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Get Help with Student Loan Debt?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Some ways to get help with student loan debt include lowering your payments through an income-driven payment (IDR) plan, paying less temporarily via a deferment or forbearance agreement, and looking into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cancellation-of-debt.asp">debt cancellation</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-loan-forgiveness.asp">forgiveness</a> programs. In any case, talking to a credit counselor at a nonprofit service is a good way to start.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_92-0"><span class="heading-toc" id="toc-how-do-i-get-help-with-student-loan-forgiveness"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Get Help with Student Loan Forgiveness?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Student loan forgiveness is only available to individuals with federal student loans, not private loans. Applying to the different programs that offer student loan forgiveness and meeting the criteria for qualification can lead to student loan forgiveness.</p><p>There are a variety of programs available, including income-driven forgiveness, public service loan forgiveness, teacher loan forgiveness, military student loan forgiveness, and state-sponsored repayment programs.</p></div>
</div>
<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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_94-0"><span class="heading-toc" id="toc-how-might-canceling-student-loan-debt-help-america"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Might Canceling Student Loan Debt Help America?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Proponents of canceling student loan debt argue that it would help America in many ways, including encouraging people to seek higher levels of education, increasing savings rates, improving the quality of food consumption, increasing birth levels, boosting home purchases, and encouraging business creation.</p></div>
</div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_96-0"> <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_97-0"> Ignoring financial problems never makes them go away, and it often makes them worse. If you default on your federal student loans, the government has the power to seize your income tax refund and garnish your wages and even <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/socialsecurity.asp">Social Security</a> benefits.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> Falling too far behind on any type of student loan, federal or private, can also seriously hurt your credit. It can also cause your lender to take the seemingly nonsensical and drastic step of accelerating your loan, making the entire balance due immediately.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> You can prevent the situation from getting worse and put your loans back on track with one of the options described above. If your situation truly seems hopeless, trying to get your student loans <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-file-student-loan-bankruptcy-4772237">discharged in bankruptcy</a> might be your best option. That’s possible, but not easy.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> <em>Investopedia does not provide tax, investment, or financial services and advice. Readers should consult with a qualified financial professional to determine suitable options and their ramifications given their specific circumstances.</em><br/>
</p></div> | If you’re falling behind on your [student loans](https://www.investopedia.com/student-loans-4689727), you need to get help fast. Miss enough payments and you could face serious consequences, including damage to your [credit score](https://www.investopedia.com/terms/c/credit_score.asp), having your wages [garnished](https://www.investopedia.com/terms/g/garnishment.asp), getting sued, or having your tax refund seized.
Fortunately, both federal and private [loan servicers](https://www.investopedia.com/terms/l/loan_servicing.asp) have ways to help borrowers get back on track. Nonprofit organizations can assist, too. And if those options don’t work, then hiring a knowledgeable attorney could be money well spent.
### Key Takeaways
* If you’re struggling to pay back your student loan debt, you can apply for an income-driven repayment (IDR) plan for long-term relief.
* You can also seek deferment or forbearance for a short-term break.
* If you’ve defaulted on your student loans, you can rehabilitate or consolidate them.
* You may be able to refinance any private student loans you have.
* You can also get advice from a nonprofit credit counseling agency.
## Income-Driven Repayment (IDR)
If you can’t afford your current monthly student loan payments, but a lower payment might be doable, then you have several options.
If you have federal student loans, consider applying for an [income-driven repayment (IDR) plan](https://www.investopedia.com/income-driven-repayment-plans-7562851). That can be a good choice if your current income is low relative to your student loan debt. Your payment under an IDR plan could be as low as $0. Each year, you will need to recertify your [income](https://www.investopedia.com/terms/i/income.asp) with the federal government, and your monthly payment will be adjusted based on your income and family size.
There are four different IDR plans; the ones available to you will depend on the type of federal student loans you have.
When you choose an IDR plan, you’ll probably pay more [interest](https://www.investopedia.com/terms/i/interest.asp) in the long run, as you’ll owe money for a longer period and be paying down the [principal](https://www.investopedia.com/terms/p/principal.asp) more slowly than if you were on a standard 10-year repayment plan.
IDR plans forgive your remaining balance after 20 or 25 years of payments, but you may owe federal [income tax](https://www.investopedia.com/terms/i/incometax.asp) on the forgiven sum. It’s a good idea to set aside a little money each year so you’ll be able to pay that bill one day.
###
Income-driven repayment plans are free to apply for (although some private companies will try to get you to pay a fee). You can complete the paperwork yourself in about 10 minutes.
Income-driven repayment won’t solve everyone’s student loan problems. Some borrowers find that they have so many mandatory expenses, such as taxes and child care, that they still can’t afford the payments.
And if your loans are in default, then you aren’t eligible for IDR (or for deferment or forbearance, for that matter). You’ll first need to fix the default through loan rehabilitation or consolidation, as explained below.
## Deferment and Forbearance
[Deferment](https://www.investopedia.com/what-is-student-loan-deferment-4771251) and [forbearance](https://www.investopedia.com/student-loan-forbearance-pros-and-cons-4771305) are two ways to temporarily stop making payments or lower your payments on federal student loans. Some private lenders offer one or both, with different rules.
Borrowers with subsidized federal loans or federal Perkins loans don’t have to pay the interest that accrues during deferment.
Forbearance, on the other hand, does not stop interest from accruing on any type of federal student loan. Private lenders decide how to handle interest accrual under deferment or forbearance.
###
In November 2022, the U.S. Department of Education extended the pause on federal student loan payments in response to a federal court order blocking the White House’s student loan forgiveness plan. However, the plan was never approved, and student loan payments and interest relief ended in September 2023 and resumed in October 2023.
[Your lender or loan servicer](https://www.investopedia.com/find-student-loan-servicer-5322700) will require you to meet certain conditions before it approves your request for deferment or forbearance. For example, federal student loan borrowers may be able to take a break from making payments if they are unemployed, experiencing economic hardship, undergoing or recovering from cancer treatment, or serving on active military duty.
## Delinquency and Default
Either deferment or forbearance may be better than letting your loans become [delinquent](https://www.investopedia.com/terms/d/delinquent.asp). Once your payment is 90 days late, [your loan servicer](https://www.investopedia.com/student-loan-servicers-customer-service-5323796) will report your delinquent payments to the three major credit bureaus, which can hurt your credit score. That will make it harder to get other forms of credit or do anything else that requires a [credit check](https://www.investopedia.com/terms/c/credit-inquiry.asp), such as renting an apartment or getting a job.
Going into [default](https://www.investopedia.com/terms/d/default2.asp) is even worse. The timing varies by loan type, but for federal direct loans and Federal Family Education Loans, the debt is in default if it is 270 days late. For private student loans, default usually happens as soon as you miss a single payment.
The consequences of default will be defined in your loan agreement. Your entire balance can become due immediately, your lender can sue you, and your wages can be garnished, among other consequences.
### If Student Loans Are Part of a Bigger Financial Problem
A nonprofit [credit counseling](https://www.investopedia.com/terms/c/credit-counseling.asp) organization can work with you to come up with a personalized plan to repay your student loans and any other debts. You may have to pay a fee for this help.
A reputable place to search for help is the [National Foundation for Credit Counseling](https://www.investopedia.com/terms/n/national-foundation-for-consumer-credit.asp). A credit counselor can offer guidance on your entire financial picture, not just getting your student loans under control.
## When Your Federal Student Loans Are in Default
If your federal student loans are in default, you can either enter the federal student loan rehabilitation program or try loan consolidation.
### Loan Rehabilitation
The federal student loan rehabilitation program requires you to make nine payments within 10 consecutive months. You’ll need to work with your loan servicer to determine your required payment, which will be based on your disposable income.
You’ll also need to provide proof of your income and possibly your expenses. The Federal Student Aid website says your payments could be as low as $5 per month under a rehabilitation plan.
Once your loan is rehabilitated, you can apply for deferment, forbearance, or income-driven repayment. Your [credit report](https://www.investopedia.com/terms/c/creditreport.asp) will no longer show a default, though it will still show the late payments that led to your default.
You only get one chance to rehabilitate a loan. In addition, your loan will continue to accrue interest during rehabilitation, and you may have to pay collection fees as well.
### Loan Consolidation
Loan consolidation is another option for getting out of default. You may be able to use a federal [direct consolidation loan](https://www.investopedia.com/terms/d/direct-consolidation-loan.asp) to pay off your defaulted loan. You can then set up an income-driven repayment plan for your new consolidation loan if you need to.
You’ll need to make three consecutive monthly payments on your defaulted loan before you can consolidate it. Your loan servicer will base the amount of the payments on your current financial circumstances, so they may be less than you were required to pay in the past.
Consolidation will get you out of default sooner, but it won’t remove the default from your credit report. It also comes with possible collection fees and additional accrued interest.
## When Your Private Student Loans Are in Default
There’s no simple path for getting out of default when it comes to private student loans. You’ll have to work out something with your lender or hire an attorney. [Negotiating a settlement](https://www.investopedia.com/settle-student-loan-debt-guide-8547140) for less than you owe may be an option. To find an attorney, try the American Bar Association’s website, the National Association of Consumer Advocates, or LawHelp.org.
If you can’t afford to have an attorney represent you, consider paying for an hour or two of advice so you can learn what you need to do to represent yourself. You can expect to pay a few hundred dollars for this service vs. several thousand to have an attorney represent you.
Also, be careful to [avoid student loan scams](https://www.investopedia.com/personal-finance/worst-student-loan-servicers-going-2018/) when you’re looking for help.
## Student Loan Refinancing
If you have multiple federal student loans, you can apply for a consolidation loan, as noted above. The [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) will be based on your loans’ original interest rates.
Unfortunately, you can’t consolidate your loans into a new loan with a lower interest rate, even if rates are lower now. To get that lower rate, you would need to refinance your federal student loans into a private student loan. You can also refinance private student loans into a new private student loan.
[It can make sense to refinance](https://www.investopedia.com/refinance-student-loans-5323837) if doing so will significantly lower your interest rate and make your monthly payment more affordable. It can also help you repay your loan faster and pay less interest over the life of the loan.
However, if you refinance a federal loan into a private loan, you will lose the unique options available with federal loans: income-driven repayment, loan forgiveness, loan rehabilitation, and possibly deferment and forbearance. So, think carefully before giving up these benefits.
Refinancing might also mean paying an [origination fee](https://www.investopedia.com/terms/o/origination-fee.asp), which will vary depending on the lender. Many private student lenders don’t charge them, but if they do, the fee will usually be added to your loan balance or subtracted from your loan proceeds.
Private student refinance loans can have fixed or variable interest rates. If you’re struggling with your current payments, it may be tempting to refinance into a [variable-rate](https://www.investopedia.com/terms/v/variableinterestrate.asp) loan because it will probably have a lower interest rate than a [fixed-rate](https://www.investopedia.com/terms/f/fixedinterestrate.asp) one. Before you do, find out how often the loan’s rate can increase and by how much. Also, find out what the floor and ceiling are on the variable interest rate. You’ll need to consider whether you would be able to afford the payments if the rate goes up.
You’ll have to have good credit to refinance at a favorable interest rate. If you’ve already fallen far behind and your credit score has plunged, then [refinancing might not be an option](https://www.investopedia.com/student-loan-refinancing-8599202) for you.
You also need to have a steady income to refinance, so if you’re unemployed, you’ll have to look at other options.
## How Can I Get Help with Student Loan Debt?
Some ways to get help with student loan debt include lowering your payments through an income-driven payment (IDR) plan, paying less temporarily via a deferment or forbearance agreement, and looking into [debt cancellation](https://www.investopedia.com/terms/c/cancellation-of-debt.asp) or [forgiveness](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) programs. In any case, talking to a credit counselor at a nonprofit service is a good way to start.
## How Do I Get Help with Student Loan Forgiveness?
Student loan forgiveness is only available to individuals with federal student loans, not private loans. Applying to the different programs that offer student loan forgiveness and meeting the criteria for qualification can lead to student loan forgiveness.
There are a variety of programs available, including income-driven forgiveness, public service loan forgiveness, teacher loan forgiveness, military student loan forgiveness, and state-sponsored repayment programs.
## How Might Canceling Student Loan Debt Help America?
Proponents of canceling student loan debt argue that it would help America in many ways, including encouraging people to seek higher levels of education, increasing savings rates, improving the quality of food consumption, increasing birth levels, boosting home purchases, and encouraging business creation.
## The Bottom Line
Ignoring financial problems never makes them go away, and it often makes them worse. If you default on your federal student loans, the government has the power to seize your income tax refund and garnish your wages and even [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp) benefits.
Falling too far behind on any type of student loan, federal or private, can also seriously hurt your credit. It can also cause your lender to take the seemingly nonsensical and drastic step of accelerating your loan, making the entire balance due immediately.
You can prevent the situation from getting worse and put your loans back on track with one of the options described above. If your situation truly seems hopeless, trying to get your student loans [discharged in bankruptcy](https://www.investopedia.com/how-to-file-student-loan-bankruptcy-4772237) might be your best option. That’s possible, but not easy.
*Investopedia does not provide tax, investment, or financial services and advice. Readers should consult with a qualified financial professional to determine suitable options and their ramifications given their specific circumstances.*
| If you’re falling behind on your student loans, you need to get help fast. Miss enough payments and you could face serious consequences, including damage to your credit score, having your wages garnished, getting sued, or having your tax refund seized.
Fortunately, both federal and private loan servicers have ways to help borrowers get back on track. Nonprofit organizations can assist, too. And if those options don’t work, then hiring a knowledgeable attorney could be money well spent.
Key Takeaways
If you’re struggling to pay back your student loan debt, you can apply for an income-driven repayment (IDR) plan for long-term relief.You can also seek deferment or forbearance for a short-term break.If you’ve defaulted on your student loans, you can rehabilitate or consolidate them.You may be able to refinance any private student loans you have.You can also get advice from a nonprofit credit counseling agency.
Income-Driven Repayment (IDR)
If you can’t afford your current monthly student loan payments, but a lower payment might be doable, then you have several options.
If you have federal student loans, consider applying for an income-driven repayment (IDR) plan. That can be a good choice if your current income is low relative to your student loan debt. Your payment under an IDR plan could be as low as $0. Each year, you will need to recertify your income with the federal government, and your monthly payment will be adjusted based on your income and family size.
There are four different IDR plans; the ones available to you will depend on the type of federal student loans you have.
When you choose an IDR plan, you’ll probably pay more interest in the long run, as you’ll owe money for a longer period and be paying down the principal more slowly than if you were on a standard 10-year repayment plan.
IDR plans forgive your remaining balance after 20 or 25 years of payments, but you may owe federal income tax on the forgiven sum. It’s a good idea to set aside a little money each year so you’ll be able to pay that bill one day.
Income-driven repayment plans are free to apply for (although some private companies will try to get you to pay a fee). You can complete the paperwork yourself in about 10 minutes.
Income-driven repayment won’t solve everyone’s student loan problems. Some borrowers find that they have so many mandatory expenses, such as taxes and child care, that they still can’t afford the payments.
And if your loans are in default, then you aren’t eligible for IDR (or for deferment or forbearance, for that matter). You’ll first need to fix the default through loan rehabilitation or consolidation, as explained below.
Deferment and Forbearance
Deferment and forbearance are two ways to temporarily stop making payments or lower your payments on federal student loans. Some private lenders offer one or both, with different rules.
Borrowers with subsidized federal loans or federal Perkins loans don’t have to pay the interest that accrues during deferment.
Forbearance, on the other hand, does not stop interest from accruing on any type of federal student loan. Private lenders decide how to handle interest accrual under deferment or forbearance.
In November 2022, the U.S. Department of Education extended the pause on federal student loan payments in response to a federal court order blocking the White House’s student loan forgiveness plan. However, the plan was never approved, and student loan payments and interest relief ended in September 2023 and resumed in October 2023.
Your lender or loan servicer will require you to meet certain conditions before it approves your request for deferment or forbearance. For example, federal student loan borrowers may be able to take a break from making payments if they are unemployed, experiencing economic hardship, undergoing or recovering from cancer treatment, or serving on active military duty.
Delinquency and Default
Either deferment or forbearance may be better than letting your loans become delinquent. Once your payment is 90 days late, your loan servicer will report your delinquent payments to the three major credit bureaus, which can hurt your credit score. That will make it harder to get other forms of credit or do anything else that requires a credit check, such as renting an apartment or getting a job.
Going into default is even worse. The timing varies by loan type, but for federal direct loans and Federal Family Education Loans, the debt is in default if it is 270 days late. For private student loans, default usually happens as soon as you miss a single payment.
The consequences of default will be defined in your loan agreement. Your entire balance can become due immediately, your lender can sue you, and your wages can be garnished, among other consequences.
If Student Loans Are Part of a Bigger Financial Problem
A nonprofit credit counseling organization can work with you to come up with a personalized plan to repay your student loans and any other debts. You may have to pay a fee for this help.
A reputable place to search for help is the National Foundation for Credit Counseling. A credit counselor can offer guidance on your entire financial picture, not just getting your student loans under control.
When Your Federal Student Loans Are in Default
If your federal student loans are in default, you can either enter the federal student loan rehabilitation program or try loan consolidation.
Loan Rehabilitation
The federal student loan rehabilitation program requires you to make nine payments within 10 consecutive months. You’ll need to work with your loan servicer to determine your required payment, which will be based on your disposable income.
You’ll also need to provide proof of your income and possibly your expenses. The Federal Student Aid website says your payments could be as low as $5 per month under a rehabilitation plan.
Once your loan is rehabilitated, you can apply for deferment, forbearance, or income-driven repayment. Your credit report will no longer show a default, though it will still show the late payments that led to your default.
You only get one chance to rehabilitate a loan. In addition, your loan will continue to accrue interest during rehabilitation, and you may have to pay collection fees as well.
Loan Consolidation
Loan consolidation is another option for getting out of default. You may be able to use a federal direct consolidation loan to pay off your defaulted loan. You can then set up an income-driven repayment plan for your new consolidation loan if you need to.
You’ll need to make three consecutive monthly payments on your defaulted loan before you can consolidate it. Your loan servicer will base the amount of the payments on your current financial circumstances, so they may be less than you were required to pay in the past.
Consolidation will get you out of default sooner, but it won’t remove the default from your credit report. It also comes with possible collection fees and additional accrued interest.
When Your Private Student Loans Are in Default
There’s no simple path for getting out of default when it comes to private student loans. You’ll have to work out something with your lender or hire an attorney. Negotiating a settlement for less than you owe may be an option. To find an attorney, try the American Bar Association’s website, the National Association of Consumer Advocates, or LawHelp.org.
If you can’t afford to have an attorney represent you, consider paying for an hour or two of advice so you can learn what you need to do to represent yourself. You can expect to pay a few hundred dollars for this service vs. several thousand to have an attorney represent you.
Also, be careful to avoid student loan scams when you’re looking for help.
Student Loan Refinancing
If you have multiple federal student loans, you can apply for a consolidation loan, as noted above. The interest rate will be based on your loans’ original interest rates.
Unfortunately, you can’t consolidate your loans into a new loan with a lower interest rate, even if rates are lower now. To get that lower rate, you would need to refinance your federal student loans into a private student loan. You can also refinance private student loans into a new private student loan.
It can make sense to refinance if doing so will significantly lower your interest rate and make your monthly payment more affordable. It can also help you repay your loan faster and pay less interest over the life of the loan.
However, if you refinance a federal loan into a private loan, you will lose the unique options available with federal loans: income-driven repayment, loan forgiveness, loan rehabilitation, and possibly deferment and forbearance. So, think carefully before giving up these benefits.
Refinancing might also mean paying an origination fee, which will vary depending on the lender. Many private student lenders don’t charge them, but if they do, the fee will usually be added to your loan balance or subtracted from your loan proceeds.
Private student refinance loans can have fixed or variable interest rates. If you’re struggling with your current payments, it may be tempting to refinance into a variable-rate loan because it will probably have a lower interest rate than a fixed-rate one. Before you do, find out how often the loan’s rate can increase and by how much. Also, find out what the floor and ceiling are on the variable interest rate. You’ll need to consider whether you would be able to afford the payments if the rate goes up.
You’ll have to have good credit to refinance at a favorable interest rate. If you’ve already fallen far behind and your credit score has plunged, then refinancing might not be an option for you.
You also need to have a steady income to refinance, so if you’re unemployed, you’ll have to look at other options.
How Can I Get Help with Student Loan Debt?
Some ways to get help with student loan debt include lowering your payments through an income-driven payment (IDR) plan, paying less temporarily via a deferment or forbearance agreement, and looking into debt cancellation or forgiveness programs. In any case, talking to a credit counselor at a nonprofit service is a good way to start.
How Do I Get Help with Student Loan Forgiveness?
Student loan forgiveness is only available to individuals with federal student loans, not private loans. Applying to the different programs that offer student loan forgiveness and meeting the criteria for qualification can lead to student loan forgiveness.There are a variety of programs available, including income-driven forgiveness, public service loan forgiveness, teacher loan forgiveness, military student loan forgiveness, and state-sponsored repayment programs.
How Might Canceling Student Loan Debt Help America?
Proponents of canceling student loan debt argue that it would help America in many ways, including encouraging people to seek higher levels of education, increasing savings rates, improving the quality of food consumption, increasing birth levels, boosting home purchases, and encouraging business creation.
The Bottom Line
Ignoring financial problems never makes them go away, and it often makes them worse. If you default on your federal student loans, the government has the power to seize your income tax refund and garnish your wages and even Social Security benefits.
Falling too far behind on any type of student loan, federal or private, can also seriously hurt your credit. It can also cause your lender to take the seemingly nonsensical and drastic step of accelerating your loan, making the entire balance due immediately.
You can prevent the situation from getting worse and put your loans back on track with one of the options described above. If your situation truly seems hopeless, trying to get your student loans discharged in bankruptcy might be your best option. That’s possible, but not easy.
Investopedia does not provide tax, investment, or financial services and advice. Readers should consult with a qualified financial professional to determine suitable options and their ramifications given their specific circumstances.
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https://www.investopedia.com/terms/d/dealer-financing.asp | Dealer Financing: 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-dealer-financing"></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 Dealer Financing? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp" rel="noopener noreferrer">bank</a> or other third-party financial institution. The bank purchases these loans at a discount and then collects principle and interest payments from the borrower. This is also called an indirect loan.
</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>Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a bank or other third-party financial institution.</li><li>A well-known example of dealer financing is auto dealers that offer car purchase financing. </li><li>The buy rate is the interest rate that the financial institution quotes to the dealer. The actual interest rate the dealer offers to the customer, however, can be set higher.</li><li>Auto dealers market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-dealer-financing"></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 Dealer Financing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A well-known example of dealer financing is auto dealers that offer car purchase financing. Many car dealers mark up the finance company's interest rate and keep the difference as additional profit.
</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-how-retailers-benefit-from-dealer-financing"></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"> How Retailers Benefit from Dealer Financing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The so-called buy rate is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp" rel="noopener noreferrer">interest rate</a> that the financial institution quotes to the dealer for the financing. The actual interest rate the dealer offers to the customer, however, can be set higher than what the buy rate is. Dealers are not obligated to offer customers the best available interest rate, which allows them to set higher rates or longer terms on financing. An <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761" rel="noopener noreferrer">auto loan calculator</a> can be used to determine what the actual optimal interest rate would be for a car, based on its price. The dealer might own the actual loan rather than transfer it to other parties.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> By offering loans at the dealership, an auto retailer may be able to secure the sale of a vehicle more readily than waiting for potential buyers to arrange financing on their own. The dealer will forward the customer’s information to the financial institutions they have financial arrangements with.
</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"> While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so. Auto dealers often market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors. The interest rates may be higher for such loans or other tradeoffs may be incurred. In some instances, dealers who offer such financing to customers who may be considered high-risk might also install devices in the vehicle that will disable it if payments are not received on time or to aid in the finding and repossession of the vehicle if necessary.
</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>While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Other retailers, such as boat dealers, might offer this type of financing as well. By granting customers access to financing, retailers can increase the likelihood of a purchase and move more inventory. Dealer financing is comparable to credit cards that retailers may offer. The retailer works with a financial institution to provide the financing, but whereas a credit card or a line of credit may be used for a variety of different purchases, a loan is likely to be put in motion for the purchase of a specific item.
</p></div> | ## What Is Dealer Financing?
Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a [bank](https://www.investopedia.com/terms/b/bank.asp) or other third-party financial institution. The bank purchases these loans at a discount and then collects principle and interest payments from the borrower. This is also called an indirect loan.
### Key Takeaways
* Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a bank or other third-party financial institution.
* A well-known example of dealer financing is auto dealers that offer car purchase financing.
* The buy rate is the interest rate that the financial institution quotes to the dealer. The actual interest rate the dealer offers to the customer, however, can be set higher.
* Auto dealers market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors.
## Understanding Dealer Financing
A well-known example of dealer financing is auto dealers that offer car purchase financing. Many car dealers mark up the finance company's interest rate and keep the difference as additional profit.
## How Retailers Benefit from Dealer Financing
The so-called buy rate is the [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) that the financial institution quotes to the dealer for the financing. The actual interest rate the dealer offers to the customer, however, can be set higher than what the buy rate is. Dealers are not obligated to offer customers the best available interest rate, which allows them to set higher rates or longer terms on financing. An [auto loan calculator](https://www.investopedia.com/car-loan-calculator-5084761) can be used to determine what the actual optimal interest rate would be for a car, based on its price. The dealer might own the actual loan rather than transfer it to other parties.
By offering loans at the dealership, an auto retailer may be able to secure the sale of a vehicle more readily than waiting for potential buyers to arrange financing on their own. The dealer will forward the customer’s information to the financial institutions they have financial arrangements with.
While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so. Auto dealers often market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors. The interest rates may be higher for such loans or other tradeoffs may be incurred. In some instances, dealers who offer such financing to customers who may be considered high-risk might also install devices in the vehicle that will disable it if payments are not received on time or to aid in the finding and repossession of the vehicle if necessary.
###
While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so.
Other retailers, such as boat dealers, might offer this type of financing as well. By granting customers access to financing, retailers can increase the likelihood of a purchase and move more inventory. Dealer financing is comparable to credit cards that retailers may offer. The retailer works with a financial institution to provide the financing, but whereas a credit card or a line of credit may be used for a variety of different purchases, a loan is likely to be put in motion for the purchase of a specific item.
| What Is Dealer Financing?
Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a bank or other third-party financial institution. The bank purchases these loans at a discount and then collects principle and interest payments from the borrower. This is also called an indirect loan.
Key Takeaways
Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a bank or other third-party financial institution.A well-known example of dealer financing is auto dealers that offer car purchase financing. The buy rate is the interest rate that the financial institution quotes to the dealer. The actual interest rate the dealer offers to the customer, however, can be set higher.Auto dealers market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors.
Understanding Dealer Financing
A well-known example of dealer financing is auto dealers that offer car purchase financing. Many car dealers mark up the finance company's interest rate and keep the difference as additional profit.
How Retailers Benefit from Dealer Financing
The so-called buy rate is the interest rate that the financial institution quotes to the dealer for the financing. The actual interest rate the dealer offers to the customer, however, can be set higher than what the buy rate is. Dealers are not obligated to offer customers the best available interest rate, which allows them to set higher rates or longer terms on financing. An auto loan calculator can be used to determine what the actual optimal interest rate would be for a car, based on its price. The dealer might own the actual loan rather than transfer it to other parties.
By offering loans at the dealership, an auto retailer may be able to secure the sale of a vehicle more readily than waiting for potential buyers to arrange financing on their own. The dealer will forward the customer’s information to the financial institutions they have financial arrangements with.
While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so. Auto dealers often market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors. The interest rates may be higher for such loans or other tradeoffs may be incurred. In some instances, dealers who offer such financing to customers who may be considered high-risk might also install devices in the vehicle that will disable it if payments are not received on time or to aid in the finding and repossession of the vehicle if necessary.
While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so.
Other retailers, such as boat dealers, might offer this type of financing as well. By granting customers access to financing, retailers can increase the likelihood of a purchase and move more inventory. Dealer financing is comparable to credit cards that retailers may offer. The retailer works with a financial institution to provide the financing, but whereas a credit card or a line of credit may be used for a variety of different purchases, a loan is likely to be put in motion for the purchase of a specific item.
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https://www.investopedia.com/terms/b/bearraid.asp | Bear Raid | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-bear-raid"></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 Bear Raid? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A bear raid is an illegal practice of colluding to push a stock's price lower through concerted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">short selling</a>, while spreading negative rumors about the shorted company. A bear raid is sometimes undertaken by unscrupulous short sellers who want to make a quick buck from their short positions, leveraging social media platforms and online message boards.
</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 bear-raid target is generally a company that is going through a challenging period, since its vulnerable position makes it easy fodder for short sellers. While short selling is legal, coordinated short selling is viewed as market manipulation 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</a> (SEC), and spreading false rumors is tantamount to fraudulent activity.<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>Bear raids are illegal if the short sellers are colluding and spreading false rumors. </li><li>The intent of a bear raid is to force the price down quickly so as to profit from a short position, selling first and buying back at a lower price.</li><li>Bear raids are often used as the scapegoat for stock prices which are falling for legitimate reasons. Short selling is not illegal but may push the price down if short sellers are correct in their concerns about the company or the stock's inflated price.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-a-bear-raid"></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 Bear Raid </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The objective of a bear raid is typically to make <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/windfall-profits.asp">windfall profits</a> in a brief time period through short sales. If the bear raid works and the target stock plunges, short sellers can buy the shares back cheaply on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/open-market.asp">open market</a>. The short sellers make money by selling the shares first, at what they believe is a high price, and then buying them back to close out their position at a lower price. The short sellers profit from the difference.
</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 a typical bear raid, short sellers may conspire beforehand to quietly establish large <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">short positions</a> in the target stock. Since the short interest in the stock increases the risk of a <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> that can inflict substantial losses on the shorts, the short sellers cannot afford to wait patiently for months until their short strategy works out.
</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 next step in the bear raid is akin to a smear campaign, with whispers and rumors about the company spread by unknown sources. These rumors can be anything that portrays the target company in a negative light, such as allegations of accounting fraud, an SEC investigation, an earnings miss, financial difficulties, and so on. The rumors may cause nervous investors to exit the stock in droves, driving the price down further and giving the short sellers the profit they are looking for.
</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 repeal of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uptick.asp">uptick</a> rule in July 2007 is regarded by some experts as having made it easier for short sellers to embark on bear raids. The collapse or near-collapse of a number of leading <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstitution.asp">financial institutions</a> in 2008 is attributed in some circles to bear raids.
</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"> While bear raids may involve collusion and false rumors, which is illegal, there are also legal bear raids that can occur when people start shorting a large amount of stock, individually, due to concerns with a company's direction. They may also voice their legitimate concerns. As long as the information is not intentionally false and the shorts are not colluding with each other, a stock may see downward pressure due to the selling and increasing negative news. Many people will refer to this natural market behavior as a bear raid.
</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-bear-raids-as-an-excuse-for-falling-stock-prices"></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"> Bear Raids as an Excuse for Falling Stock Prices </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> When a stock price falls, especially when the company is embroiled in some controversy, owners of the stock often attribute the falling price to bears or short sellers. Short sellers have been at least partially blamed for most major <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock-market-crash.asp">stock market crashes</a> in history. Typically short sellers are not the cause of falling prices, people who are selling current holdings are. Short interest can be tracked via the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortinterest.asp">short interest</a> figures.
</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"> Yet, short sellers actually play a pivotal role in the markets. It is often the short sellers who reveal or bring to light major problems within companies. In many cases, these are not fabricated stories meant to temporarily push the price down, but actual facts which could greatly affect the value of the company. While most people are pushing good news to drive prices up, the bears present the opposite side of the argument, helping stocks stay closer to their true value.
</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"> Therefore, it is important to differentiate between unsubstantiated rumors and facts. While many falling stocks will be blamed on bear raiders, the key for investors is discerning whether the company is in real trouble or if the sell-off is a temporary hiccup or due to other factors such as a market-wide or sector-wide <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sell-off.asp">selloff</a>.
</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"> Not all falling stocks are caused by bear raids. And sometimes a bear raid may have a legitimate cause, as the company may actually be in serious trouble or the stock price is too inflated yet it hasn't become obvious to the masses yet. The key difference between an illegal bear raid and short sellers expressing their concern about a company is whether the short sellers have colluded and are spreading false information. Sometimes this isn't known for some time after the raid begins.
</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-example-of-a-legal-bear-raid-in-the-pound-sterling"></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"> Example of a Legal Bear Raid in the Pound Sterling </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> One of the most well-known trades in history is commonly referred to as a bear raid, or currency raid, yet it was legal because it didn't involve collusion and was based on sound reasoning and not false rumors.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In 1992 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/soros.asp">George Soros</a> began selling the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/11/five-reports-affect-the-pound.asp">British pound</a>. In currencies, while the word "shorting" is used, one currency is just exchanged for another currency. So by selling pounds, Soros was buying other currencies against the pound.<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_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Soros was selling pounds because he believed that Britain would be unable to hold their currency within the band stipulated by the European <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchange-rate-mechanism.asp">Exchange Rate Mechanism</a> (ERM). This mechanism was designed to stabilize exchange rates in Europe and required that the pound stay within 6% of other ERM currencies. The problem was that Britain had an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> rate far higher than some other countries in the ERM, like Germany.
</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 ERM forced Britain to hold their currency up, within the band, at artificially high levels. Soros saw this and believed that ultimately Britain would be unable to hold the currency in the band for long and would eventually have to abandon the ERM. With the currency no longer artificially inflated by Britain buying pounds in an effort to hold the currency in the band, the pound would fall.
</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"> On September 16, 1992, Britain did abandon the ERM after several last-ditch attempts to support the currency—like raising interest rates from 10% to 12%, and then saying they would raise the rates to 15%, although that last raise didn't come to fruition.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> After leaving the ERM the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/forex/g/gbp-usd-british-pound-us-dollar-currency-pair.asp">GBPUSD</a> fell more than 25% by December.<span class="ql-inline-citation" data-cite="4"></span> The legal bear raid was a success, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp">Soros made approximately $1 billion</a> for seeing the problem with the pound.<span class="ql-inline-citation" data-cite="5"></span>
</p></div> | ## What Is a Bear Raid?
A bear raid is an illegal practice of colluding to push a stock's price lower through concerted [short selling](https://www.investopedia.com/terms/s/shortselling.asp), while spreading negative rumors about the shorted company. A bear raid is sometimes undertaken by unscrupulous short sellers who want to make a quick buck from their short positions, leveraging social media platforms and online message boards.
A bear-raid target is generally a company that is going through a challenging period, since its vulnerable position makes it easy fodder for short sellers. While short selling is legal, coordinated short selling is viewed as market manipulation by the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC), and spreading false rumors is tantamount to fraudulent activity.
### Key Takeaways
* Bear raids are illegal if the short sellers are colluding and spreading false rumors.
* The intent of a bear raid is to force the price down quickly so as to profit from a short position, selling first and buying back at a lower price.
* Bear raids are often used as the scapegoat for stock prices which are falling for legitimate reasons. Short selling is not illegal but may push the price down if short sellers are correct in their concerns about the company or the stock's inflated price.
## Understanding a Bear Raid
The objective of a bear raid is typically to make [windfall profits](https://www.investopedia.com/terms/w/windfall-profits.asp) in a brief time period through short sales. If the bear raid works and the target stock plunges, short sellers can buy the shares back cheaply on the [open market](https://www.investopedia.com/terms/o/open-market.asp). The short sellers make money by selling the shares first, at what they believe is a high price, and then buying them back to close out their position at a lower price. The short sellers profit from the difference.
In a typical bear raid, short sellers may conspire beforehand to quietly establish large [short positions](https://www.investopedia.com/terms/s/short.asp) in the target stock. Since the short interest in the stock increases the risk of a [short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp) that can inflict substantial losses on the shorts, the short sellers cannot afford to wait patiently for months until their short strategy works out.
The next step in the bear raid is akin to a smear campaign, with whispers and rumors about the company spread by unknown sources. These rumors can be anything that portrays the target company in a negative light, such as allegations of accounting fraud, an SEC investigation, an earnings miss, financial difficulties, and so on. The rumors may cause nervous investors to exit the stock in droves, driving the price down further and giving the short sellers the profit they are looking for.
## Special Considerations
The repeal of the [uptick](https://www.investopedia.com/terms/u/uptick.asp) rule in July 2007 is regarded by some experts as having made it easier for short sellers to embark on bear raids. The collapse or near-collapse of a number of leading [financial institutions](https://www.investopedia.com/terms/f/financialinstitution.asp) in 2008 is attributed in some circles to bear raids.
While bear raids may involve collusion and false rumors, which is illegal, there are also legal bear raids that can occur when people start shorting a large amount of stock, individually, due to concerns with a company's direction. They may also voice their legitimate concerns. As long as the information is not intentionally false and the shorts are not colluding with each other, a stock may see downward pressure due to the selling and increasing negative news. Many people will refer to this natural market behavior as a bear raid.
## Bear Raids as an Excuse for Falling Stock Prices
When a stock price falls, especially when the company is embroiled in some controversy, owners of the stock often attribute the falling price to bears or short sellers. Short sellers have been at least partially blamed for most major [stock market crashes](https://www.investopedia.com/terms/s/stock-market-crash.asp) in history. Typically short sellers are not the cause of falling prices, people who are selling current holdings are. Short interest can be tracked via the [short interest](https://www.investopedia.com/terms/s/shortinterest.asp) figures.
Yet, short sellers actually play a pivotal role in the markets. It is often the short sellers who reveal or bring to light major problems within companies. In many cases, these are not fabricated stories meant to temporarily push the price down, but actual facts which could greatly affect the value of the company. While most people are pushing good news to drive prices up, the bears present the opposite side of the argument, helping stocks stay closer to their true value.
Therefore, it is important to differentiate between unsubstantiated rumors and facts. While many falling stocks will be blamed on bear raiders, the key for investors is discerning whether the company is in real trouble or if the sell-off is a temporary hiccup or due to other factors such as a market-wide or sector-wide [selloff](https://www.investopedia.com/terms/s/sell-off.asp).
Not all falling stocks are caused by bear raids. And sometimes a bear raid may have a legitimate cause, as the company may actually be in serious trouble or the stock price is too inflated yet it hasn't become obvious to the masses yet. The key difference between an illegal bear raid and short sellers expressing their concern about a company is whether the short sellers have colluded and are spreading false information. Sometimes this isn't known for some time after the raid begins.
## Example of a Legal Bear Raid in the Pound Sterling
One of the most well-known trades in history is commonly referred to as a bear raid, or currency raid, yet it was legal because it didn't involve collusion and was based on sound reasoning and not false rumors.
In 1992 [George Soros](https://www.investopedia.com/terms/g/soros.asp) began selling the [British pound](https://www.investopedia.com/articles/forex/11/five-reports-affect-the-pound.asp). In currencies, while the word "shorting" is used, one currency is just exchanged for another currency. So by selling pounds, Soros was buying other currencies against the pound.
Soros was selling pounds because he believed that Britain would be unable to hold their currency within the band stipulated by the European [Exchange Rate Mechanism](https://www.investopedia.com/terms/e/exchange-rate-mechanism.asp) (ERM). This mechanism was designed to stabilize exchange rates in Europe and required that the pound stay within 6% of other ERM currencies. The problem was that Britain had an [inflation](https://www.investopedia.com/terms/i/inflation.asp) rate far higher than some other countries in the ERM, like Germany.
The ERM forced Britain to hold their currency up, within the band, at artificially high levels. Soros saw this and believed that ultimately Britain would be unable to hold the currency in the band for long and would eventually have to abandon the ERM. With the currency no longer artificially inflated by Britain buying pounds in an effort to hold the currency in the band, the pound would fall.
On September 16, 1992, Britain did abandon the ERM after several last-ditch attempts to support the currency—like raising interest rates from 10% to 12%, and then saying they would raise the rates to 15%, although that last raise didn't come to fruition.
After leaving the ERM the [GBPUSD](https://www.investopedia.com/terms/forex/g/gbp-usd-british-pound-us-dollar-currency-pair.asp) fell more than 25% by December. The legal bear raid was a success, and [Soros made approximately $1 billion](https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp) for seeing the problem with the pound.
| What Is a Bear Raid?
A bear raid is an illegal practice of colluding to push a stock's price lower through concerted short selling, while spreading negative rumors about the shorted company. A bear raid is sometimes undertaken by unscrupulous short sellers who want to make a quick buck from their short positions, leveraging social media platforms and online message boards.
A bear-raid target is generally a company that is going through a challenging period, since its vulnerable position makes it easy fodder for short sellers. While short selling is legal, coordinated short selling is viewed as market manipulation by the Securities and Exchange Commission (SEC), and spreading false rumors is tantamount to fraudulent activity.
Key Takeaways
Bear raids are illegal if the short sellers are colluding and spreading false rumors. The intent of a bear raid is to force the price down quickly so as to profit from a short position, selling first and buying back at a lower price.Bear raids are often used as the scapegoat for stock prices which are falling for legitimate reasons. Short selling is not illegal but may push the price down if short sellers are correct in their concerns about the company or the stock's inflated price.
Understanding a Bear Raid
The objective of a bear raid is typically to make windfall profits in a brief time period through short sales. If the bear raid works and the target stock plunges, short sellers can buy the shares back cheaply on the open market. The short sellers make money by selling the shares first, at what they believe is a high price, and then buying them back to close out their position at a lower price. The short sellers profit from the difference.
In a typical bear raid, short sellers may conspire beforehand to quietly establish large short positions in the target stock. Since the short interest in the stock increases the risk of a short squeeze that can inflict substantial losses on the shorts, the short sellers cannot afford to wait patiently for months until their short strategy works out.
The next step in the bear raid is akin to a smear campaign, with whispers and rumors about the company spread by unknown sources. These rumors can be anything that portrays the target company in a negative light, such as allegations of accounting fraud, an SEC investigation, an earnings miss, financial difficulties, and so on. The rumors may cause nervous investors to exit the stock in droves, driving the price down further and giving the short sellers the profit they are looking for.
Special Considerations
The repeal of the uptick rule in July 2007 is regarded by some experts as having made it easier for short sellers to embark on bear raids. The collapse or near-collapse of a number of leading financial institutions in 2008 is attributed in some circles to bear raids.
While bear raids may involve collusion and false rumors, which is illegal, there are also legal bear raids that can occur when people start shorting a large amount of stock, individually, due to concerns with a company's direction. They may also voice their legitimate concerns. As long as the information is not intentionally false and the shorts are not colluding with each other, a stock may see downward pressure due to the selling and increasing negative news. Many people will refer to this natural market behavior as a bear raid.
Bear Raids as an Excuse for Falling Stock Prices
When a stock price falls, especially when the company is embroiled in some controversy, owners of the stock often attribute the falling price to bears or short sellers. Short sellers have been at least partially blamed for most major stock market crashes in history. Typically short sellers are not the cause of falling prices, people who are selling current holdings are. Short interest can be tracked via the short interest figures.
Yet, short sellers actually play a pivotal role in the markets. It is often the short sellers who reveal or bring to light major problems within companies. In many cases, these are not fabricated stories meant to temporarily push the price down, but actual facts which could greatly affect the value of the company. While most people are pushing good news to drive prices up, the bears present the opposite side of the argument, helping stocks stay closer to their true value.
Therefore, it is important to differentiate between unsubstantiated rumors and facts. While many falling stocks will be blamed on bear raiders, the key for investors is discerning whether the company is in real trouble or if the sell-off is a temporary hiccup or due to other factors such as a market-wide or sector-wide selloff.
Not all falling stocks are caused by bear raids. And sometimes a bear raid may have a legitimate cause, as the company may actually be in serious trouble or the stock price is too inflated yet it hasn't become obvious to the masses yet. The key difference between an illegal bear raid and short sellers expressing their concern about a company is whether the short sellers have colluded and are spreading false information. Sometimes this isn't known for some time after the raid begins.
Example of a Legal Bear Raid in the Pound Sterling
One of the most well-known trades in history is commonly referred to as a bear raid, or currency raid, yet it was legal because it didn't involve collusion and was based on sound reasoning and not false rumors.
In 1992 George Soros began selling the British pound. In currencies, while the word "shorting" is used, one currency is just exchanged for another currency. So by selling pounds, Soros was buying other currencies against the pound.
Soros was selling pounds because he believed that Britain would be unable to hold their currency within the band stipulated by the European Exchange Rate Mechanism (ERM). This mechanism was designed to stabilize exchange rates in Europe and required that the pound stay within 6% of other ERM currencies. The problem was that Britain had an inflation rate far higher than some other countries in the ERM, like Germany.
The ERM forced Britain to hold their currency up, within the band, at artificially high levels. Soros saw this and believed that ultimately Britain would be unable to hold the currency in the band for long and would eventually have to abandon the ERM. With the currency no longer artificially inflated by Britain buying pounds in an effort to hold the currency in the band, the pound would fall.
On September 16, 1992, Britain did abandon the ERM after several last-ditch attempts to support the currency—like raising interest rates from 10% to 12%, and then saying they would raise the rates to 15%, although that last raise didn't come to fruition.
After leaving the ERM the GBPUSD fell more than 25% by December. The legal bear raid was a success, and Soros made approximately $1 billion for seeing the problem with the pound.
| [
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],
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[
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[
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"https://www.investopedia.com/articles/forex/11/five-reports-affect-the-pound.asp"
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[
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[
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https://www.investopedia.com/etp-vs-etf-what-is-the-difference-8557256 | Exchange-Traded Product (ETP) vs. Exchange-Traded Fund (ETF): 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-exchange-traded-products-etps-vs-exchange-traded-funds-etfs-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"> Exchange-Traded Products (ETPs) vs. Exchange-Traded Funds (ETFs): An Overview </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Exchange-traded products (ETPs) offer investors diversity and liquidity through pooled investments that trade on stock exchanges, akin to individual stocks. But ETPs are not stocks; they are sophisticated financial instruments that can pool a variety of investment types, including funds and commodities, traded like stocks.
</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"> Among ETPs, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> are the best known, and offer flexibility, cost efficiency, and comparatively lower fees. ETFs often mirror the performance of indexes, sectors, or commodities prices, providing a transparent and effective way to invest in entire markets or specific economic niches without having to buy the underlying assets.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Exchange-traded products (ETPs) are accessible investments offering diversification and liquidity.</li><li>Exchange-traded funds (ETFs) are a specific type of ETP that tracks an underlying index and can be bought and sold on an exchange throughout the trading day.</li><li>ETPs also include other exchange-traded instruments, such as exchange-traded notes (ETNs) and exchange-traded commodities (ETCs).</li><li>Factors to consider when choosing between ETPs and ETFs include expense ratios, liquidity options, diversification, and regulatory oversight.</li><li>Investors should thoroughly research any ETP or ETF and seek professional advice before investing in them.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> With ETPs, the pooling of different investment types enables both seasoned and novice <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a> to access a broad range of assets, from traditional stocks and bonds to more niche markets like commodities or specific industry sectors, all with the ease of buying and selling shares throughout the trading day. ETPs not only provide a platform for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> diversification but also enhance the financial ecosystem’s adaptability, allowing investors to respond swiftly to market changes and opportunities.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> ETPs include other securities beyond ETFs, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etn.asp">exchange-traded notes (ETNs)</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchangetraded-commodity-etc.asp">exchange-traded commodities (ETCs)</a>. ETNs are debt instruments that track an index while carrying credit risk, while ETCs offer exposure to commodities and currencies, but can face unique risks discussed below.
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<span class="heading-toc" id="toc-exchange-traded-products-etps"></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"> Exchange-Traded Products (ETPs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> ETPs bundle securities into a portfolio to provide exposure to a wide array of assets, all while trading like stocks on major stock exchanges. These products are designed to offer diversified exposure, high liquidity, transparency, and cost efficiency.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The first ETP is thought to be the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spiders.asp">Standard & Poor’s Depositary Receipts (SPDRs), commonly known as “Spiders.”</a> The first SPDR was introduced in 1993 and is now known by its ticker symbol, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SPY">SPY</a>.<span class="ql-inline-citation" data-cite="2"></span> <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp">This product</a> was designed to track the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040215/what-does-sp-500-index-measure-and-how-it-calculated.asp">S&P 500 Index</a>, allowing investors to buy shares in a portfolio that mirrors the performance of the S&P 500.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The approval process for the first ETP was a significant milestone in financial markets, requiring collaboration among the American Stock Exchange, the Securities and Exchange Commission (SEC), and State Street Global Advisors, which developed and sponsored the ETP.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Before SPY’s debut, trading the S&P 500 Index was difficult, and investors had to dig into each component stock. SPY would be efficient for gaining exposure to the broad index through a single product. Given the novelty of this product, there were regulatory and logistical hurdles to overcome. Until then, stock exchanges focused on individual company stocks rather than pooled investment products.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> SPDRs adopted a unique share creation/redemption mechanism to assuage regulators to keep their prices closely aligned with the index it tracked. This mechanism allowed large broker-dealers to exchange underlying stocks for shares of the SPY ETP with the fund manager.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> SPDRs paved the way for the ETP industry by proving the appeal and feasibility of packaged financial products that supply diversified exposure to indexes through a publicly traded security. SPY remains the world’s largest and most actively traded ETP, with an average of over 77.5 million shares exchanged daily and $490 billion in assets as of the first quarter (Q1) of 2024.<span class="ql-inline-citation" data-cite="3"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Key Characteristics of ETPs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> ETPs have these main elements:<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0">
<li><strong>Basket of securities in one security</strong>: Each ETP contains a portfolio or basket of assets rather than a single security. The basket can include stocks, bonds, commodities, currencies, and more. This provides instant <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversification</a>.</li>
<li><strong>Traded on exchanges</strong>: ETPs trade on major stock exchanges like individual stocks, allowing investors to buy and sell them throughout the trading day via their broker.</li>
<li><strong>Intraday pricing</strong>: The price of an ETP fluctuates throughout the day based on supply and demand, allowing for real-time pricing and trading flexibility.</li>
<li><strong>Cost-effective</strong>: A pivotal feature of ETPs is that they often offer low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managementfee.asp">management fees</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratios</a>, making them less costly to trade than mutual funds or even the underlying securities they hold. In addition, many brokerages today offer commission-free trading for these products.</li>
</ul>
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<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"> Benefits of ETPs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Several advantages make ETPs an appealing investment vehicle:<span class="ql-inline-citation" data-cite="12"></span><span class="ql-inline-citation" data-cite="11"></span>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0">
<li><strong>Diversification</strong>: ETPs provide instant diversification across asset classes, market sectors, industries, geographic regions, and more. Investors gain broad exposure through a single ticker.</li>
<li><strong>Liquidity</strong>: The ability to trade ETPs seamlessly throughout the day on major exchanges provides constant <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>. This distinguishes them from mutual funds that trade just once a day.</li>
<li><strong>Low costs</strong>: ETPs have lower expense ratios than actively managed mutual funds since they passively track an index. This means saving substantially on fees.</li>
<li><strong>Tax efficiency</strong>: ETPs are structured in a tax-efficient manner compared with mutual funds in most cases, saving investors further costs.</li>
</ul>
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<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"> ETP Regulations </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> While they may be structured differently, all ETPs in the United States are regulated by the SEC for investor protection and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transparency.asp">transparency</a>. The SEC reviews ETP prospectuses, requires regular disclosures, oversees market trading, and enforces rules around practices like manipulation and fraud. This oversight applies across the ETP spectrum, no matter its structure.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> However, the level of oversight depends on the type of ETP. For example, ETNs operate as <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> securities issued by financial institutions. This differs from ETFs, which directly hold underlying assets.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> As a debt instrument, ETNs carry credit risk should the issuing institution default. As a result, the SEC monitors ETNs more closely than it does the diversification and tracking error risks of ETFs.<span class="ql-inline-citation" data-cite="4"></span> While both are ETPs, the SEC tailors its approach based on each structure’s characteristics to safeguard investors.
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<span class="heading-toc" id="toc-exchange-traded-funds-etfs"></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"> Exchange-Traded Funds (ETFs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> ETFs are popular financial instruments designed to offer investors an easy and efficient way to gain diversified exposure to an entire index or market segment through a single trade. They are easily the most traded and best-known of the ETPs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Unlike mutual funds, ETFs trade on stock exchanges like equities. This gives ETFs the advantage of continuous pricing and trading throughout the day. ETFs hold a basket of assets that can include stocks across various sectors and industries, government and corporate bonds, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ung.asp">commodities like natural gas</a> or precious metals, and foreign currencies. The basket of assets held by an ETF is carefully selected and weighted to closely replicate the performance of a specific underlying index or benchmark.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> For example, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/total-stock-fund.asp">total stock market ETF</a> would hold hundreds or even thousands of different stocks in proportion to their weight in a broad stock market index. By buying a share of the ETF, an investor instantly gains diversified exposure to the returns of the entire equity market rather than buying each stock separately.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> ETFs offer efficient, liquid, low-cost market access in a transparent, tax-efficient vehicle. Investors can also choose from various ETFs targeting more specialized market sectors based on their financial goals and risk tolerance.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-subheading__text"> Types of ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> ETFs track many different market segments. Here are the most common:<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="12"></span>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0">
<li><strong>Stock index ETFs</strong>: These <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index-etf.asp">track indexes</a> like the S&P 500, Nasdaq 100, Dow Jones Industrial Average, etc.</li>
<li><strong>Industry/sector-specific ETFs</strong>: These focus on and track specific industries or sectors like technology or financials.</li>
<li><strong>Bond ETFs</strong>: These track government, corporate, or municipal bond indexes.</li>
<li><strong>Commodity ETFs</strong>: These track the prices of gold, silver, oil, grains, and other commodities. They either directly hold these commodities or use derivative products like <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a>.</li>
<li><strong>Currency ETFs</strong>: These track foreign currency exchange rates.</li>
<li><strong>Inverse ETFs</strong>: These furnish returns that move the opposite of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a>. This allows for short-market exposure.</li>
<li><strong>Leveraged ETFs</strong>: These want multiple returns, such as plus or minus two or three (or more) times the return of an underlying index or asset.</li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/understanding-cryptocurrency-etfs/"><strong>Crypto ETFs</strong></a>: These track one or more major cryptocurrencies such as Bitcoin or Ethereum. They may directly hold cryptocurrencies or use <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> contracts to gain exposure.</li>
</ul>
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<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_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>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">Difference Among ETFs, Mutual Funds, and Single Stocks</th>
</tr>
<tr>
<th>Feature</th>
<th>ETFs</th>
<th>Mutual Funds</th>
<th>Stocks</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<th>Pricing/Trading</th>
<td>Intraday pricing and trading</td>
<td>End-of-day pricing; trades once per day</td>
<td>Intraday pricing and trading</td>
</tr>
<tr>
<th>Costs</th>
<td>Lower expense ratios than active mutual funds</td>
<td>Typically higher expense ratios</td>
<td>May have commission fees on trades</td>
</tr>
<tr>
<th>Tax Efficiency</th>
<td>More tax-efficient in most cases</td>
<td>Can have capital gains distributions</td>
<td>Taxes on dividends and capital gains</td>
</tr>
<tr>
<th>Diversification</th>
<td>Holds basket of securities</td>
<td>Holds basket of securities</td>
<td>A single security</td>
</tr>
<tr>
<th>Risk Profile</th>
<td>Potentially lower volatility than individual stocks because of multiple holdings</td>
<td>Often lower volatility than individual stocks</td>
<td>Higher volatility as a single security</td>
</tr>
<tr>
<th>Transparency</th>
<td>Full portfolio holdings disclosed daily</td>
<td>Periodic portfolio disclosures</td>
<td>Public filings from a single company</td>
</tr>
<tr>
<th>Index Tracking</th>
<td>Follows underlying index</td>
<td>Actively managed or passive index tracking</td>
<td>Follows the performance of a single company</td>
</tr>
</tbody>
</table>
</div></figure>
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<span class="heading-toc" id="toc-other-types-of-etps"></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"> Other Types of ETPs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> In addition to ETFs, other types of ETPs include ETNs and exchange-traded commodities (ETCs).
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-subheading__text"> Exchange-Traded Notes (ETNs) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> ETNs combine bond investing with the tradability of stocks. Unlike ETFs, which hold underlying assets, ETNs are structured as unsecured debt securities issued by financial institutions. These notes promise to pay the holder a return based on the performance of a market index or other reference measure, minus applicable fees, at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a>.<span class="ql-inline-citation" data-cite="12"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> ETNs, however, have some unique risks and benefits:<span class="ql-inline-citation" data-cite="14"></span><span class="ql-inline-citation" data-cite="4"></span>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0">
<li><strong>Credit risk</strong>: Since ETNs are debt instruments, their value is dependent, in part, on the creditworthiness of the issuing bank. If the issuer faces financial difficulties, the ETN could lose value, no matter the performance of the underlying index.</li>
<li><strong>Price tracking</strong>: ETNs aim to closely track the performance of their underlying index or benchmark. They do not experience <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trackingerror.asp">tracking errors</a> the same way that ETFs might.</li>
<li><strong>Liquidity risk</strong>: Some ETNs may have lower trading volumes than ETFs, potentially leading to wider bid-ask spreads and impacting the ease with which they can be bought or sold at desired prices.</li>
<li><strong>Tax efficiency</strong>: ETNs can offer unique tax benefits in certain situations. For instance, since they do not distribute dividends, investors might not incur taxes until the sale of the ETN or its maturity, potentially deferring tax liabilities.</li>
<li><strong>Market exposure</strong>: ETNs can provide exposure to many assets, including hard-to-reach markets and strategies. This includes commodities, emerging markets, private equity, or specific investment strategies that might be difficult or costly to access directly.</li>
</ul>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-subheading__text"> Exchange-Traded Commodities (ETCs) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> ETCs offer exposure to commodities, including metals, energy, and agricultural products, without directly investing in physical commodities or futures contracts. ETCs track the commodity’s price or a basket of commodities, allowing investors to gain exposure to commodity markets through a security that trades on a stock exchange.<span class="ql-inline-citation" data-cite="9"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> There are differences between ETCs and ETFs that track commodities. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity-etf.asp">Commodity ETFs</a> are structured as funds and regulated under the Investment Company Act of 1940 in the U.S. They hold either physical commodities (like gold or silver) or futures contracts on commodities. Commodity ETFs are considered equity products and are regulated like mutual funds and other ETFs.<span class="ql-inline-citation" data-cite="12"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Exchange-traded commodities, like ETNs, are structured as debt securities, even though they track commodity prices. They are not considered funds in the traditional sense, but are debt instruments issued by a single entity. This means there are credit risks involving the issuer.<span class="ql-inline-citation" data-cite="15"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> ETCs can be broadly classified into two categories:<span class="ql-inline-citation" data-cite="12"></span>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> <li><strong>Physical ETCs</strong>: These ETCs hold physical commodities, such as gold or silver bars, in secure vaults. Investors in physical ETCs have a claim on the underlying metal, and the value of the ETC is directly tied to the price of the physical commodity.</li><li><strong>Synthetic ETCs</strong>: Instead of holding physical commodities, synthetic ETCs use derivatives like futures contracts to replicate the performance of the underlying commodity. This approach can provide exposure to a broader range of commodities, including those difficult or impractical to store physically.</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> As with ETNs, ETCs also present unique risks and benefits:
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<li><strong>Direct commodity exposure</strong>: ETCs offer a straightforward way to invest in commodities, which can serve as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedge</a> against inflation or a diversification tool outside traditional stocks and bonds.</li>
<li><strong>Variety</strong>: Investors can choose from various commodities, from gold and silver to oil and agricultural products, depending on their investment goals and market outlook.</li>
<li><strong>Transparency</strong>: ETCs offer transparency in holdings and pricing, with the value of the ETC closely tracking the underlying commodity or commodities.</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp"><strong>Volatility</strong></a>: Commodity markets can be highly volatile, with prices influenced by various factors, including geopolitical events, weather conditions, and changes in supply and demand.</li>
<li><strong>Counterparty risk</strong>: Synthetic ETCs can involve <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/counterpartyrisk.asp">counterparty risk</a> since their performance depends on the ability of the issuer or counterparty to fulfill their obligations under the derivative contracts.</li>
<li><strong>Credit risk</strong>: Because they are structured as unsecured debt instruments from a single issuer if the issuer faces financial difficulties, the ETN could lose value, whatever the performance of the underlying commodities.</li>
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<span class="heading-toc" id="toc-what-to-consider-when-choosing-between-etps-and-etfs"></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"> What to Consider When Choosing Between ETPs and ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> When deciding whether an ETP or ETF makes the most sense for an investment strategy, investors should weigh several key factors:
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<li><strong>Expenses and fees</strong>: ETPs and ETFs often have lower expense ratios than actively managed mutual funds, but fees vary between products. All else being equal, an ETP with a lower expense ratio is preferred. ETFs typically have lower fees than other ETPs since they have less complex structures. Consider the expense ratio, commission fees, bid-ask spreads, and premiums/discounts.</li>
<li><strong>Liquidity</strong>: ETFs tend to have higher daily trading volumes and tighter bid-ask spreads. Some ETPs have limited secondary market liquidity, which can impact prices. Assess the average trading volume and bid-ask spread for a particular ETP or ETF—the higher the volume and the tighter the spread, the better.</li>
<li><strong>Performance and tracking</strong>: ETPs are often highly efficient at replicating their benchmark index performance, but some have more tracking errors. Research historical returns and compare them with the ETP’s benchmark.</li>
<li><strong>Diversification</strong>:<strong> </strong>ETFs offer exposure to various indexes across all major asset classes. Some ETPs zero in on narrow commodities or niche assets. Other times, two or more ETFs may hold the same assets; for example, if a stock is represented as a significant part of the S&P 500 and a sector index. This could mean doubling the exposure to specific stocks. Assess how well an ETP or ETF aligns with your <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 diversification goals.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Reputation of issuer and regulatory compliance</strong>: The trustworthiness and track record of the ETP issuer matter. A well-regarded issuer with a history of regulatory compliance and transparency is likely to offer low-cost products managed in the best interest of investors. Investigate the issuer’s reputation, experience in managing investment products, and history of adherence to regulations.</li>
<li><strong>Tax efficiency</strong>:<strong> </strong>ETFs are generally known for their tax efficiency, especially those that track broad-market indexes because of their unique creation and redemption process, which can minimize capital gains distributions. Depending on their structure, ETPs might not offer the same level of tax efficiency. Understand the tax implications of each investment, including how distributions are taxed and the potential for triggering taxable events.</li>
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<span class="heading-toc" id="toc-costs-and-fees-associated-with-etps-and-etfs"></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"> Costs and Fees Associated with ETPs and ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> All ETPs have costs that affect the total return on investment.<span class="ql-inline-citation" data-cite="16"></span>
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<li><strong>Expense ratios</strong>: This annual fee, expressed as a percentage of assets under management, covers the operational costs of the fund, including management fees, administrative fees, and other operating expenses. ETFs often have lower expense ratios than actively managed mutual funds, and ETCs can vary widely based on the complexity of the commodity exposure and management.</li>
<li><strong>Trading costs</strong>: Investors also have trading costs, such as commissions when buying or selling shares, including brokerage commissions (if applicable) and bid-ask spreads. Some ETFs today may be part of commission-free trading programs offered by brokers.</li>
<li><strong>Premiums/discounts</strong>: ETPs can trade at a premium or discount to their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">net asset value (NAV)</a>, depending on market demand and the underlying securities. These differences can mean more costs or benefits when entering or exiting positions.<br/></li>
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<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-how-does-liquidity-differ-for-different-etps-and-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Liquidity Differ for Different ETPs and ETFs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>ETFs generally offer higher liquidity than other ETPs due to their broader market appeal and higher trading volumes. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/exchangetradedfunds/08/etf-liquidity.asp">ETF liquidity</a> also depends on a unique creation and redemption mechanism that allows for the adjustment of supply in the market, helping to maintain the ETF’s price close to its net asset value (NAV).<span class="ql-inline-citation" data-cite="17"></span></p><p>Depending on their specific type and market demand, other ETPs may not have this mechanism and can experience wider bid-ask spreads and lower trading volumes, potentially lowering liquidity.</p></div>
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<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-are-etfs-and-etps-regulated-by-the-same-authorities"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are ETFs and ETPs Regulated by the Same Authorities?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Both ETPs and ETFs in the U.S. are regulated by the SEC. However, the specific regulations depend on the type of ETP.</p><p>Like mutual funds, ETFs are regulated under the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentcompanyact.asp">Investment Company Act of 1940</a>, with additional rules tailored explicitly to ETFs. Other ETPs, such as ETNs and ETCs, fall under different regulations based on their structure (e.g., debt securities). Despite these differences, all ETPs must follow SEC regulations to protect investors.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="12"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_97-0"><span class="heading-toc" id="toc-can-you-short-etps-and-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Short ETPs and ETFs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As long as your broker approves you for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">short selling</a>, ETPs and ETFs can be shorted like shares of stock. In fact, short selling may be easier with ETPs and ETFs than individual stocks because of the improved liquidity. There are also inverse ETFs that deliver inverse returns for short strategies without having to sell short any security.</p></div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_99-0"> <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_100-0"> ETPs offer investors an efficient way to gain exposure to diverse assets pooled and traded on stock exchanges. ETPs have advantages like low costs, tax efficiency, liquidity, and transparency.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> ETFs are a subset of ETPs regulated by the SEC under the 1940 Investment Company Act, while ETPs can fall under further regulations depending on their assets. Investors should weigh factors like expenses, tracking ability, liquidity, diversification, and risks when choosing between ETPs and ETFs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> Thorough research is vital to successfully incorporating these worthwhile investments in a portfolio. Both ETPs and ETFs can serve a valuable role in asset allocation when they match an investor’s strategy, goals, and risk tolerance.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness.</em>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> <em><span class="ql-cursor"></span>The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.</em>
</p></div> | ## Exchange-Traded Products (ETPs) vs. Exchange-Traded Funds (ETFs): An Overview
Exchange-traded products (ETPs) offer investors diversity and liquidity through pooled investments that trade on stock exchanges, akin to individual stocks. But ETPs are not stocks; they are sophisticated financial instruments that can pool a variety of investment types, including funds and commodities, traded like stocks.
Among ETPs, [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) are the best known, and offer flexibility, cost efficiency, and comparatively lower fees. ETFs often mirror the performance of indexes, sectors, or commodities prices, providing a transparent and effective way to invest in entire markets or specific economic niches without having to buy the underlying assets.
### Key Takeaways
* Exchange-traded products (ETPs) are accessible investments offering diversification and liquidity.
* Exchange-traded funds (ETFs) are a specific type of ETP that tracks an underlying index and can be bought and sold on an exchange throughout the trading day.
* ETPs also include other exchange-traded instruments, such as exchange-traded notes (ETNs) and exchange-traded commodities (ETCs).
* Factors to consider when choosing between ETPs and ETFs include expense ratios, liquidity options, diversification, and regulatory oversight.
* Investors should thoroughly research any ETP or ETF and seek professional advice before investing in them.
With ETPs, the pooling of different investment types enables both seasoned and novice [investors](https://www.investopedia.com/terms/i/investor.asp) to access a broad range of assets, from traditional stocks and bonds to more niche markets like commodities or specific industry sectors, all with the ease of buying and selling shares throughout the trading day. ETPs not only provide a platform for [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) diversification but also enhance the financial ecosystem’s adaptability, allowing investors to respond swiftly to market changes and opportunities.
ETPs include other securities beyond ETFs, such as [exchange-traded notes (ETNs)](https://www.investopedia.com/terms/e/etn.asp) and [exchange-traded commodities (ETCs)](https://www.investopedia.com/terms/e/exchangetraded-commodity-etc.asp). ETNs are debt instruments that track an index while carrying credit risk, while ETCs offer exposure to commodities and currencies, but can face unique risks discussed below.
## Exchange-Traded Products (ETPs)
ETPs bundle securities into a portfolio to provide exposure to a wide array of assets, all while trading like stocks on major stock exchanges. These products are designed to offer diversified exposure, high liquidity, transparency, and cost efficiency.
The first ETP is thought to be the [Standard & Poor’s Depositary Receipts (SPDRs), commonly known as “Spiders.”](https://www.investopedia.com/terms/s/spiders.asp) The first SPDR was introduced in 1993 and is now known by its ticker symbol, [SPY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SPY). [This product](https://www.investopedia.com/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp) was designed to track the [S&P 500 Index](https://www.investopedia.com/ask/answers/040215/what-does-sp-500-index-measure-and-how-it-calculated.asp), allowing investors to buy shares in a portfolio that mirrors the performance of the S&P 500.
The approval process for the first ETP was a significant milestone in financial markets, requiring collaboration among the American Stock Exchange, the Securities and Exchange Commission (SEC), and State Street Global Advisors, which developed and sponsored the ETP.
Before SPY’s debut, trading the S&P 500 Index was difficult, and investors had to dig into each component stock. SPY would be efficient for gaining exposure to the broad index through a single product. Given the novelty of this product, there were regulatory and logistical hurdles to overcome. Until then, stock exchanges focused on individual company stocks rather than pooled investment products.
SPDRs adopted a unique share creation/redemption mechanism to assuage regulators to keep their prices closely aligned with the index it tracked. This mechanism allowed large broker-dealers to exchange underlying stocks for shares of the SPY ETP with the fund manager.
SPDRs paved the way for the ETP industry by proving the appeal and feasibility of packaged financial products that supply diversified exposure to indexes through a publicly traded security. SPY remains the world’s largest and most actively traded ETP, with an average of over 77.5 million shares exchanged daily and $490 billion in assets as of the first quarter (Q1) of 2024.
### Key Characteristics of ETPs
ETPs have these main elements:
* **Basket of securities in one security**: Each ETP contains a portfolio or basket of assets rather than a single security. The basket can include stocks, bonds, commodities, currencies, and more. This provides instant [diversification](https://www.investopedia.com/terms/d/diversification.asp).
* **Traded on exchanges**: ETPs trade on major stock exchanges like individual stocks, allowing investors to buy and sell them throughout the trading day via their broker.
* **Intraday pricing**: The price of an ETP fluctuates throughout the day based on supply and demand, allowing for real-time pricing and trading flexibility.
* **Cost-effective**: A pivotal feature of ETPs is that they often offer low [management fees](https://www.investopedia.com/terms/m/managementfee.asp) and [expense ratios](https://www.investopedia.com/terms/e/expenseratio.asp), making them less costly to trade than mutual funds or even the underlying securities they hold. In addition, many brokerages today offer commission-free trading for these products.
### Benefits of ETPs
Several advantages make ETPs an appealing investment vehicle:
* **Diversification**: ETPs provide instant diversification across asset classes, market sectors, industries, geographic regions, and more. Investors gain broad exposure through a single ticker.
* **Liquidity**: The ability to trade ETPs seamlessly throughout the day on major exchanges provides constant [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). This distinguishes them from mutual funds that trade just once a day.
* **Low costs**: ETPs have lower expense ratios than actively managed mutual funds since they passively track an index. This means saving substantially on fees.
* **Tax efficiency**: ETPs are structured in a tax-efficient manner compared with mutual funds in most cases, saving investors further costs.
### ETP Regulations
While they may be structured differently, all ETPs in the United States are regulated by the SEC for investor protection and [transparency](https://www.investopedia.com/terms/t/transparency.asp). The SEC reviews ETP prospectuses, requires regular disclosures, oversees market trading, and enforces rules around practices like manipulation and fraud. This oversight applies across the ETP spectrum, no matter its structure.
However, the level of oversight depends on the type of ETP. For example, ETNs operate as [unsecured debt](https://www.investopedia.com/terms/u/unsecureddebt.asp) securities issued by financial institutions. This differs from ETFs, which directly hold underlying assets.
As a debt instrument, ETNs carry credit risk should the issuing institution default. As a result, the SEC monitors ETNs more closely than it does the diversification and tracking error risks of ETFs. While both are ETPs, the SEC tailors its approach based on each structure’s characteristics to safeguard investors.
## Exchange-Traded Funds (ETFs)
ETFs are popular financial instruments designed to offer investors an easy and efficient way to gain diversified exposure to an entire index or market segment through a single trade. They are easily the most traded and best-known of the ETPs.
Unlike mutual funds, ETFs trade on stock exchanges like equities. This gives ETFs the advantage of continuous pricing and trading throughout the day. ETFs hold a basket of assets that can include stocks across various sectors and industries, government and corporate bonds, [commodities like natural gas](https://www.investopedia.com/terms/u/ung.asp) or precious metals, and foreign currencies. The basket of assets held by an ETF is carefully selected and weighted to closely replicate the performance of a specific underlying index or benchmark.
For example, a [total stock market ETF](https://www.investopedia.com/terms/t/total-stock-fund.asp) would hold hundreds or even thousands of different stocks in proportion to their weight in a broad stock market index. By buying a share of the ETF, an investor instantly gains diversified exposure to the returns of the entire equity market rather than buying each stock separately.
ETFs offer efficient, liquid, low-cost market access in a transparent, tax-efficient vehicle. Investors can also choose from various ETFs targeting more specialized market sectors based on their financial goals and risk tolerance.
### Types of ETFs
ETFs track many different market segments. Here are the most common:
* **Stock index ETFs**: These [track indexes](https://www.investopedia.com/terms/i/index-etf.asp) like the S&P 500, Nasdaq 100, Dow Jones Industrial Average, etc.
* **Industry/sector-specific ETFs**: These focus on and track specific industries or sectors like technology or financials.
* **Bond ETFs**: These track government, corporate, or municipal bond indexes.
* **Commodity ETFs**: These track the prices of gold, silver, oil, grains, and other commodities. They either directly hold these commodities or use derivative products like [futures](https://www.investopedia.com/terms/f/futures.asp).
* **Currency ETFs**: These track foreign currency exchange rates.
* **Inverse ETFs**: These furnish returns that move the opposite of [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp). This allows for short-market exposure.
* **Leveraged ETFs**: These want multiple returns, such as plus or minus two or three (or more) times the return of an underlying index or asset.
* [**Crypto ETFs**](https://www.investopedia.com/investing/understanding-cryptocurrency-etfs/): These track one or more major cryptocurrencies such as Bitcoin or Ethereum. They may directly hold cryptocurrencies or use [derivatives](https://www.investopedia.com/terms/d/derivative.asp) contracts to gain exposure.
| Difference Among ETFs, Mutual Funds, and Single Stocks | | | |
| --- | --- | --- | --- |
| Feature | ETFs | Mutual Funds | Stocks |
| Pricing/Trading | Intraday pricing and trading | End-of-day pricing; trades once per day | Intraday pricing and trading |
| Costs | Lower expense ratios than active mutual funds | Typically higher expense ratios | May have commission fees on trades |
| Tax Efficiency | More tax-efficient in most cases | Can have capital gains distributions | Taxes on dividends and capital gains |
| Diversification | Holds basket of securities | Holds basket of securities | A single security |
| Risk Profile | Potentially lower volatility than individual stocks because of multiple holdings | Often lower volatility than individual stocks | Higher volatility as a single security |
| Transparency | Full portfolio holdings disclosed daily | Periodic portfolio disclosures | Public filings from a single company |
| Index Tracking | Follows underlying index | Actively managed or passive index tracking | Follows the performance of a single company |
## Other Types of ETPs
In addition to ETFs, other types of ETPs include ETNs and exchange-traded commodities (ETCs).
### Exchange-Traded Notes (ETNs)
ETNs combine bond investing with the tradability of stocks. Unlike ETFs, which hold underlying assets, ETNs are structured as unsecured debt securities issued by financial institutions. These notes promise to pay the holder a return based on the performance of a market index or other reference measure, minus applicable fees, at [maturity](https://www.investopedia.com/terms/m/maturity.asp).
ETNs, however, have some unique risks and benefits:
* **Credit risk**: Since ETNs are debt instruments, their value is dependent, in part, on the creditworthiness of the issuing bank. If the issuer faces financial difficulties, the ETN could lose value, no matter the performance of the underlying index.
* **Price tracking**: ETNs aim to closely track the performance of their underlying index or benchmark. They do not experience [tracking errors](https://www.investopedia.com/terms/t/trackingerror.asp) the same way that ETFs might.
* **Liquidity risk**: Some ETNs may have lower trading volumes than ETFs, potentially leading to wider bid-ask spreads and impacting the ease with which they can be bought or sold at desired prices.
* **Tax efficiency**: ETNs can offer unique tax benefits in certain situations. For instance, since they do not distribute dividends, investors might not incur taxes until the sale of the ETN or its maturity, potentially deferring tax liabilities.
* **Market exposure**: ETNs can provide exposure to many assets, including hard-to-reach markets and strategies. This includes commodities, emerging markets, private equity, or specific investment strategies that might be difficult or costly to access directly.
### Exchange-Traded Commodities (ETCs)
ETCs offer exposure to commodities, including metals, energy, and agricultural products, without directly investing in physical commodities or futures contracts. ETCs track the commodity’s price or a basket of commodities, allowing investors to gain exposure to commodity markets through a security that trades on a stock exchange.
There are differences between ETCs and ETFs that track commodities. [Commodity ETFs](https://www.investopedia.com/terms/c/commodity-etf.asp) are structured as funds and regulated under the Investment Company Act of 1940 in the U.S. They hold either physical commodities (like gold or silver) or futures contracts on commodities. Commodity ETFs are considered equity products and are regulated like mutual funds and other ETFs.
Exchange-traded commodities, like ETNs, are structured as debt securities, even though they track commodity prices. They are not considered funds in the traditional sense, but are debt instruments issued by a single entity. This means there are credit risks involving the issuer.
ETCs can be broadly classified into two categories:
* **Physical ETCs**: These ETCs hold physical commodities, such as gold or silver bars, in secure vaults. Investors in physical ETCs have a claim on the underlying metal, and the value of the ETC is directly tied to the price of the physical commodity.
* **Synthetic ETCs**: Instead of holding physical commodities, synthetic ETCs use derivatives like futures contracts to replicate the performance of the underlying commodity. This approach can provide exposure to a broader range of commodities, including those difficult or impractical to store physically.
As with ETNs, ETCs also present unique risks and benefits:
* **Direct commodity exposure**: ETCs offer a straightforward way to invest in commodities, which can serve as a [hedge](https://www.investopedia.com/terms/h/hedge.asp) against inflation or a diversification tool outside traditional stocks and bonds.
* **Variety**: Investors can choose from various commodities, from gold and silver to oil and agricultural products, depending on their investment goals and market outlook.
* **Transparency**: ETCs offer transparency in holdings and pricing, with the value of the ETC closely tracking the underlying commodity or commodities.
* [**Volatility**](https://www.investopedia.com/terms/v/volatility.asp): Commodity markets can be highly volatile, with prices influenced by various factors, including geopolitical events, weather conditions, and changes in supply and demand.
* **Counterparty risk**: Synthetic ETCs can involve [counterparty risk](https://www.investopedia.com/terms/c/counterpartyrisk.asp) since their performance depends on the ability of the issuer or counterparty to fulfill their obligations under the derivative contracts.
* **Credit risk**: Because they are structured as unsecured debt instruments from a single issuer if the issuer faces financial difficulties, the ETN could lose value, whatever the performance of the underlying commodities.
## What to Consider When Choosing Between ETPs and ETFs
When deciding whether an ETP or ETF makes the most sense for an investment strategy, investors should weigh several key factors:
* **Expenses and fees**: ETPs and ETFs often have lower expense ratios than actively managed mutual funds, but fees vary between products. All else being equal, an ETP with a lower expense ratio is preferred. ETFs typically have lower fees than other ETPs since they have less complex structures. Consider the expense ratio, commission fees, bid-ask spreads, and premiums/discounts.
* **Liquidity**: ETFs tend to have higher daily trading volumes and tighter bid-ask spreads. Some ETPs have limited secondary market liquidity, which can impact prices. Assess the average trading volume and bid-ask spread for a particular ETP or ETF—the higher the volume and the tighter the spread, the better.
* **Performance and tracking**: ETPs are often highly efficient at replicating their benchmark index performance, but some have more tracking errors. Research historical returns and compare them with the ETP’s benchmark.
* **Diversification**:ETFs offer exposure to various indexes across all major asset classes. Some ETPs zero in on narrow commodities or niche assets. Other times, two or more ETFs may hold the same assets; for example, if a stock is represented as a significant part of the S&P 500 and a sector index. This could mean doubling the exposure to specific stocks. Assess how well an ETP or ETF aligns with your [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp) and diversification goals.
* **Reputation of issuer and regulatory compliance**: The trustworthiness and track record of the ETP issuer matter. A well-regarded issuer with a history of regulatory compliance and transparency is likely to offer low-cost products managed in the best interest of investors. Investigate the issuer’s reputation, experience in managing investment products, and history of adherence to regulations.
* **Tax efficiency**:ETFs are generally known for their tax efficiency, especially those that track broad-market indexes because of their unique creation and redemption process, which can minimize capital gains distributions. Depending on their structure, ETPs might not offer the same level of tax efficiency. Understand the tax implications of each investment, including how distributions are taxed and the potential for triggering taxable events.
## Costs and Fees Associated with ETPs and ETFs
All ETPs have costs that affect the total return on investment.
* **Expense ratios**: This annual fee, expressed as a percentage of assets under management, covers the operational costs of the fund, including management fees, administrative fees, and other operating expenses. ETFs often have lower expense ratios than actively managed mutual funds, and ETCs can vary widely based on the complexity of the commodity exposure and management.
* **Trading costs**: Investors also have trading costs, such as commissions when buying or selling shares, including brokerage commissions (if applicable) and bid-ask spreads. Some ETFs today may be part of commission-free trading programs offered by brokers.
* **Premiums/discounts**: ETPs can trade at a premium or discount to their [net asset value (NAV)](https://www.investopedia.com/terms/n/nav.asp), depending on market demand and the underlying securities. These differences can mean more costs or benefits when entering or exiting positions.
## How Does Liquidity Differ for Different ETPs and ETFs?
ETFs generally offer higher liquidity than other ETPs due to their broader market appeal and higher trading volumes. [ETF liquidity](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-liquidity.asp) also depends on a unique creation and redemption mechanism that allows for the adjustment of supply in the market, helping to maintain the ETF’s price close to its net asset value (NAV).
Depending on their specific type and market demand, other ETPs may not have this mechanism and can experience wider bid-ask spreads and lower trading volumes, potentially lowering liquidity.
## Are ETFs and ETPs Regulated by the Same Authorities?
Both ETPs and ETFs in the U.S. are regulated by the SEC. However, the specific regulations depend on the type of ETP.
Like mutual funds, ETFs are regulated under the [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp), with additional rules tailored explicitly to ETFs. Other ETPs, such as ETNs and ETCs, fall under different regulations based on their structure (e.g., debt securities). Despite these differences, all ETPs must follow SEC regulations to protect investors.
## Can You Short ETPs and ETFs?
As long as your broker approves you for [short selling](https://www.investopedia.com/terms/s/shortselling.asp), ETPs and ETFs can be shorted like shares of stock. In fact, short selling may be easier with ETPs and ETFs than individual stocks because of the improved liquidity. There are also inverse ETFs that deliver inverse returns for short strategies without having to sell short any security.
## The Bottom Line
ETPs offer investors an efficient way to gain exposure to diverse assets pooled and traded on stock exchanges. ETPs have advantages like low costs, tax efficiency, liquidity, and transparency.
ETFs are a subset of ETPs regulated by the SEC under the 1940 Investment Company Act, while ETPs can fall under further regulations depending on their assets. Investors should weigh factors like expenses, tracking ability, liquidity, diversification, and risks when choosing between ETPs and ETFs.
Thorough research is vital to successfully incorporating these worthwhile investments in a portfolio. Both ETPs and ETFs can serve a valuable role in asset allocation when they match an investor’s strategy, goals, and risk tolerance.
*The comments, opinions, and analyses expressed on Investopedia are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness.*
*The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.*
| Exchange-Traded Products (ETPs) vs. Exchange-Traded Funds (ETFs): An Overview
Exchange-traded products (ETPs) offer investors diversity and liquidity through pooled investments that trade on stock exchanges, akin to individual stocks. But ETPs are not stocks; they are sophisticated financial instruments that can pool a variety of investment types, including funds and commodities, traded like stocks.
Among ETPs, exchange-traded funds (ETFs) are the best known, and offer flexibility, cost efficiency, and comparatively lower fees. ETFs often mirror the performance of indexes, sectors, or commodities prices, providing a transparent and effective way to invest in entire markets or specific economic niches without having to buy the underlying assets.
Key Takeaways
Exchange-traded products (ETPs) are accessible investments offering diversification and liquidity.Exchange-traded funds (ETFs) are a specific type of ETP that tracks an underlying index and can be bought and sold on an exchange throughout the trading day.ETPs also include other exchange-traded instruments, such as exchange-traded notes (ETNs) and exchange-traded commodities (ETCs).Factors to consider when choosing between ETPs and ETFs include expense ratios, liquidity options, diversification, and regulatory oversight.Investors should thoroughly research any ETP or ETF and seek professional advice before investing in them.
With ETPs, the pooling of different investment types enables both seasoned and novice investors to access a broad range of assets, from traditional stocks and bonds to more niche markets like commodities or specific industry sectors, all with the ease of buying and selling shares throughout the trading day. ETPs not only provide a platform for portfolio diversification but also enhance the financial ecosystem’s adaptability, allowing investors to respond swiftly to market changes and opportunities.
ETPs include other securities beyond ETFs, such as exchange-traded notes (ETNs) and exchange-traded commodities (ETCs). ETNs are debt instruments that track an index while carrying credit risk, while ETCs offer exposure to commodities and currencies, but can face unique risks discussed below.
Exchange-Traded Products (ETPs)
ETPs bundle securities into a portfolio to provide exposure to a wide array of assets, all while trading like stocks on major stock exchanges. These products are designed to offer diversified exposure, high liquidity, transparency, and cost efficiency.
The first ETP is thought to be the Standard & Poor’s Depositary Receipts (SPDRs), commonly known as “Spiders.” The first SPDR was introduced in 1993 and is now known by its ticker symbol, SPY. This product was designed to track the S&P 500 Index, allowing investors to buy shares in a portfolio that mirrors the performance of the S&P 500.
The approval process for the first ETP was a significant milestone in financial markets, requiring collaboration among the American Stock Exchange, the Securities and Exchange Commission (SEC), and State Street Global Advisors, which developed and sponsored the ETP.
Before SPY’s debut, trading the S&P 500 Index was difficult, and investors had to dig into each component stock. SPY would be efficient for gaining exposure to the broad index through a single product. Given the novelty of this product, there were regulatory and logistical hurdles to overcome. Until then, stock exchanges focused on individual company stocks rather than pooled investment products.
SPDRs adopted a unique share creation/redemption mechanism to assuage regulators to keep their prices closely aligned with the index it tracked. This mechanism allowed large broker-dealers to exchange underlying stocks for shares of the SPY ETP with the fund manager.
SPDRs paved the way for the ETP industry by proving the appeal and feasibility of packaged financial products that supply diversified exposure to indexes through a publicly traded security. SPY remains the world’s largest and most actively traded ETP, with an average of over 77.5 million shares exchanged daily and $490 billion in assets as of the first quarter (Q1) of 2024.
Key Characteristics of ETPs
ETPs have these main elements:
Basket of securities in one security: Each ETP contains a portfolio or basket of assets rather than a single security. The basket can include stocks, bonds, commodities, currencies, and more. This provides instant diversification.
Traded on exchanges: ETPs trade on major stock exchanges like individual stocks, allowing investors to buy and sell them throughout the trading day via their broker.
Intraday pricing: The price of an ETP fluctuates throughout the day based on supply and demand, allowing for real-time pricing and trading flexibility.
Cost-effective: A pivotal feature of ETPs is that they often offer low management fees and expense ratios, making them less costly to trade than mutual funds or even the underlying securities they hold. In addition, many brokerages today offer commission-free trading for these products.
Benefits of ETPs
Several advantages make ETPs an appealing investment vehicle:
Diversification: ETPs provide instant diversification across asset classes, market sectors, industries, geographic regions, and more. Investors gain broad exposure through a single ticker.
Liquidity: The ability to trade ETPs seamlessly throughout the day on major exchanges provides constant liquidity. This distinguishes them from mutual funds that trade just once a day.
Low costs: ETPs have lower expense ratios than actively managed mutual funds since they passively track an index. This means saving substantially on fees.
Tax efficiency: ETPs are structured in a tax-efficient manner compared with mutual funds in most cases, saving investors further costs.
ETP Regulations
While they may be structured differently, all ETPs in the United States are regulated by the SEC for investor protection and transparency. The SEC reviews ETP prospectuses, requires regular disclosures, oversees market trading, and enforces rules around practices like manipulation and fraud. This oversight applies across the ETP spectrum, no matter its structure.
However, the level of oversight depends on the type of ETP. For example, ETNs operate as unsecured debt securities issued by financial institutions. This differs from ETFs, which directly hold underlying assets.
As a debt instrument, ETNs carry credit risk should the issuing institution default. As a result, the SEC monitors ETNs more closely than it does the diversification and tracking error risks of ETFs. While both are ETPs, the SEC tailors its approach based on each structure’s characteristics to safeguard investors.
Exchange-Traded Funds (ETFs)
ETFs are popular financial instruments designed to offer investors an easy and efficient way to gain diversified exposure to an entire index or market segment through a single trade. They are easily the most traded and best-known of the ETPs.
Unlike mutual funds, ETFs trade on stock exchanges like equities. This gives ETFs the advantage of continuous pricing and trading throughout the day. ETFs hold a basket of assets that can include stocks across various sectors and industries, government and corporate bonds, commodities like natural gas or precious metals, and foreign currencies. The basket of assets held by an ETF is carefully selected and weighted to closely replicate the performance of a specific underlying index or benchmark.
For example, a total stock market ETF would hold hundreds or even thousands of different stocks in proportion to their weight in a broad stock market index. By buying a share of the ETF, an investor instantly gains diversified exposure to the returns of the entire equity market rather than buying each stock separately.
ETFs offer efficient, liquid, low-cost market access in a transparent, tax-efficient vehicle. Investors can also choose from various ETFs targeting more specialized market sectors based on their financial goals and risk tolerance.
Types of ETFs
ETFs track many different market segments. Here are the most common:
Stock index ETFs: These track indexes like the S&P 500, Nasdaq 100, Dow Jones Industrial Average, etc.
Industry/sector-specific ETFs: These focus on and track specific industries or sectors like technology or financials.
Bond ETFs: These track government, corporate, or municipal bond indexes.
Commodity ETFs: These track the prices of gold, silver, oil, grains, and other commodities. They either directly hold these commodities or use derivative products like futures.
Currency ETFs: These track foreign currency exchange rates.
Inverse ETFs: These furnish returns that move the opposite of benchmarks. This allows for short-market exposure.
Leveraged ETFs: These want multiple returns, such as plus or minus two or three (or more) times the return of an underlying index or asset.
Crypto ETFs: These track one or more major cryptocurrencies such as Bitcoin or Ethereum. They may directly hold cryptocurrencies or use derivatives contracts to gain exposure.
Difference Among ETFs, Mutual Funds, and Single Stocks
Feature
ETFs
Mutual Funds
Stocks
Pricing/Trading
Intraday pricing and trading
End-of-day pricing; trades once per day
Intraday pricing and trading
Costs
Lower expense ratios than active mutual funds
Typically higher expense ratios
May have commission fees on trades
Tax Efficiency
More tax-efficient in most cases
Can have capital gains distributions
Taxes on dividends and capital gains
Diversification
Holds basket of securities
Holds basket of securities
A single security
Risk Profile
Potentially lower volatility than individual stocks because of multiple holdings
Often lower volatility than individual stocks
Higher volatility as a single security
Transparency
Full portfolio holdings disclosed daily
Periodic portfolio disclosures
Public filings from a single company
Index Tracking
Follows underlying index
Actively managed or passive index tracking
Follows the performance of a single company
Other Types of ETPs
In addition to ETFs, other types of ETPs include ETNs and exchange-traded commodities (ETCs).
Exchange-Traded Notes (ETNs)
ETNs combine bond investing with the tradability of stocks. Unlike ETFs, which hold underlying assets, ETNs are structured as unsecured debt securities issued by financial institutions. These notes promise to pay the holder a return based on the performance of a market index or other reference measure, minus applicable fees, at maturity.
ETNs, however, have some unique risks and benefits:
Credit risk: Since ETNs are debt instruments, their value is dependent, in part, on the creditworthiness of the issuing bank. If the issuer faces financial difficulties, the ETN could lose value, no matter the performance of the underlying index.
Price tracking: ETNs aim to closely track the performance of their underlying index or benchmark. They do not experience tracking errors the same way that ETFs might.
Liquidity risk: Some ETNs may have lower trading volumes than ETFs, potentially leading to wider bid-ask spreads and impacting the ease with which they can be bought or sold at desired prices.
Tax efficiency: ETNs can offer unique tax benefits in certain situations. For instance, since they do not distribute dividends, investors might not incur taxes until the sale of the ETN or its maturity, potentially deferring tax liabilities.
Market exposure: ETNs can provide exposure to many assets, including hard-to-reach markets and strategies. This includes commodities, emerging markets, private equity, or specific investment strategies that might be difficult or costly to access directly.
Exchange-Traded Commodities (ETCs)
ETCs offer exposure to commodities, including metals, energy, and agricultural products, without directly investing in physical commodities or futures contracts. ETCs track the commodity’s price or a basket of commodities, allowing investors to gain exposure to commodity markets through a security that trades on a stock exchange.
There are differences between ETCs and ETFs that track commodities. Commodity ETFs are structured as funds and regulated under the Investment Company Act of 1940 in the U.S. They hold either physical commodities (like gold or silver) or futures contracts on commodities. Commodity ETFs are considered equity products and are regulated like mutual funds and other ETFs.
Exchange-traded commodities, like ETNs, are structured as debt securities, even though they track commodity prices. They are not considered funds in the traditional sense, but are debt instruments issued by a single entity. This means there are credit risks involving the issuer.
ETCs can be broadly classified into two categories:
Physical ETCs: These ETCs hold physical commodities, such as gold or silver bars, in secure vaults. Investors in physical ETCs have a claim on the underlying metal, and the value of the ETC is directly tied to the price of the physical commodity.Synthetic ETCs: Instead of holding physical commodities, synthetic ETCs use derivatives like futures contracts to replicate the performance of the underlying commodity. This approach can provide exposure to a broader range of commodities, including those difficult or impractical to store physically.
As with ETNs, ETCs also present unique risks and benefits:
Direct commodity exposure: ETCs offer a straightforward way to invest in commodities, which can serve as a hedge against inflation or a diversification tool outside traditional stocks and bonds.
Variety: Investors can choose from various commodities, from gold and silver to oil and agricultural products, depending on their investment goals and market outlook.
Transparency: ETCs offer transparency in holdings and pricing, with the value of the ETC closely tracking the underlying commodity or commodities.
Volatility: Commodity markets can be highly volatile, with prices influenced by various factors, including geopolitical events, weather conditions, and changes in supply and demand.
Counterparty risk: Synthetic ETCs can involve counterparty risk since their performance depends on the ability of the issuer or counterparty to fulfill their obligations under the derivative contracts.
Credit risk: Because they are structured as unsecured debt instruments from a single issuer if the issuer faces financial difficulties, the ETN could lose value, whatever the performance of the underlying commodities.
What to Consider When Choosing Between ETPs and ETFs
When deciding whether an ETP or ETF makes the most sense for an investment strategy, investors should weigh several key factors:
Expenses and fees: ETPs and ETFs often have lower expense ratios than actively managed mutual funds, but fees vary between products. All else being equal, an ETP with a lower expense ratio is preferred. ETFs typically have lower fees than other ETPs since they have less complex structures. Consider the expense ratio, commission fees, bid-ask spreads, and premiums/discounts.
Liquidity: ETFs tend to have higher daily trading volumes and tighter bid-ask spreads. Some ETPs have limited secondary market liquidity, which can impact prices. Assess the average trading volume and bid-ask spread for a particular ETP or ETF—the higher the volume and the tighter the spread, the better.
Performance and tracking: ETPs are often highly efficient at replicating their benchmark index performance, but some have more tracking errors. Research historical returns and compare them with the ETP’s benchmark.
Diversification: ETFs offer exposure to various indexes across all major asset classes. Some ETPs zero in on narrow commodities or niche assets. Other times, two or more ETFs may hold the same assets; for example, if a stock is represented as a significant part of the S&P 500 and a sector index. This could mean doubling the exposure to specific stocks. Assess how well an ETP or ETF aligns with your asset allocation and diversification goals.
Reputation of issuer and regulatory compliance: The trustworthiness and track record of the ETP issuer matter. A well-regarded issuer with a history of regulatory compliance and transparency is likely to offer low-cost products managed in the best interest of investors. Investigate the issuer’s reputation, experience in managing investment products, and history of adherence to regulations.
Tax efficiency: ETFs are generally known for their tax efficiency, especially those that track broad-market indexes because of their unique creation and redemption process, which can minimize capital gains distributions. Depending on their structure, ETPs might not offer the same level of tax efficiency. Understand the tax implications of each investment, including how distributions are taxed and the potential for triggering taxable events.
Costs and Fees Associated with ETPs and ETFs
All ETPs have costs that affect the total return on investment.
Expense ratios: This annual fee, expressed as a percentage of assets under management, covers the operational costs of the fund, including management fees, administrative fees, and other operating expenses. ETFs often have lower expense ratios than actively managed mutual funds, and ETCs can vary widely based on the complexity of the commodity exposure and management.
Trading costs: Investors also have trading costs, such as commissions when buying or selling shares, including brokerage commissions (if applicable) and bid-ask spreads. Some ETFs today may be part of commission-free trading programs offered by brokers.
Premiums/discounts: ETPs can trade at a premium or discount to their net asset value (NAV), depending on market demand and the underlying securities. These differences can mean more costs or benefits when entering or exiting positions.
How Does Liquidity Differ for Different ETPs and ETFs?
ETFs generally offer higher liquidity than other ETPs due to their broader market appeal and higher trading volumes. ETF liquidity also depends on a unique creation and redemption mechanism that allows for the adjustment of supply in the market, helping to maintain the ETF’s price close to its net asset value (NAV).Depending on their specific type and market demand, other ETPs may not have this mechanism and can experience wider bid-ask spreads and lower trading volumes, potentially lowering liquidity.
Are ETFs and ETPs Regulated by the Same Authorities?
Both ETPs and ETFs in the U.S. are regulated by the SEC. However, the specific regulations depend on the type of ETP.Like mutual funds, ETFs are regulated under the Investment Company Act of 1940, with additional rules tailored explicitly to ETFs. Other ETPs, such as ETNs and ETCs, fall under different regulations based on their structure (e.g., debt securities). Despite these differences, all ETPs must follow SEC regulations to protect investors.
Can You Short ETPs and ETFs?
As long as your broker approves you for short selling, ETPs and ETFs can be shorted like shares of stock. In fact, short selling may be easier with ETPs and ETFs than individual stocks because of the improved liquidity. There are also inverse ETFs that deliver inverse returns for short strategies without having to sell short any security.
The Bottom Line
ETPs offer investors an efficient way to gain exposure to diverse assets pooled and traded on stock exchanges. ETPs have advantages like low costs, tax efficiency, liquidity, and transparency.
ETFs are a subset of ETPs regulated by the SEC under the 1940 Investment Company Act, while ETPs can fall under further regulations depending on their assets. Investors should weigh factors like expenses, tracking ability, liquidity, diversification, and risks when choosing between ETPs and ETFs.
Thorough research is vital to successfully incorporating these worthwhile investments in a portfolio. Both ETPs and ETFs can serve a valuable role in asset allocation when they match an investor’s strategy, goals, and risk tolerance.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness.
The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
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https://www.investopedia.com/how-to-retire-with-no-money-7505220 | How to Retire with No 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"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> One of the biggest questions associated with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-planning-4689695">retirement planning</a> is, “How much do I need to save?” A retirement study of American workers conducted by Schroders found that the average worker age 45 or older believes it will take $1.1 million to retire comfortably. However, only 21% of those workers expect to save $1 million or more for retirement.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Can you retire on no money? Having no savings means that you will be forced to rely on your Social Security benefit for income in retirement. According to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssa.asp">Social Security Administration (SSA)</a>, among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income.<span class="ql-inline-citation" data-cite="13"></span> So people do it. Still, it requires sacrifices, hustling, and planning.
</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>Retiring with little to no money saved is not impossible, but it can present some challenges to your financial plan.</li><li>Depending on where you’re starting from, you may need to delay Social Security benefits, work longer, or drastically reduce expenses to retire with no money saved.</li><li>Talking to a financial advisor can help you create a realistic plan for retiring with no savings.</li><li>Investing money vs. saving it can help you to build wealth, so that you don’t go into retirement empty-handed.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understand-your-social-security-benefits"></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"> Understand Your Social Security Benefits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-security-benefits.asp">Social Security benefits</a> provide a stream of income for retirement, so if you’re trying to retire with no money saved, it’s important to understand how much you might be able to collect. As of November 2023, the average monthly retirement benefit from Social Security was $1,844.76.<span class="ql-inline-citation" data-cite="2"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Whether you receive that amount, or more, or less, can depend on a number of factors, including your employment and earnings history and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/when-should-i-retire-pros-and-cons-different-ages/">the age at which you retire</a>. The earliest you can begin taking Social Security retirement benefits is age 62, but claiming benefits early reduces the amount you’re entitled to receive. Delaying benefits until age 70, on the other hand, can allow you to claim an increased benefit amount.<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_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’re retiring with no savings, it may be to your advantage to wait as long as possible to take Social Security benefits. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/calculate-social-security-benefits/">Calculating your estimated retirement benefit</a> at different ages can help you determine when the timing may be right to apply for Social Security.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> According to the SSA, Social Security benefits typically account for a replacement rate of roughly 40% of a retiree’s previous working income, but it is commonly accepted that a replacement rate of roughly 70% is adequate for retirement income from all sources.<span class="ql-inline-citation" data-cite="14"></span> So how do you make up that 30%?
</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-warning" 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">Warning</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>If you take Social Security retirement benefits early and are still working, your benefit amount may be reduced if your earnings exceed a certain amount. For 2024, the earnings limit is $22,320.<span class="ql-inline-citation" data-cite="19"></span></p></div></div></div>
<span class="heading-toc" id="toc-stick-to-a-budget"></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"> Stick to a Budget </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Making a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110315/4-phases-retirement-and-how-budget-them.asp">retirement budget</a> is essential if you have little to no money saved. Having a budget can help you track where your money is going and avoid overspending.
</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"> When making a budget for retirement, it’s good to consider where you can slash spending if you anticipate having limited income. You can start with the largest expenses first, which are usually <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/07/buy-rent.asp">housing</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/how-plan-medical-expenses-retirement/">healthcare</a>, then work your way down the list to look for areas where you may be able to cut back.
</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 instance, if housing costs take up a sizable part of your income, you might be able to reduce those expenses by:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0">
<li>Downsizing to a smaller home or moving to an area with a lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cost-of-living.asp">cost of living</a></li>
<li>Renting out part of your home, either on a temporary or permanent basis</li>
<li>Selling your home and moving in with one of your children, a sibling, or another relative</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-cost-of-living-in-a-retirement-community-5069448">Moving to an all-inclusive retirement community</a> that bundles utilities, maintenance, and other homeownership costs into the purchase price</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The more cuts you can make, the better off you’ll be when retiring with nothing in the bank.<br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-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"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>If you own your home outright and meet other requirements, you may be able to get a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/reverse-mortgage/">reverse mortgage</a> to create an additional stream of income in retirement.</p></div></div></div>
<span class="heading-toc" id="toc-apply-for-government-benefits"></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"> Apply for Government Benefits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Government programs can help to offset some of your cost of living in retirement if you have little or no money saved. There are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/special-government-help-for-your-retirement-5069756">several government programs</a> for which you may be able to qualify if you have limited financial resources, including:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/supplemental-nutrition-assistance-program-snap-5187718">Supplemental Nutrition Assistance Program (SNAP)</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medicaid.asp">Medicaid</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medicare.asp">Medicare</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssi.asp">Supplemental Security Income (SSI)</a></li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Eligibility requirements for each program vary but can be based on age, disability status, income, and assets. For example, SSI is available to individuals who are 65, blind, or disabled and have limited income and financial resources.<span class="ql-inline-citation" data-cite="8"></span> Medicare eligibility, on the other hand, is based on age; you can apply when you turn 65.<span class="ql-inline-citation" data-cite="9"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> If you’re unsure of the kind of government benefits for which you might qualify, you can contact your local Department of Social Services. Someone there should be able to tell you the programs for which you may be eligible and how to apply.<br/>
</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_4-0">Important</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Eligibility requirements for SNAP and Medicaid can vary based on the state where you live.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="21"></span></p></div></div></div>
<span class="heading-toc" id="toc-get-a-part-time-job-or-side-hustle"></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"> Get a Part-Time Job or Side Hustle </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> If you’re contemplating retirement with no savings, then you may need to find ways to make more money. Getting a part-time job or starting a side hustle are two ways to earn money in your spare time without being locked into a full-time position.
</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"> Examples of possible side hustles that you might start in retirement include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> <li>Walking dogs or pet sitting</li><li>Babysitting</li><li>Cutting grass or doing yardwork</li><li>Selling homemade baked goods</li><li>Getting paid to run errands or do odd jobs for neighbors</li>
</ul>
<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"> Remember that if you’re earning money from side hustles, 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> still expects you to report that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> on your taxes. If you have more than $400 in earnings from side hustles or self-employment for the year, you’ll have to report it as taxable income.<span class="ql-inline-citation" data-cite="10"></span> Failure to report income properly could result in financial penalties and other serious consequences, such as a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxlien.asp">tax lien</a>, if the IRS believes that you’re attempting to commit tax fraud.<span class="ql-inline-citation" data-cite="22"></span><span class="ql-inline-citation" data-cite="23"></span>
</p>
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<span class="heading-toc" id="toc-ways-to-avoid-retiring-with-no-money"></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"> Ways to Avoid Retiring with No Money </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> If you fear that you will have to retire without any savings but haven’t yet actually gotten there, there are things you can try to prevent that scenario. They may include:<br/>
</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"> Pay Off Debt </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt.asp">Debt</a>, of course, is the opposite of savings, so the first thing to do is get rid of yours if you want to save for retirement. Retiring with debt, alas, is not uncommon.
</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"> According to a Clever Real Estate survey, in 2023, retirees have an average of $19,888 in debt, excluding mortgage debt but including credit cards, medical bills, car payments, and personal loans.<span class="ql-inline-citation" data-cite="5"></span> According to the Federal Student Aid Portfolio Summary, borrowers age 50 or older accounted for 25.16% of total student loan debt of $1.63 trillion in 2023.<span class="ql-inline-citation" data-cite="25"></span><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_58-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> How you go about paying down debt can depend on what you owe and how much money you have to commit to debt <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repayment.asp">repayment</a>. Some of the options include:
</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><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> balance transfers</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtconsolidation.asp">Debt consolidation</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/">Using a home equity loan or a home equity line of credit (HELOC)</a> to pay off debt</li>
<li>Federal <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-consolidation-definition-4684455">student loan consolidation</a></li>
<li>Private <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/refinance-student-loans-5323837">student loan refinancing</a></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’re having trouble getting a grip on debt, you might want to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-find-a-credit-counselor-7514802">talk to a certified credit counselor</a> or debt counselor. They can review your budget and debt to offer solutions for dealing with it, which may include enrolling in a debt management plan, negotiating debt to pay less than what’s owed, or, in extreme cases, filing for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-subheading__text"> Increase Your Income </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> If you need more money but feel stuck at your current pay level, there are steps you can take to increase your income. These include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> <li><strong>Ask for a raise</strong>. Be smart and check comparable salaries to yours. If you are on the low end, make sure that your employer knows it.</li><li><strong>Look for a new job</strong>. Sometimes there is little room for advancement where you work, while moving to a different employer could open up the corporate ladder.</li><li><strong>Go back to school</strong>. If you improve your credentials, you can increase your earning power.</li><li><strong>Get a second job</strong>. There are plenty of part-time opportunities out there, from waiting tables to driving a cab or livery vehicle in the evenings and on weekends.</li><li><strong>Turn your expertise into cash</strong>. If you have a deep knowledge about a subject people want to learn about, you could use it to teach part-time, blog online, or hit the lecture circuit.</li><li><strong>Turn a hobby into a business</strong>. You may have a passion that you can turn into a marketable sideline online or at various selling places, such as the local fair, a farmer’s market, or a consignment booth in an antiques and tchotchkes store.</li>
</ul>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-subheading__text"> Utilize Your Workplace Plan </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> If your employer offers a retirement plan, it’s to your advantage to make the most of it during your working years. Among private industry workers, 69% have access to a retirement plan at work. Those include both <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/definedcontributionplan.asp">defined-contribution plans</a>, such as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k)</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp">defined-benefit plans</a>, such as a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp">pension</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_72-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Saving in a 401(k) can help you head into retirement with some money in hand, especially if you’re contributing enough to get the full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp">employer match</a> if one is offered. With pension plans, your benefit amount is typically determined by how many years you worked for your employer and your income in your highest-earning years.
</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"> If your employer offers a 401(k) and you’re not yet enrolled, sign up and start making contributions once you have retired any high-interest debt. If your current employer doesn’t offer one, ask if the company would consider changing that. If not, you might want to consider moving to a new company that does, as 401(k) plans are quite common. If your employer doesn’t offer a pension, though, it’s highly unlikely that you can do anything about that or find a new employer that does. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/06/demiseofdbplan.asp">Pensions have largely gone the way of the dodo</a>.
</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"> Invest Your Money </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Once you are able to start saving, think about investing that money instead of just saving it. When you invest money, you’re putting it into the market, where it can earn a higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rate of return</a> than in a savings account. Both saving and investing can allow you to capitalize on the power of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">compounding interest</a>, though at different rates.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> How can you invest money for retirement? Your options include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0">
<li>Contributing to a 401(k) at work</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/">Opening a traditional or Roth individual retirement account (IRA)</a></li>
<li>Investing through a taxable <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerageaccount.asp">brokerage account</a></li>
<li>Purchasing <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/real-estate-investing-4689779">real estate</a> as an investment property</li>
<li>Buying an <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedannuity.asp">annuity</a> to get an unchanging regular income stream</li>
</ul>
<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"> The most important thing to remember about investing is that it almost always involves some degree of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risk</a>. Certain investments tend to be riskier than others. For example, trading cryptocurrency is generally riskier than investing in municipal bonds, as the latter is backed by the issuing municipality while the former is not.<span class="ql-inline-citation" data-cite="26"></span><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_85-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> Considering your 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>, goals, and timeline until you plan to retire can help you decide what approach to take when investing. You may also benefit from talking to 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 an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentadvisor.asp">investment advisor</a> if you need more specific guidance on where to invest.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div>
<span class="heading-toc" id="toc-you-can-also-delay-retirement"></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"> You Can Also Delay Retirement </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Whether you feel that you still haven’t saved enough money for a comfortable retirement or have no savings at all, there’s one more thing you can do: wait to retire.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Delaying your retirement date may not be ideal, and for some people, it might not be realistic. For example, if you have a serious health issue that’s making it difficult to keep up with the demands of your job, then an earlier-than-expected retirement could be inevitable.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> However, if you’re able to put off retirement, it can give you more time to save and invest. And as mentioned, waiting longer to retire and claim Social Security could result in a larger benefit amount.
</p>
<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-happens-if-you-have-no-money-when-you-retire"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens If You Have No Money When You Retire?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If you retire with no money, you’ll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_97-0"><span class="heading-toc" id="toc-how-do-i-retire-in-five-years-with-no-savings"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Retire in Five Years with No Savings?</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/retirement/07/5yearstoretirement.asp">Retiring in five years</a> with no savings can be challenging and may require you to make some drastic changes to your financial situation. This might include cutting expenses down to the bone, finding ways to increase your income, and investing aggressively to grow your money faster. You could also aim to max out your 401(k) for those five years, in order to accumulate as much in savings as possible before retiring.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_99-0"><span class="heading-toc" id="toc-how-do-low-income-people-retire"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Low-Income People Retire?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Low-income people may retire by cutting their expenses, downsizing their homes, taking Social Security benefits early, and/or applying for financial assistance through government benefit programs. Depending on their situation, they may continue working on a part-time basis or start one or more side hustles to generate supplemental income.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_101-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> Retiring with no money may not be an ideal situation, especially if you’re dreaming of a particular type of lifestyle. If you have little to no money saved and your retirement is nearing, it’s important to start planning sooner rather than later.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/updates/find-financial-advisor-planner/">Finding a financial planner or advisor</a> to work with can make coming up with a realistic plan for retiring with scant savings easier.
</p></div> | One of the biggest questions associated with [retirement planning](https://www.investopedia.com/retirement-planning-4689695) is, “How much do I need to save?” A retirement study of American workers conducted by Schroders found that the average worker age 45 or older believes it will take $1.1 million to retire comfortably. However, only 21% of those workers expect to save $1 million or more for retirement.
Can you retire on no money? Having no savings means that you will be forced to rely on your Social Security benefit for income in retirement. According to the [Social Security Administration (SSA)](https://www.investopedia.com/terms/s/ssa.asp), among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income. So people do it. Still, it requires sacrifices, hustling, and planning.
### Key Takeaways
* Retiring with little to no money saved is not impossible, but it can present some challenges to your financial plan.
* Depending on where you’re starting from, you may need to delay Social Security benefits, work longer, or drastically reduce expenses to retire with no money saved.
* Talking to a financial advisor can help you create a realistic plan for retiring with no savings.
* Investing money vs. saving it can help you to build wealth, so that you don’t go into retirement empty-handed.
## Understand Your Social Security Benefits
[Social Security benefits](https://www.investopedia.com/terms/s/social-security-benefits.asp) provide a stream of income for retirement, so if you’re trying to retire with no money saved, it’s important to understand how much you might be able to collect. As of November 2023, the average monthly retirement benefit from Social Security was $1,844.76.
Whether you receive that amount, or more, or less, can depend on a number of factors, including your employment and earnings history and [the age at which you retire](https://www.investopedia.com/retirement/when-should-i-retire-pros-and-cons-different-ages/). The earliest you can begin taking Social Security retirement benefits is age 62, but claiming benefits early reduces the amount you’re entitled to receive. Delaying benefits until age 70, on the other hand, can allow you to claim an increased benefit amount.
If you’re retiring with no savings, it may be to your advantage to wait as long as possible to take Social Security benefits. [Calculating your estimated retirement benefit](https://www.investopedia.com/retirement/calculate-social-security-benefits/) at different ages can help you determine when the timing may be right to apply for Social Security.
According to the SSA, Social Security benefits typically account for a replacement rate of roughly 40% of a retiree’s previous working income, but it is commonly accepted that a replacement rate of roughly 70% is adequate for retirement income from all sources. So how do you make up that 30%?
### Warning
If you take Social Security retirement benefits early and are still working, your benefit amount may be reduced if your earnings exceed a certain amount. For 2024, the earnings limit is $22,320.
## Stick to a Budget
Making a [retirement budget](https://www.investopedia.com/articles/personal-finance/110315/4-phases-retirement-and-how-budget-them.asp) is essential if you have little to no money saved. Having a budget can help you track where your money is going and avoid overspending.
When making a budget for retirement, it’s good to consider where you can slash spending if you anticipate having limited income. You can start with the largest expenses first, which are usually [housing](https://www.investopedia.com/articles/retirement/07/buy-rent.asp) and [healthcare](https://www.investopedia.com/retirement/how-plan-medical-expenses-retirement/), then work your way down the list to look for areas where you may be able to cut back.
For instance, if housing costs take up a sizable part of your income, you might be able to reduce those expenses by:
* Downsizing to a smaller home or moving to an area with a lower [cost of living](https://www.investopedia.com/terms/c/cost-of-living.asp)
* Renting out part of your home, either on a temporary or permanent basis
* Selling your home and moving in with one of your children, a sibling, or another relative
* [Moving to an all-inclusive retirement community](https://www.investopedia.com/the-cost-of-living-in-a-retirement-community-5069448) that bundles utilities, maintenance, and other homeownership costs into the purchase price
The more cuts you can make, the better off you’ll be when retiring with nothing in the bank.
###
If you own your home outright and meet other requirements, you may be able to get a [reverse mortgage](https://www.investopedia.com/mortgage/reverse-mortgage/) to create an additional stream of income in retirement.
## Apply for Government Benefits
Government programs can help to offset some of your cost of living in retirement if you have little or no money saved. There are [several government programs](https://www.investopedia.com/special-government-help-for-your-retirement-5069756) for which you may be able to qualify if you have limited financial resources, including:
* [Supplemental Nutrition Assistance Program (SNAP)](https://www.investopedia.com/supplemental-nutrition-assistance-program-snap-5187718)
* [Medicaid](https://www.investopedia.com/terms/m/medicaid.asp)
* [Medicare](https://www.investopedia.com/terms/m/medicare.asp)
* [Supplemental Security Income (SSI)](https://www.investopedia.com/terms/s/ssi.asp)
Eligibility requirements for each program vary but can be based on age, disability status, income, and assets. For example, SSI is available to individuals who are 65, blind, or disabled and have limited income and financial resources. Medicare eligibility, on the other hand, is based on age; you can apply when you turn 65.
If you’re unsure of the kind of government benefits for which you might qualify, you can contact your local Department of Social Services. Someone there should be able to tell you the programs for which you may be eligible and how to apply.
### Important
Eligibility requirements for SNAP and Medicaid can vary based on the state where you live.
## Get a Part-Time Job or Side Hustle
If you’re contemplating retirement with no savings, then you may need to find ways to make more money. Getting a part-time job or starting a side hustle are two ways to earn money in your spare time without being locked into a full-time position.
Examples of possible side hustles that you might start in retirement include:
* Walking dogs or pet sitting
* Babysitting
* Cutting grass or doing yardwork
* Selling homemade baked goods
* Getting paid to run errands or do odd jobs for neighbors
Remember that if you’re earning money from side hustles, the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) still expects you to report that [income](https://www.investopedia.com/terms/i/income.asp) on your taxes. If you have more than $400 in earnings from side hustles or self-employment for the year, you’ll have to report it as taxable income. Failure to report income properly could result in financial penalties and other serious consequences, such as a [tax lien](https://www.investopedia.com/terms/t/taxlien.asp), if the IRS believes that you’re attempting to commit tax fraud.
## Ways to Avoid Retiring with No Money
If you fear that you will have to retire without any savings but haven’t yet actually gotten there, there are things you can try to prevent that scenario. They may include:
### Pay Off Debt
[Debt](https://www.investopedia.com/terms/d/debt.asp), of course, is the opposite of savings, so the first thing to do is get rid of yours if you want to save for retirement. Retiring with debt, alas, is not uncommon.
According to a Clever Real Estate survey, in 2023, retirees have an average of $19,888 in debt, excluding mortgage debt but including credit cards, medical bills, car payments, and personal loans. According to the Federal Student Aid Portfolio Summary, borrowers age 50 or older accounted for 25.16% of total student loan debt of $1.63 trillion in 2023.
How you go about paying down debt can depend on what you owe and how much money you have to commit to debt [repayment](https://www.investopedia.com/terms/r/repayment.asp). Some of the options include:
* [Credit card](https://www.investopedia.com/best-credit-cards-4801582) balance transfers
* [Debt consolidation](https://www.investopedia.com/terms/d/debtconsolidation.asp)
* [Using a home equity loan or a home equity line of credit (HELOC)](https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/) to pay off debt
* Federal [student loan consolidation](https://www.investopedia.com/student-loan-consolidation-definition-4684455)
* Private [student loan refinancing](https://www.investopedia.com/refinance-student-loans-5323837)
If you’re having trouble getting a grip on debt, you might want to [talk to a certified credit counselor](https://www.investopedia.com/how-to-find-a-credit-counselor-7514802) or debt counselor. They can review your budget and debt to offer solutions for dealing with it, which may include enrolling in a debt management plan, negotiating debt to pay less than what’s owed, or, in extreme cases, filing for [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp).
### Increase Your Income
If you need more money but feel stuck at your current pay level, there are steps you can take to increase your income. These include:
* **Ask for a raise**. Be smart and check comparable salaries to yours. If you are on the low end, make sure that your employer knows it.
* **Look for a new job**. Sometimes there is little room for advancement where you work, while moving to a different employer could open up the corporate ladder.
* **Go back to school**. If you improve your credentials, you can increase your earning power.
* **Get a second job**. There are plenty of part-time opportunities out there, from waiting tables to driving a cab or livery vehicle in the evenings and on weekends.
* **Turn your expertise into cash**. If you have a deep knowledge about a subject people want to learn about, you could use it to teach part-time, blog online, or hit the lecture circuit.
* **Turn a hobby into a business**. You may have a passion that you can turn into a marketable sideline online or at various selling places, such as the local fair, a farmer’s market, or a consignment booth in an antiques and tchotchkes store.
### Utilize Your Workplace Plan
If your employer offers a retirement plan, it’s to your advantage to make the most of it during your working years. Among private industry workers, 69% have access to a retirement plan at work. Those include both [defined-contribution plans](https://www.investopedia.com/terms/d/definedcontributionplan.asp), such as a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp), and [defined-benefit plans](https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp), such as a [pension](https://www.investopedia.com/terms/p/pensionplan.asp).
Saving in a 401(k) can help you head into retirement with some money in hand, especially if you’re contributing enough to get the full [employer match](https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp) if one is offered. With pension plans, your benefit amount is typically determined by how many years you worked for your employer and your income in your highest-earning years.
If your employer offers a 401(k) and you’re not yet enrolled, sign up and start making contributions once you have retired any high-interest debt. If your current employer doesn’t offer one, ask if the company would consider changing that. If not, you might want to consider moving to a new company that does, as 401(k) plans are quite common. If your employer doesn’t offer a pension, though, it’s highly unlikely that you can do anything about that or find a new employer that does. [Pensions have largely gone the way of the dodo](https://www.investopedia.com/articles/retirement/06/demiseofdbplan.asp).
### Invest Your Money
Once you are able to start saving, think about investing that money instead of just saving it. When you invest money, you’re putting it into the market, where it can earn a higher [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) than in a savings account. Both saving and investing can allow you to capitalize on the power of [compounding interest](https://www.investopedia.com/terms/c/compoundinterest.asp), though at different rates.
How can you invest money for retirement? Your options include:
* Contributing to a 401(k) at work
* [Opening a traditional or Roth individual retirement account (IRA)](https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/)
* Investing through a taxable [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp)
* Purchasing [real estate](https://www.investopedia.com/real-estate-investing-4689779) as an investment property
* Buying an [annuity](https://www.investopedia.com/terms/f/fixedannuity.asp) to get an unchanging regular income stream
The most important thing to remember about investing is that it almost always involves some degree of [risk](https://www.investopedia.com/terms/r/risk.asp). Certain investments tend to be riskier than others. For example, trading cryptocurrency is generally riskier than investing in municipal bonds, as the latter is backed by the issuing municipality while the former is not.
Considering your personal [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), goals, and timeline until you plan to retire can help you decide what approach to take when investing. You may also benefit from talking to a [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) or an [investment advisor](https://www.investopedia.com/terms/i/investmentadvisor.asp) if you need more specific guidance on where to invest.
## You Can Also Delay Retirement
Whether you feel that you still haven’t saved enough money for a comfortable retirement or have no savings at all, there’s one more thing you can do: wait to retire.
Delaying your retirement date may not be ideal, and for some people, it might not be realistic. For example, if you have a serious health issue that’s making it difficult to keep up with the demands of your job, then an earlier-than-expected retirement could be inevitable.
However, if you’re able to put off retirement, it can give you more time to save and invest. And as mentioned, waiting longer to retire and claim Social Security could result in a larger benefit amount.
## What Happens If You Have No Money When You Retire?
If you retire with no money, you’ll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
## How Do I Retire in Five Years with No Savings?
[Retiring in five years](https://www.investopedia.com/articles/retirement/07/5yearstoretirement.asp) with no savings can be challenging and may require you to make some drastic changes to your financial situation. This might include cutting expenses down to the bone, finding ways to increase your income, and investing aggressively to grow your money faster. You could also aim to max out your 401(k) for those five years, in order to accumulate as much in savings as possible before retiring.
## How Do Low-Income People Retire?
Low-income people may retire by cutting their expenses, downsizing their homes, taking Social Security benefits early, and/or applying for financial assistance through government benefit programs. Depending on their situation, they may continue working on a part-time basis or start one or more side hustles to generate supplemental income.
## The Bottom Line
Retiring with no money may not be an ideal situation, especially if you’re dreaming of a particular type of lifestyle. If you have little to no money saved and your retirement is nearing, it’s important to start planning sooner rather than later.
[Finding a financial planner or advisor](https://www.investopedia.com/updates/find-financial-advisor-planner/) to work with can make coming up with a realistic plan for retiring with scant savings easier.
| One of the biggest questions associated with retirement planning is, “How much do I need to save?” A retirement study of American workers conducted by Schroders found that the average worker age 45 or older believes it will take $1.1 million to retire comfortably. However, only 21% of those workers expect to save $1 million or more for retirement.
Can you retire on no money? Having no savings means that you will be forced to rely on your Social Security benefit for income in retirement. According to the Social Security Administration (SSA), among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income. So people do it. Still, it requires sacrifices, hustling, and planning.
Key Takeaways
Retiring with little to no money saved is not impossible, but it can present some challenges to your financial plan.Depending on where you’re starting from, you may need to delay Social Security benefits, work longer, or drastically reduce expenses to retire with no money saved.Talking to a financial advisor can help you create a realistic plan for retiring with no savings.Investing money vs. saving it can help you to build wealth, so that you don’t go into retirement empty-handed.
Understand Your Social Security Benefits
Social Security benefits provide a stream of income for retirement, so if you’re trying to retire with no money saved, it’s important to understand how much you might be able to collect. As of November 2023, the average monthly retirement benefit from Social Security was $1,844.76.
Whether you receive that amount, or more, or less, can depend on a number of factors, including your employment and earnings history and the age at which you retire. The earliest you can begin taking Social Security retirement benefits is age 62, but claiming benefits early reduces the amount you’re entitled to receive. Delaying benefits until age 70, on the other hand, can allow you to claim an increased benefit amount.
If you’re retiring with no savings, it may be to your advantage to wait as long as possible to take Social Security benefits. Calculating your estimated retirement benefit at different ages can help you determine when the timing may be right to apply for Social Security.
According to the SSA, Social Security benefits typically account for a replacement rate of roughly 40% of a retiree’s previous working income, but it is commonly accepted that a replacement rate of roughly 70% is adequate for retirement income from all sources. So how do you make up that 30%?
Warning
If you take Social Security retirement benefits early and are still working, your benefit amount may be reduced if your earnings exceed a certain amount. For 2024, the earnings limit is $22,320.
Stick to a Budget
Making a retirement budget is essential if you have little to no money saved. Having a budget can help you track where your money is going and avoid overspending.
When making a budget for retirement, it’s good to consider where you can slash spending if you anticipate having limited income. You can start with the largest expenses first, which are usually housing and healthcare, then work your way down the list to look for areas where you may be able to cut back.
For instance, if housing costs take up a sizable part of your income, you might be able to reduce those expenses by:
Downsizing to a smaller home or moving to an area with a lower cost of living
Renting out part of your home, either on a temporary or permanent basis
Selling your home and moving in with one of your children, a sibling, or another relative
Moving to an all-inclusive retirement community that bundles utilities, maintenance, and other homeownership costs into the purchase price
The more cuts you can make, the better off you’ll be when retiring with nothing in the bank.
If you own your home outright and meet other requirements, you may be able to get a reverse mortgage to create an additional stream of income in retirement.
Apply for Government Benefits
Government programs can help to offset some of your cost of living in retirement if you have little or no money saved. There are several government programs for which you may be able to qualify if you have limited financial resources, including:
Supplemental Nutrition Assistance Program (SNAP)
Medicaid
Medicare
Supplemental Security Income (SSI)
Eligibility requirements for each program vary but can be based on age, disability status, income, and assets. For example, SSI is available to individuals who are 65, blind, or disabled and have limited income and financial resources. Medicare eligibility, on the other hand, is based on age; you can apply when you turn 65.
If you’re unsure of the kind of government benefits for which you might qualify, you can contact your local Department of Social Services. Someone there should be able to tell you the programs for which you may be eligible and how to apply.
Important
Eligibility requirements for SNAP and Medicaid can vary based on the state where you live.
Get a Part-Time Job or Side Hustle
If you’re contemplating retirement with no savings, then you may need to find ways to make more money. Getting a part-time job or starting a side hustle are two ways to earn money in your spare time without being locked into a full-time position.
Examples of possible side hustles that you might start in retirement include:
Walking dogs or pet sittingBabysittingCutting grass or doing yardworkSelling homemade baked goodsGetting paid to run errands or do odd jobs for neighbors
Remember that if you’re earning money from side hustles, the Internal Revenue Service (IRS) still expects you to report that income on your taxes. If you have more than $400 in earnings from side hustles or self-employment for the year, you’ll have to report it as taxable income. Failure to report income properly could result in financial penalties and other serious consequences, such as a tax lien, if the IRS believes that you’re attempting to commit tax fraud.
Ways to Avoid Retiring with No Money
If you fear that you will have to retire without any savings but haven’t yet actually gotten there, there are things you can try to prevent that scenario. They may include:
Pay Off Debt
Debt, of course, is the opposite of savings, so the first thing to do is get rid of yours if you want to save for retirement. Retiring with debt, alas, is not uncommon.
According to a Clever Real Estate survey, in 2023, retirees have an average of $19,888 in debt, excluding mortgage debt but including credit cards, medical bills, car payments, and personal loans. According to the Federal Student Aid Portfolio Summary, borrowers age 50 or older accounted for 25.16% of total student loan debt of $1.63 trillion in 2023.
How you go about paying down debt can depend on what you owe and how much money you have to commit to debt repayment. Some of the options include:
Credit card balance transfers
Debt consolidation
Using a home equity loan or a home equity line of credit (HELOC) to pay off debt
Federal student loan consolidation
Private student loan refinancing
If you’re having trouble getting a grip on debt, you might want to talk to a certified credit counselor or debt counselor. They can review your budget and debt to offer solutions for dealing with it, which may include enrolling in a debt management plan, negotiating debt to pay less than what’s owed, or, in extreme cases, filing for bankruptcy.
Increase Your Income
If you need more money but feel stuck at your current pay level, there are steps you can take to increase your income. These include:
Ask for a raise. Be smart and check comparable salaries to yours. If you are on the low end, make sure that your employer knows it.Look for a new job. Sometimes there is little room for advancement where you work, while moving to a different employer could open up the corporate ladder.Go back to school. If you improve your credentials, you can increase your earning power.Get a second job. There are plenty of part-time opportunities out there, from waiting tables to driving a cab or livery vehicle in the evenings and on weekends.Turn your expertise into cash. If you have a deep knowledge about a subject people want to learn about, you could use it to teach part-time, blog online, or hit the lecture circuit.Turn a hobby into a business. You may have a passion that you can turn into a marketable sideline online or at various selling places, such as the local fair, a farmer’s market, or a consignment booth in an antiques and tchotchkes store.
Utilize Your Workplace Plan
If your employer offers a retirement plan, it’s to your advantage to make the most of it during your working years. Among private industry workers, 69% have access to a retirement plan at work. Those include both defined-contribution plans, such as a 401(k), and defined-benefit plans, such as a pension.
Saving in a 401(k) can help you head into retirement with some money in hand, especially if you’re contributing enough to get the full employer match if one is offered. With pension plans, your benefit amount is typically determined by how many years you worked for your employer and your income in your highest-earning years.
If your employer offers a 401(k) and you’re not yet enrolled, sign up and start making contributions once you have retired any high-interest debt. If your current employer doesn’t offer one, ask if the company would consider changing that. If not, you might want to consider moving to a new company that does, as 401(k) plans are quite common. If your employer doesn’t offer a pension, though, it’s highly unlikely that you can do anything about that or find a new employer that does. Pensions have largely gone the way of the dodo.
Invest Your Money
Once you are able to start saving, think about investing that money instead of just saving it. When you invest money, you’re putting it into the market, where it can earn a higher rate of return than in a savings account. Both saving and investing can allow you to capitalize on the power of compounding interest, though at different rates.
How can you invest money for retirement? Your options include:
Contributing to a 401(k) at work
Opening a traditional or Roth individual retirement account (IRA)
Investing through a taxable brokerage account
Purchasing real estate as an investment property
Buying an annuity to get an unchanging regular income stream
The most important thing to remember about investing is that it almost always involves some degree of risk. Certain investments tend to be riskier than others. For example, trading cryptocurrency is generally riskier than investing in municipal bonds, as the latter is backed by the issuing municipality while the former is not.
Considering your personal risk tolerance, goals, and timeline until you plan to retire can help you decide what approach to take when investing. You may also benefit from talking to a financial advisor or an investment advisor if you need more specific guidance on where to invest.
You Can Also Delay Retirement
Whether you feel that you still haven’t saved enough money for a comfortable retirement or have no savings at all, there’s one more thing you can do: wait to retire.
Delaying your retirement date may not be ideal, and for some people, it might not be realistic. For example, if you have a serious health issue that’s making it difficult to keep up with the demands of your job, then an earlier-than-expected retirement could be inevitable.
However, if you’re able to put off retirement, it can give you more time to save and invest. And as mentioned, waiting longer to retire and claim Social Security could result in a larger benefit amount.
What Happens If You Have No Money When You Retire?
If you retire with no money, you’ll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
How Do I Retire in Five Years with No Savings?
Retiring in five years with no savings can be challenging and may require you to make some drastic changes to your financial situation. This might include cutting expenses down to the bone, finding ways to increase your income, and investing aggressively to grow your money faster. You could also aim to max out your 401(k) for those five years, in order to accumulate as much in savings as possible before retiring.
How Do Low-Income People Retire?
Low-income people may retire by cutting their expenses, downsizing their homes, taking Social Security benefits early, and/or applying for financial assistance through government benefit programs. Depending on their situation, they may continue working on a part-time basis or start one or more side hustles to generate supplemental income.
The Bottom Line
Retiring with no money may not be an ideal situation, especially if you’re dreaming of a particular type of lifestyle. If you have little to no money saved and your retirement is nearing, it’s important to start planning sooner rather than later.
Finding a financial planner or advisor to work with can make coming up with a realistic plan for retiring with scant savings easier.
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