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https://www.investopedia.com/terms/e/ebida.asp | Earnings Before Interest, Depreciation, and Amortization (EBIDA) | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-earnings-before-interest-depreciation-and-amortization-ebida"></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 Earnings Before Interest, Depreciation and Amortization (EBIDA)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Earnings before interest, depreciation and amortization (EBIDA) is a measure of the earnings of a company that adds the interest expense, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/depreciation.asp">depreciation</a>, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/amortization.asp">amortization</a> back to the net income number. However, it does include tax expenses. This measure is not as well known or used as often as its counterpart—earnings before interest, taxes, depreciation and amortization (EBITDA).
</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>Earnings before interest, depreciation and amortization (EBIDA) is an earnings metric that adds interest and depreciation/amortization back to net income. </li><li>EBIDA is said to be more conservative compared to its EBITDA counterpart, as the former is generally always lower. </li><li>The EBIDA measure removes the assumption that the money paid in taxes could be used to pay down debt. </li><li>However, EBIDA is not often used by analysts, who instead opt for either EBITDA or EBIT. </li><li>The components needed to calculate EBIDA can be found on a company's income statement.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-earnings-before-interest-depreciation-and-amortization-ebida"></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 Earnings Before Interest, Depreciation and Amortization (EBIDA) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> There are various ways to calculate EBIDA, such as adding interest, depreciation, and amortization to net income. Another way to calculate EBIDA is to add depreciation and amortization to earnings before interest and taxes (EBIT) and then subtract taxes.
</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 metric is generally used to analyze companies in the same industry. It does not include the direct effects of financing, where taxes a company pays are a direct result of its use of debt.
</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"> EBIDA can often be found as a metric for companies that do not pay taxes. This can include many nonprofits, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/non-profitorganization.asp">non-for-profit</a> hospitals or charity and religious organizations. In this case, it can be used interchangeably with EBITDA.
</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>All components needed to calculate EBIDA can be found on a company's income statement.</p></div></div></div>
<span class="heading-toc" id="toc-formula-and-calculation-for-ebida"></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"> Formula and Calculation for EBIDA </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> EBIDA is calculated by deducting certain costs from EBIT or operating profit. The formula for EBIDA is:
</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>EBITDA = EBIT + Depreciation + Amortization - Taxes</strong>
</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"> As an example, consider a company with the following financial information:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li>Total Revenue: $1,000,000</li><li>Cost of Goods Sold: $200,000</li><li>Selling and Administrative Expenses: $150,000</li><li>Depreciation Expense: $50,000</li><li>Amortization Expense: $25,000</li><li>Interest Expense: $100,000</li><li>Taxes: $35,000</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> EBIDA is calculated by first finding EBIT which is calculated as the difference between total net revenue and operating costs. In this example, we'll want to subtract the cost of goods sold, S&A expenses, depreciation expense, and amortization expenses from total revenue. In this example, EBIT (or operating profit) is $575,000.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> However, EBIDA does not want to consider the non-cashflow items such as depreciation or amortization. Both are typically accounting entries that record an expense that does not tie to the cash outlay on the financial statements. Therefore, both depreciation and amortization need to be added back in.
</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"> Last, EBIDA also considers interest. Because interest is not an operating expense, it is not naturally included in operating profit. Therefore, companies will want to include this expense in as it is often avoidable and on a fixed schedule. In this example, the final EBIDA is calculated as:
</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"> <strong>EBIDA = $575,000 (EBIT) + $50,000 + 25,000 - $100,000 = $550,000</strong>
</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-special-considerations"></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"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Earnings before interest, depreciation, and amortization (EBIDA) is considered to be a more conservative <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuation.asp">valuation</a> measure than EBITDA because it includes the tax expense in the earnings measure. The EBIDA measure removes the assumption that the money paid in taxes could be used to pay down debt, an assumption made in EBITDA.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> This debt payment assumption is made because interest payments are tax <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deductible.asp">deductible</a>, which, in turn, may lower the company's tax expense, giving it more money to service its debt. EBIDA, however, does not make the assumption that the tax expense can be lowered through the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestexpense.asp">interest expense</a> and, therefore, does not add it back to net income.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_38-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>EBIDA is not regulated or required as part of GAAP reporting. Therefore, you probably won't see it explicitly calculated or reported as part of a company's financial statements.</p></div></div></div>
<span class="heading-toc" id="toc-criticism-of-ebida"></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"> Criticism of EBIDA </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> EBIDA as an earnings measure is very rarely calculated by companies and analysts. It serves little purpose, then, if EBIDA is not a standard measure to track, compare, analyze and forecast. Instead, EBITDA is widely accepted as one of the major earnings metrics. As well, EBIDA can be deceptive as it’ll still always be higher than net income, and in most cases, higher than EBIT as well.
</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"> And like other popular metrics (such as EBITDA and EBIT), EBIDA isn’t regulated by Generally Accepted Accounting Principles (GAAP), thus, what’s included is at the company’s discretion. Along with the criticism of EBIT and EBITDA, the EBIDA figure does not include other key information, such as working capital changes and <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> (CapEx).
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-is-the-difference-between-ebida-and-ebitda"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between EBIDA and EBITDA?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>EBIDA and EBITDA are both profitability measurements that compare a company's earnings after certain expenses have been considered. The only difference between the two is the treatment of taxes. EBIDA does not consider taxes, while EBITDA does deduct the amount of taxes owed. Therefore, EBIDA is often a higher calculation due to it consider one less corporate expense.</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-is-ebida-used-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is EBIDA Used for?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>EBIDA is used to gauge how profitable a company is when not considered some non-cashflow expenses. For instance, both depreciation and amortization are expensed over time not in line with when an initial investment and cash outlay may have occurred. Therefore, EBIDA gives an organization a better understanding of what its profitability is from a cash-generating standpoint.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-what-is-a-good-ebida"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good EBIDA?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As a baseline, a company's EBIDA must be positive if it hopes to achieve positive cashflow. Even then, EBIDA adds back in depreciation and amortization, so it is possible for a company to have a positive EBIDA and yet still lose money each period. A company should strive to have an EBIDA high enough to sustain company growth as well as tracking what competitive company EBIDA's are to make sure their own is comparable.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> EBIDA is a measure of company earnings that considers operating profit, depreciation, amortization, and interest. Companies use EBIDA to better understand their profitability as well as getting a gauge on how their earnings are after stripping away some financial accounting calculations that are not tied to cashflow. EBIDA is very similar to EBITDA, though the latter also incorporates taxes.
</p></div> | ## What Is Earnings Before Interest, Depreciation and Amortization (EBIDA)?
Earnings before interest, depreciation and amortization (EBIDA) is a measure of the earnings of a company that adds the interest expense, [depreciation](https://www.investopedia.com/terms/d/depreciation.asp), and [amortization](https://www.investopedia.com/terms/a/amortization.asp) back to the net income number. However, it does include tax expenses. This measure is not as well known or used as often as its counterpart—earnings before interest, taxes, depreciation and amortization (EBITDA).
### Key Takeaways
* Earnings before interest, depreciation and amortization (EBIDA) is an earnings metric that adds interest and depreciation/amortization back to net income.
* EBIDA is said to be more conservative compared to its EBITDA counterpart, as the former is generally always lower.
* The EBIDA measure removes the assumption that the money paid in taxes could be used to pay down debt.
* However, EBIDA is not often used by analysts, who instead opt for either EBITDA or EBIT.
* The components needed to calculate EBIDA can be found on a company's income statement.
## Understanding Earnings Before Interest, Depreciation and Amortization (EBIDA)
There are various ways to calculate EBIDA, such as adding interest, depreciation, and amortization to net income. Another way to calculate EBIDA is to add depreciation and amortization to earnings before interest and taxes (EBIT) and then subtract taxes.
The metric is generally used to analyze companies in the same industry. It does not include the direct effects of financing, where taxes a company pays are a direct result of its use of debt.
EBIDA can often be found as a metric for companies that do not pay taxes. This can include many nonprofits, such as [non-for-profit](https://www.investopedia.com/terms/n/non-profitorganization.asp) hospitals or charity and religious organizations. In this case, it can be used interchangeably with EBITDA.
###
All components needed to calculate EBIDA can be found on a company's income statement.
## Formula and Calculation for EBIDA
EBIDA is calculated by deducting certain costs from EBIT or operating profit. The formula for EBIDA is:
**EBITDA = EBIT + Depreciation + Amortization - Taxes**
As an example, consider a company with the following financial information:
* Total Revenue: $1,000,000
* Cost of Goods Sold: $200,000
* Selling and Administrative Expenses: $150,000
* Depreciation Expense: $50,000
* Amortization Expense: $25,000
* Interest Expense: $100,000
* Taxes: $35,000
EBIDA is calculated by first finding EBIT which is calculated as the difference between total net revenue and operating costs. In this example, we'll want to subtract the cost of goods sold, S&A expenses, depreciation expense, and amortization expenses from total revenue. In this example, EBIT (or operating profit) is $575,000.
However, EBIDA does not want to consider the non-cashflow items such as depreciation or amortization. Both are typically accounting entries that record an expense that does not tie to the cash outlay on the financial statements. Therefore, both depreciation and amortization need to be added back in.
Last, EBIDA also considers interest. Because interest is not an operating expense, it is not naturally included in operating profit. Therefore, companies will want to include this expense in as it is often avoidable and on a fixed schedule. In this example, the final EBIDA is calculated as:
**EBIDA = $575,000 (EBIT) + $50,000 + 25,000 - $100,000 = $550,000**
## Special Considerations
Earnings before interest, depreciation, and amortization (EBIDA) is considered to be a more conservative [valuation](https://www.investopedia.com/terms/v/valuation.asp) measure than EBITDA because it includes the tax expense in the earnings measure. The EBIDA measure removes the assumption that the money paid in taxes could be used to pay down debt, an assumption made in EBITDA.
This debt payment assumption is made because interest payments are tax [deductible](https://www.investopedia.com/terms/d/deductible.asp), which, in turn, may lower the company's tax expense, giving it more money to service its debt. EBIDA, however, does not make the assumption that the tax expense can be lowered through the [interest expense](https://www.investopedia.com/terms/i/interestexpense.asp) and, therefore, does not add it back to net income.
###
EBIDA is not regulated or required as part of GAAP reporting. Therefore, you probably won't see it explicitly calculated or reported as part of a company's financial statements.
## Criticism of EBIDA
EBIDA as an earnings measure is very rarely calculated by companies and analysts. It serves little purpose, then, if EBIDA is not a standard measure to track, compare, analyze and forecast. Instead, EBITDA is widely accepted as one of the major earnings metrics. As well, EBIDA can be deceptive as it’ll still always be higher than net income, and in most cases, higher than EBIT as well.
And like other popular metrics (such as EBITDA and EBIT), EBIDA isn’t regulated by Generally Accepted Accounting Principles (GAAP), thus, what’s included is at the company’s discretion. Along with the criticism of EBIT and EBITDA, the EBIDA figure does not include other key information, such as working capital changes and [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) (CapEx).
## What Is the Difference Between EBIDA and EBITDA?
EBIDA and EBITDA are both profitability measurements that compare a company's earnings after certain expenses have been considered. The only difference between the two is the treatment of taxes. EBIDA does not consider taxes, while EBITDA does deduct the amount of taxes owed. Therefore, EBIDA is often a higher calculation due to it consider one less corporate expense.
## What Is EBIDA Used for?
EBIDA is used to gauge how profitable a company is when not considered some non-cashflow expenses. For instance, both depreciation and amortization are expensed over time not in line with when an initial investment and cash outlay may have occurred. Therefore, EBIDA gives an organization a better understanding of what its profitability is from a cash-generating standpoint.
## What Is a Good EBIDA?
As a baseline, a company's EBIDA must be positive if it hopes to achieve positive cashflow. Even then, EBIDA adds back in depreciation and amortization, so it is possible for a company to have a positive EBIDA and yet still lose money each period. A company should strive to have an EBIDA high enough to sustain company growth as well as tracking what competitive company EBIDA's are to make sure their own is comparable.
## The Bottom Line
EBIDA is a measure of company earnings that considers operating profit, depreciation, amortization, and interest. Companies use EBIDA to better understand their profitability as well as getting a gauge on how their earnings are after stripping away some financial accounting calculations that are not tied to cashflow. EBIDA is very similar to EBITDA, though the latter also incorporates taxes.
| What Is Earnings Before Interest, Depreciation and Amortization (EBIDA)?
Earnings before interest, depreciation and amortization (EBIDA) is a measure of the earnings of a company that adds the interest expense, depreciation, and amortization back to the net income number. However, it does include tax expenses. This measure is not as well known or used as often as its counterpart—earnings before interest, taxes, depreciation and amortization (EBITDA).
Key Takeaways
Earnings before interest, depreciation and amortization (EBIDA) is an earnings metric that adds interest and depreciation/amortization back to net income. EBIDA is said to be more conservative compared to its EBITDA counterpart, as the former is generally always lower. The EBIDA measure removes the assumption that the money paid in taxes could be used to pay down debt. However, EBIDA is not often used by analysts, who instead opt for either EBITDA or EBIT. The components needed to calculate EBIDA can be found on a company's income statement.
Understanding Earnings Before Interest, Depreciation and Amortization (EBIDA)
There are various ways to calculate EBIDA, such as adding interest, depreciation, and amortization to net income. Another way to calculate EBIDA is to add depreciation and amortization to earnings before interest and taxes (EBIT) and then subtract taxes.
The metric is generally used to analyze companies in the same industry. It does not include the direct effects of financing, where taxes a company pays are a direct result of its use of debt.
EBIDA can often be found as a metric for companies that do not pay taxes. This can include many nonprofits, such as non-for-profit hospitals or charity and religious organizations. In this case, it can be used interchangeably with EBITDA.
All components needed to calculate EBIDA can be found on a company's income statement.
Formula and Calculation for EBIDA
EBIDA is calculated by deducting certain costs from EBIT or operating profit. The formula for EBIDA is:
EBITDA = EBIT + Depreciation + Amortization - Taxes
As an example, consider a company with the following financial information:
Total Revenue: $1,000,000Cost of Goods Sold: $200,000Selling and Administrative Expenses: $150,000Depreciation Expense: $50,000Amortization Expense: $25,000Interest Expense: $100,000Taxes: $35,000
EBIDA is calculated by first finding EBIT which is calculated as the difference between total net revenue and operating costs. In this example, we'll want to subtract the cost of goods sold, S&A expenses, depreciation expense, and amortization expenses from total revenue. In this example, EBIT (or operating profit) is $575,000.
However, EBIDA does not want to consider the non-cashflow items such as depreciation or amortization. Both are typically accounting entries that record an expense that does not tie to the cash outlay on the financial statements. Therefore, both depreciation and amortization need to be added back in.
Last, EBIDA also considers interest. Because interest is not an operating expense, it is not naturally included in operating profit. Therefore, companies will want to include this expense in as it is often avoidable and on a fixed schedule. In this example, the final EBIDA is calculated as:
EBIDA = $575,000 (EBIT) + $50,000 + 25,000 - $100,000 = $550,000
Special Considerations
Earnings before interest, depreciation, and amortization (EBIDA) is considered to be a more conservative valuation measure than EBITDA because it includes the tax expense in the earnings measure. The EBIDA measure removes the assumption that the money paid in taxes could be used to pay down debt, an assumption made in EBITDA.
This debt payment assumption is made because interest payments are tax deductible, which, in turn, may lower the company's tax expense, giving it more money to service its debt. EBIDA, however, does not make the assumption that the tax expense can be lowered through the interest expense and, therefore, does not add it back to net income.
EBIDA is not regulated or required as part of GAAP reporting. Therefore, you probably won't see it explicitly calculated or reported as part of a company's financial statements.
Criticism of EBIDA
EBIDA as an earnings measure is very rarely calculated by companies and analysts. It serves little purpose, then, if EBIDA is not a standard measure to track, compare, analyze and forecast. Instead, EBITDA is widely accepted as one of the major earnings metrics. As well, EBIDA can be deceptive as it’ll still always be higher than net income, and in most cases, higher than EBIT as well.
And like other popular metrics (such as EBITDA and EBIT), EBIDA isn’t regulated by Generally Accepted Accounting Principles (GAAP), thus, what’s included is at the company’s discretion. Along with the criticism of EBIT and EBITDA, the EBIDA figure does not include other key information, such as working capital changes and capital expenditures (CapEx).
What Is the Difference Between EBIDA and EBITDA?
EBIDA and EBITDA are both profitability measurements that compare a company's earnings after certain expenses have been considered. The only difference between the two is the treatment of taxes. EBIDA does not consider taxes, while EBITDA does deduct the amount of taxes owed. Therefore, EBIDA is often a higher calculation due to it consider one less corporate expense.
What Is EBIDA Used for?
EBIDA is used to gauge how profitable a company is when not considered some non-cashflow expenses. For instance, both depreciation and amortization are expensed over time not in line with when an initial investment and cash outlay may have occurred. Therefore, EBIDA gives an organization a better understanding of what its profitability is from a cash-generating standpoint.
What Is a Good EBIDA?
As a baseline, a company's EBIDA must be positive if it hopes to achieve positive cashflow. Even then, EBIDA adds back in depreciation and amortization, so it is possible for a company to have a positive EBIDA and yet still lose money each period. A company should strive to have an EBIDA high enough to sustain company growth as well as tracking what competitive company EBIDA's are to make sure their own is comparable.
The Bottom Line
EBIDA is a measure of company earnings that considers operating profit, depreciation, amortization, and interest. Companies use EBIDA to better understand their profitability as well as getting a gauge on how their earnings are after stripping away some financial accounting calculations that are not tied to cashflow. EBIDA is very similar to EBITDA, though the latter also incorporates taxes.
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https://www.investopedia.com/fafsa-student-aid-timeline-delayed-complicating-college-acceptance-process-8553400 | FAFSA Student Aid Timeline Delayed, Complicating College Acceptance 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"><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 Department of Education won't send colleges information on federal student aid letters until early March, months after it usually does.<br/></li><li>The delay, caused by the rollout of a new, simplified FAFSA application, has left college aid administrators scrambling, and has thrown the acceptance timeline into chaos.<br/></li><li>Despite the delays and other problems, officials say the new application is simpler and has resulted in more people from low-income backgrounds being eligible for the maximum amount of aid.<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"> An overhaul of the federal student aid application was supposed to make it simpler this year—instead the college acceptance process has been thrown into chaos as the changes have created delays.
</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 Department of Education said Tuesday it will give schools data on <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>applications months later than it normally does: colleges now won’t get student financial aid information until early March, James Kvaal, Under Secretary of Education, said Tuesday in a conference call with reporters.<span class="ql-inline-citation" data-cite="1"></span> <br/><br/>The department normally sends that information in October soon after applications open, but the rollout of a new, simplified application system has set the timeline back. The department only began accepting applications in January this year.
</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 delays are a result of overhauls made to the aid application system that were mandated by laws passed by Congress in 2019 and 2020. The overhauls were intended to make the FAFSA simpler, easier to use, and to make more lower-income students eligible for more aid.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> While the department said the application process has indeed become more streamlined and allowed people to qualify for more financial assistance, the delays have left college aid administrators wondering if students will get financial aid in time to make decisions about where to go to school.<br><br>“Moving the federal financial aid application into the 21st century isn’t a small endeavor, and we know how important the FAFSA is to millions of students and families and educators who serve them,” Kvaal said.<br/><br/>The National Association of Student Financial Aid Administrators said the “challenging” rollout of the new system threatened to harm the families it’s intended to help.<span class="ql-inline-citation" data-cite="2"></span>
</br></br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> “With this last-minute news, our nation's colleges are once again left scrambling as they determine how best to work within these new timelines to issue aid offers as soon as possible. So the students who can least afford higher education aren't the ones who ultimately pay the price for these missteps,” association president Justin Draeger said in a statement.<br/><br/>In addition to the delays, the new aid application system has been plagued by bugs that have left some students unable to apply at all. According to news reports and social media posts, parents have encountered websites that don’t load, buttons that don’t work, and various other frustrations as they’ve tried to apply for aid for next year.<br/><br/>The delay also means that applicants won’t be able to correct any mistakes on their submitted applications until March. Many colleges have application deadlines in February and March. As of Tuesday, it was unclear how the delay would affect college acceptance timelines, which typically end on May 1 when students must make their decision about where to enroll.<br/><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span><br/>The changes, even with the growing pains, could end up benefitting many students. Because of the simplification, 610,000 more people will qualify for Pell grants for low-income students because of the new form, and almost 1.5 million more than before will qualify for the maximum amount of $7,395, the department said.<br/><br/>Among the modifications: removing questions asking how much money the applicant made as a clergy member, and automatically retrieving income information from the IRS so that people don’t have to dig through old tax forms to fill out their application. Some of the dozens of systems modernized during the process were 50 years old, Kvaal said, and its overall functioning has been much improved.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> “We're hearing that people are able to complete the form in record time,” Kvaal said.<br/><br/>On social media, the feedback from applicants after the delay was announced was less than complimentary.<br/><br/>“Got accepted into some good schools which I was looking forward to just for these people to straight up sabotage these chances,” one user posted on Reddit’s FAFSA discussion page. “Like, people's futures are on the line here."<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 Department of Education won't send colleges information on federal student aid letters until early March, months after it usually does.
* The delay, caused by the rollout of a new, simplified FAFSA application, has left college aid administrators scrambling, and has thrown the acceptance timeline into chaos.
* Despite the delays and other problems, officials say the new application is simpler and has resulted in more people from low-income backgrounds being eligible for the maximum amount of aid.
An overhaul of the federal student aid application was supposed to make it simpler this year—instead the college acceptance process has been thrown into chaos as the changes have created delays.
The Department of Education said Tuesday it will give schools data on [Free Application for Federal Student Aid (FAFSA)](https://www.investopedia.com/terms/f/federal-application-of-student-aid-fafsa.asp) applications months later than it normally does: colleges now won’t get student financial aid information until early March, James Kvaal, Under Secretary of Education, said Tuesday in a conference call with reporters.
The department normally sends that information in October soon after applications open, but the rollout of a new, simplified application system has set the timeline back. The department only began accepting applications in January this year.
The delays are a result of overhauls made to the aid application system that were mandated by laws passed by Congress in 2019 and 2020. The overhauls were intended to make the FAFSA simpler, easier to use, and to make more lower-income students eligible for more aid.
While the department said the application process has indeed become more streamlined and allowed people to qualify for more financial assistance, the delays have left college aid administrators wondering if students will get financial aid in time to make decisions about where to go to school.
“Moving the federal financial aid application into the 21st century isn’t a small endeavor, and we know how important the FAFSA is to millions of students and families and educators who serve them,” Kvaal said.
“With this last-minute news, our nation's colleges are once again left scrambling as they determine how best to work within these new timelines to issue aid offers as soon as possible. So the students who can least afford higher education aren't the ones who ultimately pay the price for these missteps,” association president Justin Draeger said in a statement.
In addition to the delays, the new aid application system has been plagued by bugs that have left some students unable to apply at all. According to news reports and social media posts, parents have encountered websites that don’t load, buttons that don’t work, and various other frustrations as they’ve tried to apply for aid for next year.
The delay also means that applicants won’t be able to correct any mistakes on their submitted applications until March. Many colleges have application deadlines in February and March. As of Tuesday, it was unclear how the delay would affect college acceptance timelines, which typically end on May 1 when students must make their decision about where to enroll.
The changes, even with the growing pains, could end up benefitting many students. Because of the simplification, 610,000 more people will qualify for Pell grants for low-income students because of the new form, and almost 1.5 million more than before will qualify for the maximum amount of $7,395, the department said.
Among the modifications: removing questions asking how much money the applicant made as a clergy member, and automatically retrieving income information from the IRS so that people don’t have to dig through old tax forms to fill out their application. Some of the dozens of systems modernized during the process were 50 years old, Kvaal said, and its overall functioning has been much improved.
“We're hearing that people are able to complete the form in record time,” Kvaal said.
On social media, the feedback from applicants after the delay was announced was less than complimentary.
“Got accepted into some good schools which I was looking forward to just for these people to straight up sabotage these chances,” one user posted on Reddit’s FAFSA discussion page. “Like, people's futures are on the line here."
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
The Department of Education won't send colleges information on federal student aid letters until early March, months after it usually does.The delay, caused by the rollout of a new, simplified FAFSA application, has left college aid administrators scrambling, and has thrown the acceptance timeline into chaos.Despite the delays and other problems, officials say the new application is simpler and has resulted in more people from low-income backgrounds being eligible for the maximum amount of aid.
An overhaul of the federal student aid application was supposed to make it simpler this year—instead the college acceptance process has been thrown into chaos as the changes have created delays.
The Department of Education said Tuesday it will give schools data on Free Application for Federal Student Aid (FAFSA) applications months later than it normally does: colleges now won’t get student financial aid information until early March, James Kvaal, Under Secretary of Education, said Tuesday in a conference call with reporters. The department normally sends that information in October soon after applications open, but the rollout of a new, simplified application system has set the timeline back. The department only began accepting applications in January this year.
The delays are a result of overhauls made to the aid application system that were mandated by laws passed by Congress in 2019 and 2020. The overhauls were intended to make the FAFSA simpler, easier to use, and to make more lower-income students eligible for more aid.
While the department said the application process has indeed become more streamlined and allowed people to qualify for more financial assistance, the delays have left college aid administrators wondering if students will get financial aid in time to make decisions about where to go to school.“Moving the federal financial aid application into the 21st century isn’t a small endeavor, and we know how important the FAFSA is to millions of students and families and educators who serve them,” Kvaal said.The National Association of Student Financial Aid Administrators said the “challenging” rollout of the new system threatened to harm the families it’s intended to help.
“With this last-minute news, our nation's colleges are once again left scrambling as they determine how best to work within these new timelines to issue aid offers as soon as possible. So the students who can least afford higher education aren't the ones who ultimately pay the price for these missteps,” association president Justin Draeger said in a statement.In addition to the delays, the new aid application system has been plagued by bugs that have left some students unable to apply at all. According to news reports and social media posts, parents have encountered websites that don’t load, buttons that don’t work, and various other frustrations as they’ve tried to apply for aid for next year.The delay also means that applicants won’t be able to correct any mistakes on their submitted applications until March. Many colleges have application deadlines in February and March. As of Tuesday, it was unclear how the delay would affect college acceptance timelines, which typically end on May 1 when students must make their decision about where to enroll.The changes, even with the growing pains, could end up benefitting many students. Because of the simplification, 610,000 more people will qualify for Pell grants for low-income students because of the new form, and almost 1.5 million more than before will qualify for the maximum amount of $7,395, the department said.Among the modifications: removing questions asking how much money the applicant made as a clergy member, and automatically retrieving income information from the IRS so that people don’t have to dig through old tax forms to fill out their application. Some of the dozens of systems modernized during the process were 50 years old, Kvaal said, and its overall functioning has been much improved.
“We're hearing that people are able to complete the form in record time,” Kvaal said.On social media, the feedback from applicants after the delay was announced was less than complimentary.“Got accepted into some good schools which I was looking forward to just for these people to straight up sabotage these chances,” one user posted on Reddit’s FAFSA discussion page. “Like, people's futures are on the line here."
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/ask/answers/100314/why-doesnt-england-use-euro.asp | Why the U.K. Doesn't Use the Euro | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 United Kingdom withdrew from membership in the European Union (EU) on Jan. 31, 2020. Prior to Brexit, as it is known, it was the most notable member nation of the European Union that elected not to use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/euro.asp">euro</a>. Rather, the U.K. continued to use the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gbp.asp">British pound sterling</a> as its national currency.
</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"> What prevented the U.K. from shelving the pound for the euro?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Here, we take a look at the reasons why the country decided not to adopt the single currency while it was a member state of the EU.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The euro was officially adopted by most member states of the EU in 2002.</li><li>Proponents of the euro argue that the single currency reduces exchange rate risk and is better able to compete with other major world currencies.</li><li>The U.K. government determined that the euro did not meet five critical tests that would have been necessary to adopt its use.</li><li>The United Kingdom left the European Union on Jan. 31, 2020.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-euro"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> The Euro </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The European Union was established as a result of the Maastricht Treaty and went into force on Nov. 1, 1993. The euro was adopted on Jan. 1, 2002, as the official currency for most of the member states of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/europeanunion.asp">European Union</a>.<span class="ql-inline-citation" data-cite="17"></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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The geographic and economic region that uses the euro is known as the eurozone. Proponents of the euro believe that adopting a single currency over the European economic system reduces <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreignexchangerisk.asp">exchange-rate risk </a>to businesses, investors, and financial institutions. Another argument in favor of the euro is that a currency with the backing of the eurozone economy is better able to compete with the U.S. dollar and other major world currencies.
</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"> Detractors of the euro system say that too much power is concentrated with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/europeancentralbank.asp">European Central Bank (ECB)</a>, which sets monetary policy for the euro. This reduces the ability of individual countries to react to local <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-conditions.asp">economic conditions</a>.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<span class="heading-toc" id="toc-why-the-uk-never-used-the-euro"></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 the U.K. Never Used the Euro </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When the euro was first proposed as a single <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currency.asp">currency</a> system for the EU in 1997, Gordon Brown, then-Chancellor of the Exchequer, declared that there were five economic tests that must be met for the country to accept the euro, and it did not meet them.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Brown is credited with creating the five-test policy. This checklist was the main driver to decide whether the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/042915/how-uk-makes-money.asp">United Kingdom</a> would abandon the pound for the euro.
</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"> 5 Economic Tests </span> </h3>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/businesscycle.asp">Business cycles</a> and economic structures in the eurozone as a whole must be compatible enough with those of the United Kingdom that it could live with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eurozone.asp">eurozone</a> interest rates.</li>
<li>The system must have sufficient flexibility to deal with both local and aggregate economic problems.</li>
<li>Adopting the euro must create conditions conducive to companies and individuals <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investing.asp">investing</a> in the United Kingdom.</li>
<li>The euro would enable the nation's <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/030315/what-financial-services-sector.asp">financial services</a> industry to remain in a competitive position internationally.</li>
<li>Adopting the euro must promote higher growth, stability, and a long-term increase in jobs.<span class="ql-inline-citation" data-cite="5"></span><br/></li>
</ol>
<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"> Many believe that the five economic tests, as constructed, set benchmarks so difficult to satisfy that a movement to the euro from the pound sterling could never be justified.
</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-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">20</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Twenty EU nations have adopted the euro as their national currency. They include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Denmark is an EU nation but has retained its own currency.<span class="ql-inline-citation" data-cite="19"></span></p></div></div></div>
<span class="heading-toc" id="toc-other-reasons-for-not-adopting-the-euro"></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"> Other Reasons for Not Adopting the Euro </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The British government did not want to abdicate control of its own <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> policy, which would have occurred under the euro system.
</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 system would have also removed a level of comfort with the pound sterling <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>. For instance, a British firm or investor used to exchanging pounds for dollars or vice versa would have been forced to adjust to a euro exchange rate.<span class="ql-inline-citation" data-cite="22"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Here's another reason. The United Kingdom would have been forced to meet the euro convergence criteria before adopting the currency, which includes maintaining a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtgdpratio.asp">debt-to-gross domestic product (GDP)</a> ratio that would have constrained British <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiscalpolicy.asp">fiscal policy</a>.<span class="ql-inline-citation" data-cite="7"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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">Euro But Not EU</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Some states have adopted the euro but are not members of the European Union. They include Andorra, Kosovo, Monaco, Montenegro, San Marino, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/030613/secret-finances-vatican-economy.asp">Vatican City</a>.</p></div></div></div>
<span class="heading-toc" id="toc-brexit"></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"> Brexit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brexit.asp">Brexit</a> was coined as a reference to the U.K.'s decision in a June 23, 2016, referendum to leave the EU.<span class="ql-inline-citation" data-cite="10"></span> The vote result defied expectations and roiled global markets, causing the British pound to fall to its lowest exchange rate against the U.S. dollar in 30 years.<span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Former Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, announced his resignation the following day.<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_41-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> While the U.K. did not adopt the euro as its common currency, it had fully integrated itself into the eurozone economic system. That meant open borders, free trade, and free movement of labor within the zone. The reversal inevitably caused political and economic turmoil and a historically fast turnover in prime ministers.
</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"> Theresa May, who replaced Cameron as leader of the Conservative Party and prime minister, stepped down as party leader voluntarily on June 7, 2019, after facing severe pressure to resign.<span class="ql-inline-citation" data-cite="13"></span> She was succeeded by Boris Johnson, who assumed power the following month. Johnson was succeeded by Liz Truss, whose service as prime minister lasted 49 days. Truss was succeeded in July 2022 by Rishi Sunak.<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_45-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Britain ratified a withdrawal agreement with the EU that was intended to avoid an even more chaotic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-in-the-brexit-deal-5093948">no-deal exit.</a><span class="ql-inline-citation" data-cite="16"></span> The country officially left the E.U. at 11 p.m. GMT on Jan. 31, 2020.<span class="ql-inline-citation" data-cite="15"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-how-did-the-uk-decide-to-leave-the-eu"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Did the U.K. Decide to Leave the E.U.?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The U.K.'s decision for Brexit was the result of a binding public referendum conducted in June 2016. "Leave" won with 51.9% of the vote, "Remain" received 48.1%.</p><p>The outcome was an unpleasant surprise for then-Prime Minister David Cameron, who campaigned for the country to remain in the E.U. He resigned the next day.<span class="ql-inline-citation" data-cite="20"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-what-is-the-exchange-rate-between-british-pounds-gbp-and-the-euro-eur"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Exchange Rate Between British Pounds (GBP) and the Euro (EUR)?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As of July 2, 2023, one GBP is equal to 1.16 EUR.<span class="ql-inline-citation" data-cite="21"></span> Over the past five years, the exchange rate has fluctuated between around 1.06 and 1.21.<span class="ql-inline-citation" data-cite="23"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-can-i-use-euros-in-england"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Use Euros in England?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. England and the rest of the U.K. use only British pounds as currency. Visitors to the U.K. from eurozone countries (or any other country) can exchange their local money for pounds at a bank or money exchange store before or after arriving, or can withdraw British pounds from an ATM in the U.K. using a bank card or a credit card, which will automatically add a fee for the currency exchange.<span class="ql-inline-citation" data-cite="24"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Nothing changed in the national currency system when the United Kingdom left the European Union in 2020. Among the issues was economic sovereignty. The government wanted to retain control over its own interest rate policy.
</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"> Not adopting the euro made at least one aspect of the transition out of the EU easier for the United Kingdom.
</p></div> | The United Kingdom withdrew from membership in the European Union (EU) on Jan. 31, 2020. Prior to Brexit, as it is known, it was the most notable member nation of the European Union that elected not to use the [euro](https://www.investopedia.com/terms/e/euro.asp). Rather, the U.K. continued to use the [British pound sterling](https://www.investopedia.com/terms/g/gbp.asp) as its national currency.
What prevented the U.K. from shelving the pound for the euro?
Here, we take a look at the reasons why the country decided not to adopt the single currency while it was a member state of the EU.
### Key Takeaways
* The euro was officially adopted by most member states of the EU in 2002.
* Proponents of the euro argue that the single currency reduces exchange rate risk and is better able to compete with other major world currencies.
* The U.K. government determined that the euro did not meet five critical tests that would have been necessary to adopt its use.
* The United Kingdom left the European Union on Jan. 31, 2020.
## The Euro
The European Union was established as a result of the Maastricht Treaty and went into force on Nov. 1, 1993. The euro was adopted on Jan. 1, 2002, as the official currency for most of the member states of the [European Union](https://www.investopedia.com/terms/e/europeanunion.asp).
The geographic and economic region that uses the euro is known as the eurozone. Proponents of the euro believe that adopting a single currency over the European economic system reduces [exchange-rate risk](https://www.investopedia.com/terms/f/foreignexchangerisk.asp) to businesses, investors, and financial institutions. Another argument in favor of the euro is that a currency with the backing of the eurozone economy is better able to compete with the U.S. dollar and other major world currencies.
Detractors of the euro system say that too much power is concentrated with the [European Central Bank (ECB)](https://www.investopedia.com/terms/e/europeancentralbank.asp), which sets monetary policy for the euro. This reduces the ability of individual countries to react to local [economic conditions](https://www.investopedia.com/terms/e/economic-conditions.asp).
## Why the U.K. Never Used the Euro
When the euro was first proposed as a single [currency](https://www.investopedia.com/terms/c/currency.asp) system for the EU in 1997, Gordon Brown, then-Chancellor of the Exchequer, declared that there were five economic tests that must be met for the country to accept the euro, and it did not meet them.
Brown is credited with creating the five-test policy. This checklist was the main driver to decide whether the [United Kingdom](https://www.investopedia.com/articles/investing/042915/how-uk-makes-money.asp) would abandon the pound for the euro.
### 5 Economic Tests
1. [Business cycles](https://www.investopedia.com/terms/b/businesscycle.asp) and economic structures in the eurozone as a whole must be compatible enough with those of the United Kingdom that it could live with [eurozone](https://www.investopedia.com/terms/e/eurozone.asp) interest rates.
2. The system must have sufficient flexibility to deal with both local and aggregate economic problems.
3. Adopting the euro must create conditions conducive to companies and individuals [investing](https://www.investopedia.com/terms/i/investing.asp) in the United Kingdom.
4. The euro would enable the nation's [financial services](https://www.investopedia.com/ask/answers/030315/what-financial-services-sector.asp) industry to remain in a competitive position internationally.
5. Adopting the euro must promote higher growth, stability, and a long-term increase in jobs.
Many believe that the five economic tests, as constructed, set benchmarks so difficult to satisfy that a movement to the euro from the pound sterling could never be justified.
### 20
Twenty EU nations have adopted the euro as their national currency. They include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Denmark is an EU nation but has retained its own currency.
## Other Reasons for Not Adopting the Euro
The British government did not want to abdicate control of its own [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) policy, which would have occurred under the euro system.
The system would have also removed a level of comfort with the pound sterling [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp). For instance, a British firm or investor used to exchanging pounds for dollars or vice versa would have been forced to adjust to a euro exchange rate.
Here's another reason. The United Kingdom would have been forced to meet the euro convergence criteria before adopting the currency, which includes maintaining a [debt-to-gross domestic product (GDP)](https://www.investopedia.com/terms/d/debtgdpratio.asp) ratio that would have constrained British [fiscal policy](https://www.investopedia.com/terms/f/fiscalpolicy.asp).
### Euro But Not EU
Some states have adopted the euro but are not members of the European Union. They include Andorra, Kosovo, Monaco, Montenegro, San Marino, and [Vatican City](https://www.investopedia.com/articles/investing/030613/secret-finances-vatican-economy.asp).
## Brexit
The term [Brexit](https://www.investopedia.com/terms/b/brexit.asp) was coined as a reference to the U.K.'s decision in a June 23, 2016, referendum to leave the EU. The vote result defied expectations and roiled global markets, causing the British pound to fall to its lowest exchange rate against the U.S. dollar in 30 years.
Former Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, announced his resignation the following day.
While the U.K. did not adopt the euro as its common currency, it had fully integrated itself into the eurozone economic system. That meant open borders, free trade, and free movement of labor within the zone. The reversal inevitably caused political and economic turmoil and a historically fast turnover in prime ministers.
Theresa May, who replaced Cameron as leader of the Conservative Party and prime minister, stepped down as party leader voluntarily on June 7, 2019, after facing severe pressure to resign. She was succeeded by Boris Johnson, who assumed power the following month. Johnson was succeeded by Liz Truss, whose service as prime minister lasted 49 days. Truss was succeeded in July 2022 by Rishi Sunak.
Britain ratified a withdrawal agreement with the EU that was intended to avoid an even more chaotic [no-deal exit.](https://www.investopedia.com/what-is-in-the-brexit-deal-5093948) The country officially left the E.U. at 11 p.m. GMT on Jan. 31, 2020.
## How Did the U.K. Decide to Leave the E.U.?
The U.K.'s decision for Brexit was the result of a binding public referendum conducted in June 2016. "Leave" won with 51.9% of the vote, "Remain" received 48.1%.
The outcome was an unpleasant surprise for then-Prime Minister David Cameron, who campaigned for the country to remain in the E.U. He resigned the next day.
## What Is the Exchange Rate Between British Pounds (GBP) and the Euro (EUR)?
As of July 2, 2023, one GBP is equal to 1.16 EUR. Over the past five years, the exchange rate has fluctuated between around 1.06 and 1.21.
## Can I Use Euros in England?
No. England and the rest of the U.K. use only British pounds as currency. Visitors to the U.K. from eurozone countries (or any other country) can exchange their local money for pounds at a bank or money exchange store before or after arriving, or can withdraw British pounds from an ATM in the U.K. using a bank card or a credit card, which will automatically add a fee for the currency exchange.
## The Bottom Line
Nothing changed in the national currency system when the United Kingdom left the European Union in 2020. Among the issues was economic sovereignty. The government wanted to retain control over its own interest rate policy.
Not adopting the euro made at least one aspect of the transition out of the EU easier for the United Kingdom.
| The United Kingdom withdrew from membership in the European Union (EU) on Jan. 31, 2020. Prior to Brexit, as it is known, it was the most notable member nation of the European Union that elected not to use the euro. Rather, the U.K. continued to use the British pound sterling as its national currency.
What prevented the U.K. from shelving the pound for the euro?
Here, we take a look at the reasons why the country decided not to adopt the single currency while it was a member state of the EU.
Key Takeaways
The euro was officially adopted by most member states of the EU in 2002.Proponents of the euro argue that the single currency reduces exchange rate risk and is better able to compete with other major world currencies.The U.K. government determined that the euro did not meet five critical tests that would have been necessary to adopt its use.The United Kingdom left the European Union on Jan. 31, 2020.
The Euro
The European Union was established as a result of the Maastricht Treaty and went into force on Nov. 1, 1993. The euro was adopted on Jan. 1, 2002, as the official currency for most of the member states of the European Union.
The geographic and economic region that uses the euro is known as the eurozone. Proponents of the euro believe that adopting a single currency over the European economic system reduces exchange-rate risk to businesses, investors, and financial institutions. Another argument in favor of the euro is that a currency with the backing of the eurozone economy is better able to compete with the U.S. dollar and other major world currencies.
Detractors of the euro system say that too much power is concentrated with the European Central Bank (ECB), which sets monetary policy for the euro. This reduces the ability of individual countries to react to local economic conditions.
Why the U.K. Never Used the Euro
When the euro was first proposed as a single currency system for the EU in 1997, Gordon Brown, then-Chancellor of the Exchequer, declared that there were five economic tests that must be met for the country to accept the euro, and it did not meet them.
Brown is credited with creating the five-test policy. This checklist was the main driver to decide whether the United Kingdom would abandon the pound for the euro.
5 Economic Tests
Business cycles and economic structures in the eurozone as a whole must be compatible enough with those of the United Kingdom that it could live with eurozone interest rates.
The system must have sufficient flexibility to deal with both local and aggregate economic problems.
Adopting the euro must create conditions conducive to companies and individuals investing in the United Kingdom.
The euro would enable the nation's financial services industry to remain in a competitive position internationally.
Adopting the euro must promote higher growth, stability, and a long-term increase in jobs.
Many believe that the five economic tests, as constructed, set benchmarks so difficult to satisfy that a movement to the euro from the pound sterling could never be justified.
20
Twenty EU nations have adopted the euro as their national currency. They include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Denmark is an EU nation but has retained its own currency.
Other Reasons for Not Adopting the Euro
The British government did not want to abdicate control of its own interest rate policy, which would have occurred under the euro system.
The system would have also removed a level of comfort with the pound sterling exchange rate. For instance, a British firm or investor used to exchanging pounds for dollars or vice versa would have been forced to adjust to a euro exchange rate.
Here's another reason. The United Kingdom would have been forced to meet the euro convergence criteria before adopting the currency, which includes maintaining a debt-to-gross domestic product (GDP) ratio that would have constrained British fiscal policy.
Euro But Not EU
Some states have adopted the euro but are not members of the European Union. They include Andorra, Kosovo, Monaco, Montenegro, San Marino, and Vatican City.
Brexit
The term Brexit was coined as a reference to the U.K.'s decision in a June 23, 2016, referendum to leave the EU. The vote result defied expectations and roiled global markets, causing the British pound to fall to its lowest exchange rate against the U.S. dollar in 30 years.
Former Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, announced his resignation the following day.
While the U.K. did not adopt the euro as its common currency, it had fully integrated itself into the eurozone economic system. That meant open borders, free trade, and free movement of labor within the zone. The reversal inevitably caused political and economic turmoil and a historically fast turnover in prime ministers.
Theresa May, who replaced Cameron as leader of the Conservative Party and prime minister, stepped down as party leader voluntarily on June 7, 2019, after facing severe pressure to resign. She was succeeded by Boris Johnson, who assumed power the following month. Johnson was succeeded by Liz Truss, whose service as prime minister lasted 49 days. Truss was succeeded in July 2022 by Rishi Sunak.
Britain ratified a withdrawal agreement with the EU that was intended to avoid an even more chaotic no-deal exit. The country officially left the E.U. at 11 p.m. GMT on Jan. 31, 2020.
How Did the U.K. Decide to Leave the E.U.?
The U.K.'s decision for Brexit was the result of a binding public referendum conducted in June 2016. "Leave" won with 51.9% of the vote, "Remain" received 48.1%.The outcome was an unpleasant surprise for then-Prime Minister David Cameron, who campaigned for the country to remain in the E.U. He resigned the next day.
What Is the Exchange Rate Between British Pounds (GBP) and the Euro (EUR)?
As of July 2, 2023, one GBP is equal to 1.16 EUR. Over the past five years, the exchange rate has fluctuated between around 1.06 and 1.21.
Can I Use Euros in England?
No. England and the rest of the U.K. use only British pounds as currency. Visitors to the U.K. from eurozone countries (or any other country) can exchange their local money for pounds at a bank or money exchange store before or after arriving, or can withdraw British pounds from an ATM in the U.K. using a bank card or a credit card, which will automatically add a fee for the currency exchange.
The Bottom Line
Nothing changed in the national currency system when the United Kingdom left the European Union in 2020. Among the issues was economic sovereignty. The government wanted to retain control over its own interest rate policy.
Not adopting the euro made at least one aspect of the transition out of the EU easier for the United Kingdom.
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]
] |
https://www.investopedia.com/sofi-shuts-crypto-services-heres-what-customers-need-to-know-8407993 | SoFi Shuts Crypto Services. Here's What Customers 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"><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>SoFi Technologies is shutting down its cryptocurrency services by Dec. 19, the company announced Wednesday.</li><li>Existing users can either opt-in to have their accounts transferred to privately-held Blockchain.com or have their accounts automatically closed.</li><li>For users cashing out for a profit, the sale could trigger a tax implication.</li><li>In some states where Blockchain.com does not provide services, users will have to sign up with its partner Bakkt Crypto Solutions.</li><li>Users in New York will not be eligible for the migration and will need to sell or have their accounts liquidated.</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"> SoFi Technologies (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SOFI">SOFI</a>) will shut down its crypto services by Dec. 19. Existing accounts will have the choice to migrate to Blockchain.com platform or be closed and liquidated at that time, with a few caveats.
</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-what-does-this-mean-for-sofi-crypto-customers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Does This Mean For SoFi Crypto Customers? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Existing SoFi cryptocurrency customers should receive an email today with details of the migration.
</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"> Users who want to migrate to Blockchain.com will have to actively opt-in for their account to be transferred.<span class="ql-inline-citation" data-cite="2"></span> The migration will expand the services available to these crypto accounts, including access to more tokens, advanced trading features, and security measures including the ability to self-custody crypto.<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-should-i-close-my-sofi-crypto-account-instead"></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"> Should I Close My SoFi Crypto Account Instead? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> SoFi users who want their crypto accounts closed can proactively do so before Dec. 19.
</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 that day, active accounts will automatically be liquidated and closed; users will receive details of that transaction via email and receive proceeds through their brokerage account within 60 days.<span class="ql-inline-citation" data-cite="2"></span> The migration is expected to be completed by 11 p.m.
</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"> But the one big deterrent could be the tax implication of liquidating your holdings. If you make a profit, you could be on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/taxes-and-crypto/#toc-when-is-cryptocurrency-taxed">hook to pay capital gains tax</a> on that sale.
</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-different-rules-for-different-states-and-tokens"></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"> Different Rules For Different States and Tokens </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Blockchain.com does not directly offer services in all U.S. states. There are also certain tokens that will be restricted for migration to Blockchain.com in certain states.
</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"> Customers in Virginia, Hawaii, Louisiana, New Jersey, Nevada, Tennessee and Texas will receive services through a partnership with Bakkt Crypto Solutions and customers will need to agree to Bakkt's terms and conditions.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Additionally, Tokens including Aave, Stellar, Uniswap, and Polkadot, among others, will be automatically sold at the time of account migration on Dec. 19 for customers in those states.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Users in the state of New York are not eligible to migrate at all. These accounts will remain open until Jan. 28. Trading on these accounts will proceed as normal until the Dec. 19 deadline; between Dec. 19 and Jan. 28, accounts will not be able to buy cryptocurrency—only sell. After Jan. 28, accounts will be closed and liquidated under the same structure as other users.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<span class="heading-toc" id="toc-why-did-sofi-wind-down-crypto-operations"></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"> Why Did SoFi Wind Down Crypto Operations? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> SoFi's exit from the crypto business has been planned over the past two years.
</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 company received a conditional approval from the Office of the Comptroller of the Currency (OCC) to operate as a bank holding company in January 2022. That approval hinged on SoFi not engaging in any crypto-related activities or services without approval from the OCC, the company said in a filing dated September 2022.
</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"> "[T]he Bank Holding Company Act permits us to continue our current digital assets related offering for a two-year conformance period from the date we became a bank holding company," the filing said.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The company has also said in the past that cryptocurrency is not a material part of its business. SoFi shares were up roughly 2% at 2 p.m. Eastern.<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
* SoFi Technologies is shutting down its cryptocurrency services by Dec. 19, the company announced Wednesday.
* Existing users can either opt-in to have their accounts transferred to privately-held Blockchain.com or have their accounts automatically closed.
* For users cashing out for a profit, the sale could trigger a tax implication.
* In some states where Blockchain.com does not provide services, users will have to sign up with its partner Bakkt Crypto Solutions.
* Users in New York will not be eligible for the migration and will need to sell or have their accounts liquidated.
SoFi Technologies ([SOFI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SOFI)) will shut down its crypto services by Dec. 19. Existing accounts will have the choice to migrate to Blockchain.com platform or be closed and liquidated at that time, with a few caveats.
## What Does This Mean For SoFi Crypto Customers?
Existing SoFi cryptocurrency customers should receive an email today with details of the migration.
Users who want to migrate to Blockchain.com will have to actively opt-in for their account to be transferred. The migration will expand the services available to these crypto accounts, including access to more tokens, advanced trading features, and security measures including the ability to self-custody crypto.
## Should I Close My SoFi Crypto Account Instead?
SoFi users who want their crypto accounts closed can proactively do so before Dec. 19.
On that day, active accounts will automatically be liquidated and closed; users will receive details of that transaction via email and receive proceeds through their brokerage account within 60 days. The migration is expected to be completed by 11 p.m.
But the one big deterrent could be the tax implication of liquidating your holdings. If you make a profit, you could be on the [hook to pay capital gains tax](https://www.investopedia.com/tech/taxes-and-crypto/#toc-when-is-cryptocurrency-taxed) on that sale.
## Different Rules For Different States and Tokens
Blockchain.com does not directly offer services in all U.S. states. There are also certain tokens that will be restricted for migration to Blockchain.com in certain states.
Customers in Virginia, Hawaii, Louisiana, New Jersey, Nevada, Tennessee and Texas will receive services through a partnership with Bakkt Crypto Solutions and customers will need to agree to Bakkt's terms and conditions.
Additionally, Tokens including Aave, Stellar, Uniswap, and Polkadot, among others, will be automatically sold at the time of account migration on Dec. 19 for customers in those states.
Users in the state of New York are not eligible to migrate at all. These accounts will remain open until Jan. 28. Trading on these accounts will proceed as normal until the Dec. 19 deadline; between Dec. 19 and Jan. 28, accounts will not be able to buy cryptocurrency—only sell. After Jan. 28, accounts will be closed and liquidated under the same structure as other users.
## Why Did SoFi Wind Down Crypto Operations?
SoFi's exit from the crypto business has been planned over the past two years.
The company received a conditional approval from the Office of the Comptroller of the Currency (OCC) to operate as a bank holding company in January 2022. That approval hinged on SoFi not engaging in any crypto-related activities or services without approval from the OCC, the company said in a filing dated September 2022.
"[T]he Bank Holding Company Act permits us to continue our current digital assets related offering for a two-year conformance period from the date we became a bank holding company," the filing said.
The company has also said in the past that cryptocurrency is not a material part of its business. SoFi shares were up roughly 2% at 2 p.m. Eastern.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
SoFi Technologies is shutting down its cryptocurrency services by Dec. 19, the company announced Wednesday.Existing users can either opt-in to have their accounts transferred to privately-held Blockchain.com or have their accounts automatically closed.For users cashing out for a profit, the sale could trigger a tax implication.In some states where Blockchain.com does not provide services, users will have to sign up with its partner Bakkt Crypto Solutions.Users in New York will not be eligible for the migration and will need to sell or have their accounts liquidated.
SoFi Technologies (SOFI) will shut down its crypto services by Dec. 19. Existing accounts will have the choice to migrate to Blockchain.com platform or be closed and liquidated at that time, with a few caveats.
What Does This Mean For SoFi Crypto Customers?
Existing SoFi cryptocurrency customers should receive an email today with details of the migration.
Users who want to migrate to Blockchain.com will have to actively opt-in for their account to be transferred. The migration will expand the services available to these crypto accounts, including access to more tokens, advanced trading features, and security measures including the ability to self-custody crypto.
Should I Close My SoFi Crypto Account Instead?
SoFi users who want their crypto accounts closed can proactively do so before Dec. 19.
On that day, active accounts will automatically be liquidated and closed; users will receive details of that transaction via email and receive proceeds through their brokerage account within 60 days. The migration is expected to be completed by 11 p.m.
But the one big deterrent could be the tax implication of liquidating your holdings. If you make a profit, you could be on the hook to pay capital gains tax on that sale.
Different Rules For Different States and Tokens
Blockchain.com does not directly offer services in all U.S. states. There are also certain tokens that will be restricted for migration to Blockchain.com in certain states.
Customers in Virginia, Hawaii, Louisiana, New Jersey, Nevada, Tennessee and Texas will receive services through a partnership with Bakkt Crypto Solutions and customers will need to agree to Bakkt's terms and conditions.
Additionally, Tokens including Aave, Stellar, Uniswap, and Polkadot, among others, will be automatically sold at the time of account migration on Dec. 19 for customers in those states.
Users in the state of New York are not eligible to migrate at all. These accounts will remain open until Jan. 28. Trading on these accounts will proceed as normal until the Dec. 19 deadline; between Dec. 19 and Jan. 28, accounts will not be able to buy cryptocurrency—only sell. After Jan. 28, accounts will be closed and liquidated under the same structure as other users.
Why Did SoFi Wind Down Crypto Operations?
SoFi's exit from the crypto business has been planned over the past two years.
The company received a conditional approval from the Office of the Comptroller of the Currency (OCC) to operate as a bank holding company in January 2022. That approval hinged on SoFi not engaging in any crypto-related activities or services without approval from the OCC, the company said in a filing dated September 2022.
"[T]he Bank Holding Company Act permits us to continue our current digital assets related offering for a two-year conformance period from the date we became a bank holding company," the filing said.
The company has also said in the past that cryptocurrency is not a material part of its business. SoFi shares were up roughly 2% at 2 p.m. Eastern.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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"SOFI",
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https://www.investopedia.com/30-year-mortgage-rates-wavering-near-1-month-low-8645988 | 30-Year Mortgage Rates Wavering Near 1-Month Low | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Rates on 30-year new purchase mortgages inched up slightly Wednesday—but at a 7.10% average, they remain near their cheapest level in the past month. Averages for almost every <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">mortgage type</a> moved modestly higher as well.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Editor's Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.</p></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:76.1%;">
<img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 9, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/ASRo8KgqU-nU9ZL2wm1xQPxzg6s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-9-00cc55cca1c04c5d8d60f44ec42f9136.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ASRo8KgqU-nU9ZL2wm1xQPxzg6s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-9-00cc55cca1c04c5d8d60f44ec42f9136.png" data-srcset="https://www.investopedia.com/thmb/7nkb9MW0TRj9DX0iG7nDW1lyvzk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-9-00cc55cca1c04c5d8d60f44ec42f9136.png 750w" data-tracking-container="true" height="1888" id="mntl-sc-block-image_1-0" width="2480"/>
<noscript>
<img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 9, 2024" class="img--noscript universal-image__image" height="1888" sizes="750px" src="https://www.investopedia.com/thmb/ASRo8KgqU-nU9ZL2wm1xQPxzg6s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-9-00cc55cca1c04c5d8d60f44ec42f9136.png" srcset="https://www.investopedia.com/thmb/7nkb9MW0TRj9DX0iG7nDW1lyvzk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-9-00cc55cca1c04c5d8d60f44ec42f9136.png 750w" width="2480"/>
</noscript>
</div> </div>
</figure>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_6-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Rate Averages for Top 5 Mortgage Types</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>New Purchase</b></td>
<td><b>Refinance</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.10%</td>
<td>7.32%</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.92%</td>
<td>6.60%</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.22%</td>
<td>6.15%</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.08%</td>
<td>8.33%</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"> After shooting up in late April to a five-month high, rates on 30-year new purchase loans have come down somewhat. The 30-year average did edge a minor 4 basis points higher Wednesday, reaching 7.10%. But that keeps it near the one-month low of 7.06% registered Monday, and is still notably below the April peak of 7.37%.
</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 are still 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 peak of 8.01% in October.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_20-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/ZCRck/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="30-Year Mortgage Rates Since June 2021"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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 similarly inched higher. Adding 5 basis points Wednesday, the 15-year average is now at 6.22%—just 8 basis points above its four-week low. 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"> Jumbo 30-year rates also climbed Wednesday. Increasing 7 basis points, the jumbo 30-year average is now 7.13%. That's still a bit below the 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"> Every other new purchase average but one also climbed Wednesday, with the jumbo 7/6 adjustable-rate average remaining steady.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_28-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Mortgage Rate Averages - New Purchase Loans</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>New Purchase Average</b></td>
<td><b>Daily Change</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.10%</td>
<td>+0.04</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.92%</td>
<td>+0.17</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>6.46%</td>
<td>+0.03</td>
</tr>
<tr>
<td>20-Year Fixed</td>
<td>6.80%</td>
<td>+0.04</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.22%</td>
<td>+0.05</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>7.28%</td>
<td>+0.04</td>
</tr>
<tr>
<td>10-Year Fixed</td>
<td>6.20%</td>
<td>+0.14</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>8.00%</td>
<td>+0.06</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.08%</td>
<td>+0.07</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.13%</td>
<td>+0.07</td>
</tr>
<tr>
<td>Jumbo 15-Year Fixed</td>
<td>7.08%</td>
<td>+0.05</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>7.83%</td>
<td>No Change</td>
</tr>
<tr>
<td>Jumbo 5/6 ARM</td>
<td>7.92%</td>
<td>+0.05</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/TIPTv/2/" 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. Today'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>
<span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Refinancing rates also moved mostly upwards Wednesday, but mostly by small increments. The 30-year refi average rose 5 basis points, leaving the spread between 30-year new purchase and refi rates at a narrow 22 basis points. The 15-year refi average also tacked on 5 basis points, while jumbo 30-year refi rates jumped a more dramatic 14 basis 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>7.32%</td>
<td>+0.05</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>6.21%</td>
<td>+0.08</td>
</tr>
<tr>
<td>20-Year Fixed</td>
<td>6.93%</td>
<td>+0.05</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.15%</td>
<td>+0.05</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>5.96%</td>
<td>+0.19</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>8.32%</td>
<td>+0.01</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.33%</td>
<td>+0.07</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.10%</td>
<td>+0.14</td>
</tr>
<tr>
<td>Jumbo 15-Year Fixed</td>
<td>7.02%</td>
<td>+0.03</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>8.02%</td>
<td>No Change</td>
</tr>
<tr>
<td>Jumbo 5/6 ARM</td>
<td>7.89%</td>
<td>+0.04</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 Wednesday were New York, Alaska, Michigan, Louisiana, and Pennsylvania, while the states with the highest average rates were West Virginia; Washington, D.C.; Iowa; Hawaii; and Maryland.
</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/GOetm/2/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Mortgage Rates by State"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0">
<li>The level and direction of the bond market, especially 10-year Treasury yields</li>
<li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li>
<li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> The Fed has been maintaining the federal funds rate at its current level since July, with a 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 new purchase mortgages inched up slightly Wednesday—but at a 7.10% average, they remain near their cheapest level in the past month. Averages for almost every [mortgage type](https://www.investopedia.com/mortgage-rates-5094943) moved modestly higher as well.
### 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 9, 2024]()
:max_bytes(150000):strip_icc()/5-9-00cc55cca1c04c5d8d60f44ec42f9136.png)
| National Rate Averages for Top 5 Mortgage Types | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase** | **Refinance** |
| 30-Year Fixed | 7.10% | 7.32% |
| FHA 30-Year Fixed | 6.92% | 6.60% |
| 15-Year Fixed | 6.22% | 6.15% |
| 5/6 ARM | 8.08% | 8.33% |
| 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
After shooting up in late April to a five-month high, rates on 30-year new purchase loans have come down somewhat. The 30-year average did edge a minor 4 basis points higher Wednesday, reaching 7.10%. But that keeps it near the one-month low of 7.06% registered Monday, and is still notably below the April peak of 7.37%.
Rates on 30-year mortgages are still 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 peak of 8.01% in October.
New purchase 15-year mortgage rates similarly inched higher. Adding 5 basis points Wednesday, the 15-year average is now at 6.22%—just 8 basis points above its four-week low. Today's 15-year rates are also considerably more affordable than last fall's 7.08% average—a peak since 2000.
Jumbo 30-year rates also climbed Wednesday. Increasing 7 basis points, the jumbo 30-year average is now 7.13%. That's still a bit below the 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.
Every other new purchase average but one also climbed Wednesday, with the jumbo 7/6 adjustable-rate average remaining steady.
| National Mortgage Rate Averages - New Purchase Loans | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase Average** | **Daily Change** |
| 30-Year Fixed | 7.10% | +0.04 |
| FHA 30-Year Fixed | 6.92% | +0.17 |
| VA 30-Year Fixed | 6.46% | +0.03 |
| 20-Year Fixed | 6.80% | +0.04 |
| 15-Year Fixed | 6.22% | +0.05 |
| FHA 15-Year Fixed | 7.28% | +0.04 |
| 10-Year Fixed | 6.20% | +0.14 |
| 7/6 ARM | 8.00% | +0.06 |
| 5/6 ARM | 8.08% | +0.07 |
| Jumbo 30-Year Fixed | 7.13% | +0.07 |
| Jumbo 15-Year Fixed | 7.08% | +0.05 |
| Jumbo 7/6 ARM | 7.83% | No Change |
| Jumbo 5/6 ARM | 7.92% | +0.05 |
| *[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. Today'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 rates also moved mostly upwards Wednesday, but mostly by small increments. The 30-year refi average rose 5 basis points, leaving the spread between 30-year new purchase and refi rates at a narrow 22 basis points. The 15-year refi average also tacked on 5 basis points, while jumbo 30-year refi rates jumped a more dramatic 14 basis points.
| National Mortgage Rate Averages - Refinance Loans | | |
| --- | --- | --- |
| **Loan Type** | **Refinance Average** | **Daily Change** |
| 30-Year Fixed | 7.32% | +0.05 |
| FHA 30-Year Fixed | 6.60% | No Change |
| VA 30-Year Fixed | 6.21% | +0.08 |
| 20-Year Fixed | 6.93% | +0.05 |
| 15-Year Fixed | 6.15% | +0.05 |
| FHA 15-Year Fixed | 6.33% | No Change |
| 10-Year Fixed | 5.96% | +0.19 |
| 7/6 ARM | 8.32% | +0.01 |
| 5/6 ARM | 8.33% | +0.07 |
| Jumbo 30-Year Fixed | 7.10% | +0.14 |
| Jumbo 15-Year Fixed | 7.02% | +0.03 |
| Jumbo 7/6 ARM | 8.02% | No Change |
| Jumbo 5/6 ARM | 7.89% | +0.04 |
| [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 Wednesday were New York, Alaska, Michigan, Louisiana, and Pennsylvania, while the states with the highest average rates were West Virginia; Washington, D.C.; Iowa; Hawaii; and Maryland.
## 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 new purchase mortgages inched up slightly Wednesday—but at a 7.10% average, they remain near their cheapest level in the past month. Averages for almost every mortgage type moved modestly higher as well.
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
7.10%
7.32%
FHA 30-Year Fixed
6.92%
6.60%
15-Year Fixed
6.22%
6.15%
5/6 ARM
8.08%
8.33%
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
After shooting up in late April to a five-month high, rates on 30-year new purchase loans have come down somewhat. The 30-year average did edge a minor 4 basis points higher Wednesday, reaching 7.10%. But that keeps it near the one-month low of 7.06% registered Monday, and is still notably below the April peak of 7.37%.
Rates on 30-year mortgages are still 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 peak of 8.01% in October.
New purchase 15-year mortgage rates similarly inched higher. Adding 5 basis points Wednesday, the 15-year average is now at 6.22%—just 8 basis points above its four-week low. Today's 15-year rates are also considerably more affordable than last fall's 7.08% average—a peak since 2000.
Jumbo 30-year rates also climbed Wednesday. Increasing 7 basis points, the jumbo 30-year average is now 7.13%. That's still a bit below the 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.
Every other new purchase average but one also climbed Wednesday, with the jumbo 7/6 adjustable-rate average remaining steady.
National Mortgage Rate Averages - New Purchase Loans
Loan Type
New Purchase Average
Daily Change
30-Year Fixed
7.10%
+0.04
FHA 30-Year Fixed
6.92%
+0.17
VA 30-Year Fixed
6.46%
+0.03
20-Year Fixed
6.80%
+0.04
15-Year Fixed
6.22%
+0.05
FHA 15-Year Fixed
7.28%
+0.04
10-Year Fixed
6.20%
+0.14
7/6 ARM
8.00%
+0.06
5/6 ARM
8.08%
+0.07
Jumbo 30-Year Fixed
7.13%
+0.07
Jumbo 15-Year Fixed
7.08%
+0.05
Jumbo 7/6 ARM
7.83%
No Change
Jumbo 5/6 ARM
7.92%
+0.05
Provided via the Zillow Mortgage API
The Weekly Freddie Mac Average
Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Today'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 rates also moved mostly upwards Wednesday, but mostly by small increments. The 30-year refi average rose 5 basis points, leaving the spread between 30-year new purchase and refi rates at a narrow 22 basis points. The 15-year refi average also tacked on 5 basis points, while jumbo 30-year refi rates jumped a more dramatic 14 basis points.
National Mortgage Rate Averages - Refinance Loans
Loan Type
Refinance Average
Daily Change
30-Year Fixed
7.32%
+0.05
FHA 30-Year Fixed
6.60%
No Change
VA 30-Year Fixed
6.21%
+0.08
20-Year Fixed
6.93%
+0.05
15-Year Fixed
6.15%
+0.05
FHA 15-Year Fixed
6.33%
No Change
10-Year Fixed
5.96%
+0.19
7/6 ARM
8.32%
+0.01
5/6 ARM
8.33%
+0.07
Jumbo 30-Year Fixed
7.10%
+0.14
Jumbo 15-Year Fixed
7.02%
+0.03
Jumbo 7/6 ARM
8.02%
No Change
Jumbo 5/6 ARM
7.89%
+0.04
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 Wednesday were New York, Alaska, Michigan, Louisiana, and Pennsylvania, while the states with the highest average rates were West Virginia; Washington, D.C.; Iowa; Hawaii; and Maryland.
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/b/backpricing.asp | Backpricing | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-backpricing"></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 Backpricing? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> In finance, the term "backpricing" refers to the practice of entering into a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodityfuturescontract.asp">commodities futures contract</a> without initially specifying the price at which the commodity will be purchased.
</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"> Instead, the parties to a backpriced futures contract will wait until a specified date before deciding on a fair price at which to buy or sell the commodity.
</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>Backpricing is a way of structuring futures contracts in which the price is not set upon inception of the agreement.</li>
<li>Instead, the buyer and seller agree to set a price closer to the delivery date of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying.asp">underlying</a> commodity.</li>
<li>Typically, the price is agreed upon by reference to an underlying reference or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketindex.asp">index</a>, such as the spot price of the commodity.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-understanding-backpricing"></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 Backpricing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Typically, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trader.asp">traders</a> use <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contracts</a> to buy <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/commodities-trading-overview/">commodities</a> at a known price with the intention of selling the futures contract or taking delivery of its underlying commodity at a specified future date.
</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 some cases, however, a buyer may simply wish to commit to the purchase of a given quantity of the underlying commodity, while delaying the decision of what price to pay until a future date. In those situations, the buyer and seller will first decide how they will set a price in the future, such as by agreeing to use the prevailing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spotprice.asp">spot price</a> for the commodity at that future date. Once that date is reached, the buyer and seller will carry out the transaction at the agreed-upon price.
</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 basic justification for backpricing is that it helps ensure that the price paid for the commodity will closely reflect its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fairmarketvalue.asp">fair market value</a> at the time of exchange. By contrast, in typical futures contracts it is possible for the price paid for a commodity to differ markedly from its market price. This makes traditional futures contracts far more useful for traders who wish to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculation.asp">speculate</a> on commodity prices, as the opportunity for speculative profits would be largely, if not completely, eliminated by backpricing.
</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-real-world-example-of-backpricing"></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"> Real World Example of Backpricing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Suppose you are the owner of a commercial bakery that wishes to secure its supply of wheat for the upcoming year. Your main priority is ensuring that you will be able to maintain an adequate supply of wheat in order to maintain your production volumes, and to accomplish this you set out to purchase futures contracts that have wheat as their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying-asset.asp">underlying asset</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"> At the same time, you would like to avoid a situation in which you purchase wheat futures only to see the spot price of wheat decline significantly afterward. Instead, you would prefer simply committing to buy a particular quantity of wheat at set dates and then negotiate the price for those purchases shortly before their delivery dates.
</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"> To agree on those prices, you propose using the prevailing spot market price existing a week before each delivery date. This way, both the buyer and the seller of the futures contract can be assured that they are transacting at or near the best available market price, eliminating the possibility for significant speculative profits on either side.
</p></div> | ## What Is Backpricing?
In finance, the term "backpricing" refers to the practice of entering into a [commodities futures contract](https://www.investopedia.com/terms/c/commodityfuturescontract.asp) without initially specifying the price at which the commodity will be purchased.
Instead, the parties to a backpriced futures contract will wait until a specified date before deciding on a fair price at which to buy or sell the commodity.
### Key Takeaways
* Backpricing is a way of structuring futures contracts in which the price is not set upon inception of the agreement.
* Instead, the buyer and seller agree to set a price closer to the delivery date of the [underlying](https://www.investopedia.com/terms/u/underlying.asp) commodity.
* Typically, the price is agreed upon by reference to an underlying reference or [index](https://www.investopedia.com/terms/m/marketindex.asp), such as the spot price of the commodity.
## Understanding Backpricing
Typically, [traders](https://www.investopedia.com/terms/t/trader.asp) use [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp) to buy [commodities](https://www.investopedia.com/investing/commodities-trading-overview/) at a known price with the intention of selling the futures contract or taking delivery of its underlying commodity at a specified future date.
In some cases, however, a buyer may simply wish to commit to the purchase of a given quantity of the underlying commodity, while delaying the decision of what price to pay until a future date. In those situations, the buyer and seller will first decide how they will set a price in the future, such as by agreeing to use the prevailing [spot price](https://www.investopedia.com/terms/s/spotprice.asp) for the commodity at that future date. Once that date is reached, the buyer and seller will carry out the transaction at the agreed-upon price.
The basic justification for backpricing is that it helps ensure that the price paid for the commodity will closely reflect its [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp) at the time of exchange. By contrast, in typical futures contracts it is possible for the price paid for a commodity to differ markedly from its market price. This makes traditional futures contracts far more useful for traders who wish to [speculate](https://www.investopedia.com/terms/s/speculation.asp) on commodity prices, as the opportunity for speculative profits would be largely, if not completely, eliminated by backpricing.
## Real World Example of Backpricing
Suppose you are the owner of a commercial bakery that wishes to secure its supply of wheat for the upcoming year. Your main priority is ensuring that you will be able to maintain an adequate supply of wheat in order to maintain your production volumes, and to accomplish this you set out to purchase futures contracts that have wheat as their [underlying asset](https://www.investopedia.com/terms/u/underlying-asset.asp).
At the same time, you would like to avoid a situation in which you purchase wheat futures only to see the spot price of wheat decline significantly afterward. Instead, you would prefer simply committing to buy a particular quantity of wheat at set dates and then negotiate the price for those purchases shortly before their delivery dates.
To agree on those prices, you propose using the prevailing spot market price existing a week before each delivery date. This way, both the buyer and the seller of the futures contract can be assured that they are transacting at or near the best available market price, eliminating the possibility for significant speculative profits on either side.
| What Is Backpricing?
In finance, the term "backpricing" refers to the practice of entering into a commodities futures contract without initially specifying the price at which the commodity will be purchased.
Instead, the parties to a backpriced futures contract will wait until a specified date before deciding on a fair price at which to buy or sell the commodity.
Key Takeaways
Backpricing is a way of structuring futures contracts in which the price is not set upon inception of the agreement.
Instead, the buyer and seller agree to set a price closer to the delivery date of the underlying commodity.
Typically, the price is agreed upon by reference to an underlying reference or index, such as the spot price of the commodity.
Understanding Backpricing
Typically, traders use futures contracts to buy commodities at a known price with the intention of selling the futures contract or taking delivery of its underlying commodity at a specified future date.
In some cases, however, a buyer may simply wish to commit to the purchase of a given quantity of the underlying commodity, while delaying the decision of what price to pay until a future date. In those situations, the buyer and seller will first decide how they will set a price in the future, such as by agreeing to use the prevailing spot price for the commodity at that future date. Once that date is reached, the buyer and seller will carry out the transaction at the agreed-upon price.
The basic justification for backpricing is that it helps ensure that the price paid for the commodity will closely reflect its fair market value at the time of exchange. By contrast, in typical futures contracts it is possible for the price paid for a commodity to differ markedly from its market price. This makes traditional futures contracts far more useful for traders who wish to speculate on commodity prices, as the opportunity for speculative profits would be largely, if not completely, eliminated by backpricing.
Real World Example of Backpricing
Suppose you are the owner of a commercial bakery that wishes to secure its supply of wheat for the upcoming year. Your main priority is ensuring that you will be able to maintain an adequate supply of wheat in order to maintain your production volumes, and to accomplish this you set out to purchase futures contracts that have wheat as their underlying asset.
At the same time, you would like to avoid a situation in which you purchase wheat futures only to see the spot price of wheat decline significantly afterward. Instead, you would prefer simply committing to buy a particular quantity of wheat at set dates and then negotiate the price for those purchases shortly before their delivery dates.
To agree on those prices, you propose using the prevailing spot market price existing a week before each delivery date. This way, both the buyer and the seller of the futures contract can be assured that they are transacting at or near the best available market price, eliminating the possibility for significant speculative profits on either side.
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https://www.investopedia.com/terms/t/trillion-cubic-feet.asp | Trillion Cubic Feet (Tcf): 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-trillion-cubic-feet-tcf"></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 Trillion Cubic Feet (Tcf)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term trillion cubic feet refers to a volume measurement of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fundamental-analysis/12/natural-gas-primer.asp">natural gas</a> used by the U.S. oil and gas industry. The measurement is usually abbreviated as Tcf. A cubic foot is a nonmetric measurement of volume also used in the U.S. A trillion—written in numerals as 1,000,000,000,000—cubic feet is equivalent to approximately one quad of Btu or a British thermal unit.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The term trillion cubic feet is a volume measurement of natural gas used by the U.S. oil and gas industry.</li><li>The measurement of a trillion cubic feet is abbreviated as Tcf in the industry.</li><li>A trillion cubic feet is equivalent to approximately one quadrillion of a British thermal unit.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-trillion-cubic-feet-tcf"></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 Trillion Cubic Feet (Tcf) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In the United States, companies measure natural gas in cubic feet. A trillion cubic feet can be hard to imagine for the average person. It can represent billions of dollars of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodity</a>. As mentioned above, one trillion cubic feet is the same as one quad of Btu. A quad is the abbreviation for a quadrillion, or 1,000,000,000,000,000. A Btu, on the other hand, measures energy, and represents how much heat is required to raise the temperature of a single pound of water by one degree Fahrenheit at sea level. For reference's sake, a single Btu is the same as the heat from a kitchen match stick.
</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"> Most of the major international oil and gas companies have standardized reports to help analysts and investors accurately assess these figures. This is due, in part, to a regulatory requirement with 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) requiring foreign companies with stock listed on U.S. exchanges to file standardized reports on an annual basis, called a 20-F.<span class="ql-inline-citation" data-cite="2"></span> This is equivalent to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10-k.asp">10-K</a> filing for U.S. companies and provides investors with oil and gas production and reserve statistics published using imperial measurements to allow direct comparison.
</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 in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergingmarketeconomy.asp">emerging markets</a> of Russia, Africa, or Latin America often receive reports with data reported with the metric system, which is a global measurement system. Analysts of these companies will need to use conversion tables to accurately quantify and compare them to more sophisticated international operators.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Investors in markets like Russia, Africa, or Latin America often receive reports with data reported in the metric system.</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_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"> Within the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/oil-gas-industry-overview/">oil and gas industry</a>, units of measurement are represented by letters where T is the equivalent of one trillion, B represents one billion, MM equals one million, and M means one thousand. Any of these can appear before certain terms, such as MMBOE or million barrel of oil equivalent, or Tcf, which is trillion cubic feet.<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"> So just as a trillion cubic feet is abbreviated as Tcf, just as Bcf refers to a billion cubic feet. The latter is a gas measurement equal to approximately one trillion (1,000,000,000,000) Btu. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mcf.asp">Mcf</a> stands for one thousand cubic feet, a measure used more commonly in the low volume segments of the gas industry, such as stripper well production. Incidentally, Mcf is the conventional way to measure natural gas in the United States, which uses the imperial measuring system.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In Europe, where the metric system is used, the abbreviation most commonly used is thousand of cubic meters or Mcm. Oil and gas financial analysts need to be especially careful when analyzing companies' quarterly results to avoid mixing up various units. For example, it is quite easy to overlook the fact that U.S. companies will report in Mcf, while European companies often report in Mcm. This makes quite a difference because 1Mcm = 35.3Mcf.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<span class="heading-toc" id="toc-example-of-trillion-cubic-feet"></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 Trillion Cubic Feet </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The U.S. Energy Information Administration reports the world's natural gas reserves by country. As of 2019, according to the site, Russia had the highest reserves of natural gas with 1,688 Tcf, followed by Iran with 1,194 Tcf. The U.S. was fourth, with 465 Tcf. The list was rounded out by Belarus and the Czech Republic, which both reported 0.01 Tcf of natural gas each.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span>
</p></div> | ## What Is Trillion Cubic Feet (Tcf)?
The term trillion cubic feet refers to a volume measurement of [natural gas](https://www.investopedia.com/articles/fundamental-analysis/12/natural-gas-primer.asp) used by the U.S. oil and gas industry. The measurement is usually abbreviated as Tcf. A cubic foot is a nonmetric measurement of volume also used in the U.S. A trillion—written in numerals as 1,000,000,000,000—cubic feet is equivalent to approximately one quad of Btu or a British thermal unit.
### Key Takeaways
* The term trillion cubic feet is a volume measurement of natural gas used by the U.S. oil and gas industry.
* The measurement of a trillion cubic feet is abbreviated as Tcf in the industry.
* A trillion cubic feet is equivalent to approximately one quadrillion of a British thermal unit.
## Understanding Trillion Cubic Feet (Tcf)
In the United States, companies measure natural gas in cubic feet. A trillion cubic feet can be hard to imagine for the average person. It can represent billions of dollars of the [commodity](https://www.investopedia.com/terms/c/commodity.asp). As mentioned above, one trillion cubic feet is the same as one quad of Btu. A quad is the abbreviation for a quadrillion, or 1,000,000,000,000,000. A Btu, on the other hand, measures energy, and represents how much heat is required to raise the temperature of a single pound of water by one degree Fahrenheit at sea level. For reference's sake, a single Btu is the same as the heat from a kitchen match stick.
Most of the major international oil and gas companies have standardized reports to help analysts and investors accurately assess these figures. This is due, in part, to a regulatory requirement with the U.S. [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) requiring foreign companies with stock listed on U.S. exchanges to file standardized reports on an annual basis, called a 20-F. This is equivalent to the [10-K](https://www.investopedia.com/terms/1/10-k.asp) filing for U.S. companies and provides investors with oil and gas production and reserve statistics published using imperial measurements to allow direct comparison.
Investors in [emerging markets](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp) of Russia, Africa, or Latin America often receive reports with data reported with the metric system, which is a global measurement system. Analysts of these companies will need to use conversion tables to accurately quantify and compare them to more sophisticated international operators.
###
Investors in markets like Russia, Africa, or Latin America often receive reports with data reported in the metric system.
## Special Considerations
Within the [oil and gas industry](https://www.investopedia.com/investing/oil-gas-industry-overview/), units of measurement are represented by letters where T is the equivalent of one trillion, B represents one billion, MM equals one million, and M means one thousand. Any of these can appear before certain terms, such as MMBOE or million barrel of oil equivalent, or Tcf, which is trillion cubic feet.
So just as a trillion cubic feet is abbreviated as Tcf, just as Bcf refers to a billion cubic feet. The latter is a gas measurement equal to approximately one trillion (1,000,000,000,000) Btu. [Mcf](https://www.investopedia.com/terms/m/mcf.asp) stands for one thousand cubic feet, a measure used more commonly in the low volume segments of the gas industry, such as stripper well production. Incidentally, Mcf is the conventional way to measure natural gas in the United States, which uses the imperial measuring system.
In Europe, where the metric system is used, the abbreviation most commonly used is thousand of cubic meters or Mcm. Oil and gas financial analysts need to be especially careful when analyzing companies' quarterly results to avoid mixing up various units. For example, it is quite easy to overlook the fact that U.S. companies will report in Mcf, while European companies often report in Mcm. This makes quite a difference because 1Mcm = 35.3Mcf.
## Example of Trillion Cubic Feet
The U.S. Energy Information Administration reports the world's natural gas reserves by country. As of 2019, according to the site, Russia had the highest reserves of natural gas with 1,688 Tcf, followed by Iran with 1,194 Tcf. The U.S. was fourth, with 465 Tcf. The list was rounded out by Belarus and the Czech Republic, which both reported 0.01 Tcf of natural gas each.
| What Is Trillion Cubic Feet (Tcf)?
The term trillion cubic feet refers to a volume measurement of natural gas used by the U.S. oil and gas industry. The measurement is usually abbreviated as Tcf. A cubic foot is a nonmetric measurement of volume also used in the U.S. A trillion—written in numerals as 1,000,000,000,000—cubic feet is equivalent to approximately one quad of Btu or a British thermal unit.
Key Takeaways
The term trillion cubic feet is a volume measurement of natural gas used by the U.S. oil and gas industry.The measurement of a trillion cubic feet is abbreviated as Tcf in the industry.A trillion cubic feet is equivalent to approximately one quadrillion of a British thermal unit.
Understanding Trillion Cubic Feet (Tcf)
In the United States, companies measure natural gas in cubic feet. A trillion cubic feet can be hard to imagine for the average person. It can represent billions of dollars of the commodity. As mentioned above, one trillion cubic feet is the same as one quad of Btu. A quad is the abbreviation for a quadrillion, or 1,000,000,000,000,000. A Btu, on the other hand, measures energy, and represents how much heat is required to raise the temperature of a single pound of water by one degree Fahrenheit at sea level. For reference's sake, a single Btu is the same as the heat from a kitchen match stick.
Most of the major international oil and gas companies have standardized reports to help analysts and investors accurately assess these figures. This is due, in part, to a regulatory requirement with the U.S. Securities and Exchange Commission (SEC) requiring foreign companies with stock listed on U.S. exchanges to file standardized reports on an annual basis, called a 20-F. This is equivalent to the 10-K filing for U.S. companies and provides investors with oil and gas production and reserve statistics published using imperial measurements to allow direct comparison.
Investors in emerging markets of Russia, Africa, or Latin America often receive reports with data reported with the metric system, which is a global measurement system. Analysts of these companies will need to use conversion tables to accurately quantify and compare them to more sophisticated international operators.
Investors in markets like Russia, Africa, or Latin America often receive reports with data reported in the metric system.
Special Considerations
Within the oil and gas industry, units of measurement are represented by letters where T is the equivalent of one trillion, B represents one billion, MM equals one million, and M means one thousand. Any of these can appear before certain terms, such as MMBOE or million barrel of oil equivalent, or Tcf, which is trillion cubic feet.
So just as a trillion cubic feet is abbreviated as Tcf, just as Bcf refers to a billion cubic feet. The latter is a gas measurement equal to approximately one trillion (1,000,000,000,000) Btu. Mcf stands for one thousand cubic feet, a measure used more commonly in the low volume segments of the gas industry, such as stripper well production. Incidentally, Mcf is the conventional way to measure natural gas in the United States, which uses the imperial measuring system.
In Europe, where the metric system is used, the abbreviation most commonly used is thousand of cubic meters or Mcm. Oil and gas financial analysts need to be especially careful when analyzing companies' quarterly results to avoid mixing up various units. For example, it is quite easy to overlook the fact that U.S. companies will report in Mcf, while European companies often report in Mcm. This makes quite a difference because 1Mcm = 35.3Mcf.
Example of Trillion Cubic Feet
The U.S. Energy Information Administration reports the world's natural gas reserves by country. As of 2019, according to the site, Russia had the highest reserves of natural gas with 1,688 Tcf, followed by Iran with 1,194 Tcf. The U.S. was fourth, with 465 Tcf. The list was rounded out by Belarus and the Czech Republic, which both reported 0.01 Tcf of natural gas each.
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https://www.investopedia.com/terms/c/credit-freeze.asp | Credit Freeze | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-credit-freeze"></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 Credit Freeze? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A credit freeze, also known as a security freeze, is an anti-fraud measure in which a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp" rel="noopener noreferrer">credit bureau</a> refrains from sharing a consumer’s credit report with any third parties. Credit freezes are often initiated at the request of consumers who suspect that their identities may have been stolen.
</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"> To prevent thieves from using their credit information to open new accounts or make purchases, victims often prefer to freeze their credit in order to limit the damage from the theft. Until the credit freeze is lifted, no financial institutions or third parties will be able to access a consumer's credit information.
</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 credit freeze is a method used to protect consumers from identity theft.</li><li>It consists of requesting the credit bureau to not share your credit information with any third parties.</li><li>Credit freezes can help prevent theft because would-be thieves often need to access their victims' credit reports in order to open new credit accounts in their name.</li><li>Once a credit freeze is in place, no financial institutions or third parties will be able to access your credit information.</li><li>A credit freeze does not impact a person's credit score.<span class="ql-inline-citation" data-cite="2"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-how-a-credit-freeze-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> How a Credit Freeze Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A credit freeze allows a consumer to control and restrict access to their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp" rel="noopener noreferrer">credit report</a>. This makes it more difficult for thieves, scammers, and other unauthorized parties to open credit in that consumer's name without their permission. Under federal law, 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/" rel="noopener noreferrer">top three credit bureaus</a> are required to comply with a consumer's credit freeze requests at no charge.<span class="ql-inline-citation" data-cite="1"></span> The practice has become one of the main tools used by victims of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/identitytheft.asp" rel="noopener noreferrer">identity theft</a> to protect themselves.
</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 importance of credit freezes in disrupting identity theft stems from the fact that thieves often seek to open new credit accounts using stolen information. For instance, they might apply for new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp" rel="noopener noreferrer">credit cards</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/072913/basics-lines-credit.asp" rel="noopener noreferrer">lines of credit</a>, to then make large purchases and leave the victim to deal with the unpaid debts. In most cases, lenders will ask to see the borrower's credit report as part of the process for opening new accounts. Therefore, by freezing their credit, victims of identity theft can block thieves from opening new accounts in their name, potentially sparing themselves from significant financial harm.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Although credit freezes can be a useful tool to defend against identity theft, they are unfortunately not a complete solution. After all, freezing one's credit does not prevent a thief from accessing accounts that have already been opened. By the time the victim realizes that their information has been stolen, the thief may have already used a victim's existing accounts to make purchases or transfer funds. For this reason, all consumers need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-identity-theft-protection-services-5025069" rel="noopener noreferrer">protect themselves early</a> and closely monitor their account activity in order to quickly detect any suspicious changes or transactions.
</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"> A credit freeze does not impact a person's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp" rel="noopener noreferrer">credit score</a>. It is only a proactive protection measure and does not effect a person's credit profile. A credit freeze also does not stop you from receiving your annual credit report, nor does it have any relation to you applying for a job, obtaining insurance, or renting a property.<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"> Prescreened credit offers do not fall under a credit freeze, so to stop receiving prescreened credit offers, you will have to make a separate request by calling 888-5OPTOUT or filing an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.optoutprescreen.com/" rel="noopener noreferrer nofollow">online request</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_19-0"></div>
<span class="heading-toc" id="toc-example-of-a-credit-freeze"></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"> Example of a Credit Freeze </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Dorothy has been a long-term customer of XYZ Company, a popular <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecommerce.asp" rel="noopener noreferrer">e-commerce</a> retailer. One day, she receives an email notifying her that, due to a large-scale attack on XYZ’s servers, her customer data—including her credit card information—may have been compromised. In hearing this news, Dorothy realized that the hackers may be attempting to steal the customers' identities, in which case they would likely try to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetize.asp" rel="noopener noreferrer">monetize</a> this information by selling it online, making fraudulent purchases, or opening new credit accounts.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> To help protect herself, Dorothy started by notifying her bank and credit card issuer about the breach, locking her credit card to prevent unauthorized transactions, and requesting that a replacement card be sent in the mail. Then, she contacted the three major credit bureaus—TransUnion (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=tru" rel="noopener noreferrer">TRU</a>), Equifax (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=efx" rel="noopener noreferrer">EFX</a>), and Experian (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=expn" rel="noopener noreferrer">EXPN</a>)—to ask them to put a credit freeze on her account.
</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"> Because of the credit freeze, any new account requests made by the hackers would most likely be rejected when the financial institution in question sees that Dorothy's credit has been frozen. By taking these measures, Dorothy would likely have bought herself time to replace her credit card and protect herself from any further damage.
</p></div> | ## What Is a Credit Freeze?
A credit freeze, also known as a security freeze, is an anti-fraud measure in which a [credit bureau](https://www.investopedia.com/terms/c/creditbureau.asp) refrains from sharing a consumer’s credit report with any third parties. Credit freezes are often initiated at the request of consumers who suspect that their identities may have been stolen.
To prevent thieves from using their credit information to open new accounts or make purchases, victims often prefer to freeze their credit in order to limit the damage from the theft. Until the credit freeze is lifted, no financial institutions or third parties will be able to access a consumer's credit information.
### Key Takeaways
* A credit freeze is a method used to protect consumers from identity theft.
* It consists of requesting the credit bureau to not share your credit information with any third parties.
* Credit freezes can help prevent theft because would-be thieves often need to access their victims' credit reports in order to open new credit accounts in their name.
* Once a credit freeze is in place, no financial institutions or third parties will be able to access your credit information.
* A credit freeze does not impact a person's credit score.
## How a Credit Freeze Works
A credit freeze allows a consumer to control and restrict access to their [credit report](https://www.investopedia.com/terms/c/creditreport.asp). This makes it more difficult for thieves, scammers, and other unauthorized parties to open credit in that consumer's name without their permission. Under federal law, the [top three credit bureaus](https://www.investopedia.com/personal-finance/top-three-credit-bureaus/) are required to comply with a consumer's credit freeze requests at no charge. The practice has become one of the main tools used by victims of [identity theft](https://www.investopedia.com/terms/i/identitytheft.asp) to protect themselves.
The importance of credit freezes in disrupting identity theft stems from the fact that thieves often seek to open new credit accounts using stolen information. For instance, they might apply for new [credit cards](https://www.investopedia.com/terms/c/creditcard.asp) and [lines of credit](https://www.investopedia.com/articles/personal-finance/072913/basics-lines-credit.asp), to then make large purchases and leave the victim to deal with the unpaid debts. In most cases, lenders will ask to see the borrower's credit report as part of the process for opening new accounts. Therefore, by freezing their credit, victims of identity theft can block thieves from opening new accounts in their name, potentially sparing themselves from significant financial harm.
Although credit freezes can be a useful tool to defend against identity theft, they are unfortunately not a complete solution. After all, freezing one's credit does not prevent a thief from accessing accounts that have already been opened. By the time the victim realizes that their information has been stolen, the thief may have already used a victim's existing accounts to make purchases or transfer funds. For this reason, all consumers need to [protect themselves early](https://www.investopedia.com/best-identity-theft-protection-services-5025069) and closely monitor their account activity in order to quickly detect any suspicious changes or transactions.
## Special Considerations
A credit freeze does not impact a person's [credit score](https://www.investopedia.com/terms/c/credit_score.asp). It is only a proactive protection measure and does not effect a person's credit profile. A credit freeze also does not stop you from receiving your annual credit report, nor does it have any relation to you applying for a job, obtaining insurance, or renting a property.
Prescreened credit offers do not fall under a credit freeze, so to stop receiving prescreened credit offers, you will have to make a separate request by calling 888-5OPTOUT or filing an [online request](https://www.optoutprescreen.com/).
## Example of a Credit Freeze
Dorothy has been a long-term customer of XYZ Company, a popular [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp) retailer. One day, she receives an email notifying her that, due to a large-scale attack on XYZ’s servers, her customer data—including her credit card information—may have been compromised. In hearing this news, Dorothy realized that the hackers may be attempting to steal the customers' identities, in which case they would likely try to [monetize](https://www.investopedia.com/terms/m/monetize.asp) this information by selling it online, making fraudulent purchases, or opening new credit accounts.
To help protect herself, Dorothy started by notifying her bank and credit card issuer about the breach, locking her credit card to prevent unauthorized transactions, and requesting that a replacement card be sent in the mail. Then, she contacted the three major credit bureaus—TransUnion ([TRU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tru)), Equifax ([EFX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=efx)), and Experian ([EXPN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=expn))—to ask them to put a credit freeze on her account.
Because of the credit freeze, any new account requests made by the hackers would most likely be rejected when the financial institution in question sees that Dorothy's credit has been frozen. By taking these measures, Dorothy would likely have bought herself time to replace her credit card and protect herself from any further damage.
| What Is a Credit Freeze?
A credit freeze, also known as a security freeze, is an anti-fraud measure in which a credit bureau refrains from sharing a consumer’s credit report with any third parties. Credit freezes are often initiated at the request of consumers who suspect that their identities may have been stolen.
To prevent thieves from using their credit information to open new accounts or make purchases, victims often prefer to freeze their credit in order to limit the damage from the theft. Until the credit freeze is lifted, no financial institutions or third parties will be able to access a consumer's credit information.
Key Takeaways
A credit freeze is a method used to protect consumers from identity theft.It consists of requesting the credit bureau to not share your credit information with any third parties.Credit freezes can help prevent theft because would-be thieves often need to access their victims' credit reports in order to open new credit accounts in their name.Once a credit freeze is in place, no financial institutions or third parties will be able to access your credit information.A credit freeze does not impact a person's credit score.
How a Credit Freeze Works
A credit freeze allows a consumer to control and restrict access to their credit report. This makes it more difficult for thieves, scammers, and other unauthorized parties to open credit in that consumer's name without their permission. Under federal law, the top three credit bureaus are required to comply with a consumer's credit freeze requests at no charge. The practice has become one of the main tools used by victims of identity theft to protect themselves.
The importance of credit freezes in disrupting identity theft stems from the fact that thieves often seek to open new credit accounts using stolen information. For instance, they might apply for new credit cards and lines of credit, to then make large purchases and leave the victim to deal with the unpaid debts. In most cases, lenders will ask to see the borrower's credit report as part of the process for opening new accounts. Therefore, by freezing their credit, victims of identity theft can block thieves from opening new accounts in their name, potentially sparing themselves from significant financial harm.
Although credit freezes can be a useful tool to defend against identity theft, they are unfortunately not a complete solution. After all, freezing one's credit does not prevent a thief from accessing accounts that have already been opened. By the time the victim realizes that their information has been stolen, the thief may have already used a victim's existing accounts to make purchases or transfer funds. For this reason, all consumers need to protect themselves early and closely monitor their account activity in order to quickly detect any suspicious changes or transactions.
Special Considerations
A credit freeze does not impact a person's credit score. It is only a proactive protection measure and does not effect a person's credit profile. A credit freeze also does not stop you from receiving your annual credit report, nor does it have any relation to you applying for a job, obtaining insurance, or renting a property.
Prescreened credit offers do not fall under a credit freeze, so to stop receiving prescreened credit offers, you will have to make a separate request by calling 888-5OPTOUT or filing an online request.
Example of a Credit Freeze
Dorothy has been a long-term customer of XYZ Company, a popular e-commerce retailer. One day, she receives an email notifying her that, due to a large-scale attack on XYZ’s servers, her customer data—including her credit card information—may have been compromised. In hearing this news, Dorothy realized that the hackers may be attempting to steal the customers' identities, in which case they would likely try to monetize this information by selling it online, making fraudulent purchases, or opening new credit accounts.
To help protect herself, Dorothy started by notifying her bank and credit card issuer about the breach, locking her credit card to prevent unauthorized transactions, and requesting that a replacement card be sent in the mail. Then, she contacted the three major credit bureaus—TransUnion (TRU), Equifax (EFX), and Experian (EXPN)—to ask them to put a credit freeze on her account.
Because of the credit freeze, any new account requests made by the hackers would most likely be rejected when the financial institution in question sees that Dorothy's credit has been frozen. By taking these measures, Dorothy would likely have bought herself time to replace her credit card and protect herself from any further damage.
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],
[
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https://www.investopedia.com/ask/answers/find-historical-stock-index-quotes/ | Where Can I Find Historical Stock/Index Quotes? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 shortage of places online that provide current <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockquote.asp">stock quotes</a>. Using any type of Internet-connected device will let you enter a ticker <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stocksymbol.asp">symbol</a> to get the latest quote on a traded <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> from a website or app. Traditionally, historical quotes on stocks and indexes were harder to come by for the general public, but this is no longer the case.
</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"> Historical price data can be used by investors and analysts to back-test pricing models or investment strategies, to mine data for patterns that have occurred in the past, or to detect technical indicators for day traders, among other uses.
</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>Stock price quotes were once hard to find for ordinary investors, and real-time data came with a hefty price tag.</li>
<li>Today, however, several online services provide free real-time quotes for public consumption.</li>
<li>Both historical and up-to-the-minute price quotes can be found using an Internet-connected device and one of several websites or apps.</li>
<li>Investopedia has its own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/">handy tools</a> for obtaining historical price quotes as well.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-getting-historical-quotes-on-securities"></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"> Getting Historical Quotes on Securities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> If you're looking for a historical range of data on an individual security then you can use Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/">Markets</a> section to find what you need.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In order to navigate to the historical data, enter the ticker symbol of the equity you're looking for into the "Search Company or Symbol" search box on the page. This will take you to the quote page of the ticker symbol you entered.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Once on the quote page of the stock or ETF that you're interested in you can use the time interval controls in the top left of the chart to adjust the time interval that the chart displays (for example hour, day, month) so that you can see the historical timeframe you are interested in.
</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"> This tool lets you enter a date range as well as <strong>daily, weekly, or monthly closing prices</strong>. In addition to pricing data, you can also look at historical dividends and stock splits.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></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_16-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.4%;">
<img alt="Historical stock chart of AMD." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/KZG6Ox5SgVQz8KboB5VD1tqw_JU=/1216x0/filters:no_upscale():max_bytes(150000):strip_icc()/ScreenShot2019-08-28at1.59.03PM-2e8cb1195471423392644ee65bf2ca31.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/5wKI8N6osQPTNA1aqGMKeR_ZZ-Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ScreenShot2019-08-28at1.59.03PM-2e8cb1195471423392644ee65bf2ca31.png" data-srcset="https://www.investopedia.com/thmb/5DuVJbOwz12uf88m9DdyTJ-My-k=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/ScreenShot2019-08-28at1.59.03PM-2e8cb1195471423392644ee65bf2ca31.png 750w" data-tracking-container="true" height="613" id="mntl-sc-block-image_1-0" width="1216"/>
<noscript>
<img alt="Historical stock chart of AMD." class="img--noscript universal-image__image" height="613" sizes="750px" src="https://www.investopedia.com/thmb/5wKI8N6osQPTNA1aqGMKeR_ZZ-Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ScreenShot2019-08-28at1.59.03PM-2e8cb1195471423392644ee65bf2ca31.png" srcset="https://www.investopedia.com/thmb/5DuVJbOwz12uf88m9DdyTJ-My-k=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/ScreenShot2019-08-28at1.59.03PM-2e8cb1195471423392644ee65bf2ca31.png 750w" width="1216"/>
</noscript>
</div> </div>
<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"> TradingView</span>
</figcaption></figure>
<span class="heading-toc" id="toc-getting-historical-quotes-on-indices"></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"> Getting Historical Quotes on Indices </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> If you're just looking for the three major U.S. indices, then the chart on our Markets Today page features historical pricing for the Dow Jones Industrial Average, the S&P 500, and the Nasdaq.
</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"> You can adjust the dates along the top of the graph to see the historical data of the three indices. If you're looking for a more robust set of historical pricing data, the Caltech Quantitative Finance Group does a great job of providing a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://quant.caltech.edu/historical-stock-data.html">landscape of the available market data feed options</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<span class="heading-toc" id="toc-where-else-to-find-historical-quotes"></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"> Where Else to Find Historical Quotes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> There are several other resources online to find historical price quotes. Online brokerage sites such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/e-trade-review-4587893">eTrade </a>and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/td-ameritrade-review-4587925">TD Ameritrade</a> or apps like <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/robinhood-review-4587919">Robinhood</a> will have both real-time and historical quote data for customers and usually limited access for non-customers as well. Financial websites like Motley Fool or Google Finance will also provide quote information for both stocks and indices.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> For a history of index price returns dating back to the year 1928, you can check out <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html">this table</a> maintained by New York University's Stern Business School.
</p></div> | There is no shortage of places online that provide current [stock quotes](https://www.investopedia.com/terms/s/stockquote.asp). Using any type of Internet-connected device will let you enter a ticker [symbol](https://www.investopedia.com/terms/s/stocksymbol.asp) to get the latest quote on a traded [security](https://www.investopedia.com/terms/s/security.asp) from a website or app. Traditionally, historical quotes on stocks and indexes were harder to come by for the general public, but this is no longer the case.
Historical price data can be used by investors and analysts to back-test pricing models or investment strategies, to mine data for patterns that have occurred in the past, or to detect technical indicators for day traders, among other uses.
### Key Takeaways
* Stock price quotes were once hard to find for ordinary investors, and real-time data came with a hefty price tag.
* Today, however, several online services provide free real-time quotes for public consumption.
* Both historical and up-to-the-minute price quotes can be found using an Internet-connected device and one of several websites or apps.
* Investopedia has its own [handy tools](https://www.investopedia.com/markets/) for obtaining historical price quotes as well.
## Getting Historical Quotes on Securities
If you're looking for a historical range of data on an individual security then you can use Investopedia's [Markets](https://www.investopedia.com/markets/) section to find what you need.
In order to navigate to the historical data, enter the ticker symbol of the equity you're looking for into the "Search Company or Symbol" search box on the page. This will take you to the quote page of the ticker symbol you entered.
Once on the quote page of the stock or ETF that you're interested in you can use the time interval controls in the top left of the chart to adjust the time interval that the chart displays (for example hour, day, month) so that you can see the historical timeframe you are interested in.
This tool lets you enter a date range as well as **daily, weekly, or monthly closing prices**. In addition to pricing data, you can also look at historical dividends and stock splits.
![Historical stock chart of AMD.]()
:max_bytes(150000):strip_icc()/ScreenShot2019-08-28at1.59.03PM-2e8cb1195471423392644ee65bf2ca31.png)
TradingView
## Getting Historical Quotes on Indices
If you're just looking for the three major U.S. indices, then the chart on our Markets Today page features historical pricing for the Dow Jones Industrial Average, the S&P 500, and the Nasdaq.
You can adjust the dates along the top of the graph to see the historical data of the three indices. If you're looking for a more robust set of historical pricing data, the Caltech Quantitative Finance Group does a great job of providing a [landscape of the available market data feed options](http://quant.caltech.edu/historical-stock-data.html).
## Where Else to Find Historical Quotes
There are several other resources online to find historical price quotes. Online brokerage sites such as [eTrade](https://www.investopedia.com/e-trade-review-4587893) and [TD Ameritrade](https://www.investopedia.com/td-ameritrade-review-4587925) or apps like [Robinhood](https://www.investopedia.com/robinhood-review-4587919) will have both real-time and historical quote data for customers and usually limited access for non-customers as well. Financial websites like Motley Fool or Google Finance will also provide quote information for both stocks and indices.
For a history of index price returns dating back to the year 1928, you can check out [this table](http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html) maintained by New York University's Stern Business School.
| There is no shortage of places online that provide current stock quotes. Using any type of Internet-connected device will let you enter a ticker symbol to get the latest quote on a traded security from a website or app. Traditionally, historical quotes on stocks and indexes were harder to come by for the general public, but this is no longer the case.
Historical price data can be used by investors and analysts to back-test pricing models or investment strategies, to mine data for patterns that have occurred in the past, or to detect technical indicators for day traders, among other uses.
Key Takeaways
Stock price quotes were once hard to find for ordinary investors, and real-time data came with a hefty price tag.
Today, however, several online services provide free real-time quotes for public consumption.
Both historical and up-to-the-minute price quotes can be found using an Internet-connected device and one of several websites or apps.
Investopedia has its own handy tools for obtaining historical price quotes as well.
Getting Historical Quotes on Securities
If you're looking for a historical range of data on an individual security then you can use Investopedia's Markets section to find what you need.
In order to navigate to the historical data, enter the ticker symbol of the equity you're looking for into the "Search Company or Symbol" search box on the page. This will take you to the quote page of the ticker symbol you entered.
Once on the quote page of the stock or ETF that you're interested in you can use the time interval controls in the top left of the chart to adjust the time interval that the chart displays (for example hour, day, month) so that you can see the historical timeframe you are interested in.
This tool lets you enter a date range as well as daily, weekly, or monthly closing prices. In addition to pricing data, you can also look at historical dividends and stock splits.
TradingView
Getting Historical Quotes on Indices
If you're just looking for the three major U.S. indices, then the chart on our Markets Today page features historical pricing for the Dow Jones Industrial Average, the S&P 500, and the Nasdaq.
You can adjust the dates along the top of the graph to see the historical data of the three indices. If you're looking for a more robust set of historical pricing data, the Caltech Quantitative Finance Group does a great job of providing a landscape of the available market data feed options.
Where Else to Find Historical Quotes
There are several other resources online to find historical price quotes. Online brokerage sites such as eTrade and TD Ameritrade or apps like Robinhood will have both real-time and historical quote data for customers and usually limited access for non-customers as well. Financial websites like Motley Fool or Google Finance will also provide quote information for both stocks and indices.
For a history of index price returns dating back to the year 1928, you can check out this table maintained by New York University's Stern Business School.
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]
] |
https://www.investopedia.com/ask/answers/06/bidaskspread.asp | What Determines a Stock's Bid-Ask Spread? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 basic concepts of investing is the bid-ask spread, which can be used in different facets of a person's financial life, from buying a home or car. It can even be used to negotiate the purchase of stocks.
</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 bid-ask spread is very important in the marketplace. It's the difference between the buyer's and seller's prices—or what the buyer is willing to pay for something versus what the seller is willing to get in order to sell it.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> In this short article, we look at what determines the bid-ask spread for a stock.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The bid-ask spread for a stock is the difference in the price that someone is willing to pay (the bid) and where someone is willing to sell (the offer or ask).</li><li>Tighter spreads are a sign of greater liquidity, while wider bid-ask spreads occur in less liquid or highly-volatile stocks.</li><li>When a bid-ask spread is wide, it can be more difficult to trade in and out of a position at a fair price.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-a-bid-ask-spread"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> What Is a Bid-Ask Spread? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Let's first take a look at the basics of the bid-ask spread.
</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"> Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the amount a buyer is willing to pay for a particular security, while the asking price is the amount a seller will take for that security.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> If the prices are close together, it means the two parties have a similar opinion. On the other hand, if the price difference is wider, that means they don't see eye-to-eye.
</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"> But in reality, the asking price is always a little higher than the bid price. The difference between the bid and ask prices is what is called the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">bid-ask spread</a>. This difference represents a profit for the broker or specialist handling the transaction.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> This spread basically represents the supply and demand of a specific asset, including stocks. Bids reflect the demand, while the ask price reflects the supply. The spread can become much wider when one outweighs the other.
</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-liquidity-impact-on-bid-ask-spreads"></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"> Liquidity Impact on Bid-Ask Spreads </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> There are several factors that contribute to the difference between the bid and ask prices. The most evident factor is a security's liquidity. This refers to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volume.asp">volume</a> or number of shares traded on a daily basis. Some stocks are traded regularly while others are only traded a few times a day.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The stocks and indexes that have large trading volumes will have narrower bid-ask spreads than those that are infrequently traded. When a stock <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/what-types-stocks-have-large-difference-between-bid-and-ask-prices.asp">has a low trading volume</a>, it is considered illiquid because it is not easily converted to cash. As a result, a broker will require more compensation for handling the transaction, accounting for the larger spread.
</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-volatility-and-bid-ask-spreads"></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"> Volatility and Bid-Ask Spreads </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Another important aspect that affects the bid-ask spread is volatility. Volatility usually increases during periods of rapid market decline or advancement. At these times, the bid-ask spread is much wider because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp">market makers</a> want to take advantage of—and profit from—it. When securities are increasing in value, investors are willing to pay more, giving market makers the opportunity to charge higher premiums. When volatility is low, and uncertainty and risk are at a minimum, the bid-ask spread is narrow.
</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-stock-price-impact"></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"> Stock Price Impact </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> A stock's price also influences the bid-ask spread. If the price is low, the bid-ask spread will tend to be larger. The reason for this is linked to the idea of liquidity. Most low-priced securities are either new or small in size. Therefore, the number of these securities that can be traded is limited, making them less liquid.
</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"> Ultimately, the bid-ask spread comes down to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/law-of-supply-demand.asp">supply and demand</a>. That is, higher demand and tighter supply will mean a lower spread. Today, with the help of technology, finding a buyer or seller can be done much quicker, helping make supply-and-demand dynamics much more efficient.
</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-types-of-orders"></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"> Types of Orders </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> When a buyer or seller goes to place an order, there's a variety of orders that can be placed. This includes a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/basics-trading-stock-know-your-orders/">market order</a>, which, when placed, means the party will take the best offer. Then there's a limit order, which puts a limit on the price one is willing to pay to execute the transaction. A limit order will only be completed if that price is available. Meanwhile, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stoporder.asp">stop order</a> is a conditional order, where it becomes a market or limit order when a particular price is reached. It can't be seen by the market otherwise, unlike a limit order, which can be seen when placed.
</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 bid-ask spread can say a lot about a security, meaning you should be aware of all the reasons that are contributing to the bid-ask spread of a security you are following. Your <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> and the amount of risk that you are willing to take may affect what bid-ask spread you find acceptable.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The spread between the bid and ask prices generally represents a form of negotiation between two parties—the buyer and the seller. There are many compounding factors that can affect how wide or narrow the spread is between the ask and bid price. By understanding the different factors, investors can make more informed decisions on their investments and limit their risk.
</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"> <em>Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.</em>
</p></div> | One of the basic concepts of investing is the bid-ask spread, which can be used in different facets of a person's financial life, from buying a home or car. It can even be used to negotiate the purchase of stocks.
The bid-ask spread is very important in the marketplace. It's the difference between the buyer's and seller's prices—or what the buyer is willing to pay for something versus what the seller is willing to get in order to sell it.
In this short article, we look at what determines the bid-ask spread for a stock.
### Key Takeaways
* The bid-ask spread for a stock is the difference in the price that someone is willing to pay (the bid) and where someone is willing to sell (the offer or ask).
* Tighter spreads are a sign of greater liquidity, while wider bid-ask spreads occur in less liquid or highly-volatile stocks.
* When a bid-ask spread is wide, it can be more difficult to trade in and out of a position at a fair price.
## What Is a Bid-Ask Spread?
Let's first take a look at the basics of the bid-ask spread.
Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the amount a buyer is willing to pay for a particular security, while the asking price is the amount a seller will take for that security.
If the prices are close together, it means the two parties have a similar opinion. On the other hand, if the price difference is wider, that means they don't see eye-to-eye.
But in reality, the asking price is always a little higher than the bid price. The difference between the bid and ask prices is what is called the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp). This difference represents a profit for the broker or specialist handling the transaction.
This spread basically represents the supply and demand of a specific asset, including stocks. Bids reflect the demand, while the ask price reflects the supply. The spread can become much wider when one outweighs the other.
## Liquidity Impact on Bid-Ask Spreads
There are several factors that contribute to the difference between the bid and ask prices. The most evident factor is a security's liquidity. This refers to the [volume](https://www.investopedia.com/terms/v/volume.asp) or number of shares traded on a daily basis. Some stocks are traded regularly while others are only traded a few times a day.
The stocks and indexes that have large trading volumes will have narrower bid-ask spreads than those that are infrequently traded. When a stock [has a low trading volume](https://www.investopedia.com/ask/answers/042315/what-types-stocks-have-large-difference-between-bid-and-ask-prices.asp), it is considered illiquid because it is not easily converted to cash. As a result, a broker will require more compensation for handling the transaction, accounting for the larger spread.
## Volatility and Bid-Ask Spreads
Another important aspect that affects the bid-ask spread is volatility. Volatility usually increases during periods of rapid market decline or advancement. At these times, the bid-ask spread is much wider because [market makers](https://www.investopedia.com/terms/m/marketmaker.asp) want to take advantage of—and profit from—it. When securities are increasing in value, investors are willing to pay more, giving market makers the opportunity to charge higher premiums. When volatility is low, and uncertainty and risk are at a minimum, the bid-ask spread is narrow.
## Stock Price Impact
A stock's price also influences the bid-ask spread. If the price is low, the bid-ask spread will tend to be larger. The reason for this is linked to the idea of liquidity. Most low-priced securities are either new or small in size. Therefore, the number of these securities that can be traded is limited, making them less liquid.
Ultimately, the bid-ask spread comes down to [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp). That is, higher demand and tighter supply will mean a lower spread. Today, with the help of technology, finding a buyer or seller can be done much quicker, helping make supply-and-demand dynamics much more efficient.
## Types of Orders
When a buyer or seller goes to place an order, there's a variety of orders that can be placed. This includes a [market order](https://www.investopedia.com/investing/basics-trading-stock-know-your-orders/), which, when placed, means the party will take the best offer. Then there's a limit order, which puts a limit on the price one is willing to pay to execute the transaction. A limit order will only be completed if that price is available. Meanwhile, a [stop order](https://www.investopedia.com/terms/s/stoporder.asp) is a conditional order, where it becomes a market or limit order when a particular price is reached. It can't be seen by the market otherwise, unlike a limit order, which can be seen when placed.
The bid-ask spread can say a lot about a security, meaning you should be aware of all the reasons that are contributing to the bid-ask spread of a security you are following. Your [investment strategy](https://www.investopedia.com/terms/i/investmentstrategy.asp) and the amount of risk that you are willing to take may affect what bid-ask spread you find acceptable.
## The Bottom Line
The spread between the bid and ask prices generally represents a form of negotiation between two parties—the buyer and the seller. There are many compounding factors that can affect how wide or narrow the spread is between the ask and bid price. By understanding the different factors, investors can make more informed decisions on their investments and limit their risk.
*Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.*
| One of the basic concepts of investing is the bid-ask spread, which can be used in different facets of a person's financial life, from buying a home or car. It can even be used to negotiate the purchase of stocks.
The bid-ask spread is very important in the marketplace. It's the difference between the buyer's and seller's prices—or what the buyer is willing to pay for something versus what the seller is willing to get in order to sell it.
In this short article, we look at what determines the bid-ask spread for a stock.
Key Takeaways
The bid-ask spread for a stock is the difference in the price that someone is willing to pay (the bid) and where someone is willing to sell (the offer or ask).Tighter spreads are a sign of greater liquidity, while wider bid-ask spreads occur in less liquid or highly-volatile stocks.When a bid-ask spread is wide, it can be more difficult to trade in and out of a position at a fair price.
What Is a Bid-Ask Spread?
Let's first take a look at the basics of the bid-ask spread.
Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the amount a buyer is willing to pay for a particular security, while the asking price is the amount a seller will take for that security.
If the prices are close together, it means the two parties have a similar opinion. On the other hand, if the price difference is wider, that means they don't see eye-to-eye.
But in reality, the asking price is always a little higher than the bid price. The difference between the bid and ask prices is what is called the bid-ask spread. This difference represents a profit for the broker or specialist handling the transaction.
This spread basically represents the supply and demand of a specific asset, including stocks. Bids reflect the demand, while the ask price reflects the supply. The spread can become much wider when one outweighs the other.
Liquidity Impact on Bid-Ask Spreads
There are several factors that contribute to the difference between the bid and ask prices. The most evident factor is a security's liquidity. This refers to the volume or number of shares traded on a daily basis. Some stocks are traded regularly while others are only traded a few times a day.
The stocks and indexes that have large trading volumes will have narrower bid-ask spreads than those that are infrequently traded. When a stock has a low trading volume, it is considered illiquid because it is not easily converted to cash. As a result, a broker will require more compensation for handling the transaction, accounting for the larger spread.
Volatility and Bid-Ask Spreads
Another important aspect that affects the bid-ask spread is volatility. Volatility usually increases during periods of rapid market decline or advancement. At these times, the bid-ask spread is much wider because market makers want to take advantage of—and profit from—it. When securities are increasing in value, investors are willing to pay more, giving market makers the opportunity to charge higher premiums. When volatility is low, and uncertainty and risk are at a minimum, the bid-ask spread is narrow.
Stock Price Impact
A stock's price also influences the bid-ask spread. If the price is low, the bid-ask spread will tend to be larger. The reason for this is linked to the idea of liquidity. Most low-priced securities are either new or small in size. Therefore, the number of these securities that can be traded is limited, making them less liquid.
Ultimately, the bid-ask spread comes down to supply and demand. That is, higher demand and tighter supply will mean a lower spread. Today, with the help of technology, finding a buyer or seller can be done much quicker, helping make supply-and-demand dynamics much more efficient.
Types of Orders
When a buyer or seller goes to place an order, there's a variety of orders that can be placed. This includes a market order, which, when placed, means the party will take the best offer. Then there's a limit order, which puts a limit on the price one is willing to pay to execute the transaction. A limit order will only be completed if that price is available. Meanwhile, a stop order is a conditional order, where it becomes a market or limit order when a particular price is reached. It can't be seen by the market otherwise, unlike a limit order, which can be seen when placed.
The bid-ask spread can say a lot about a security, meaning you should be aware of all the reasons that are contributing to the bid-ask spread of a security you are following. Your investment strategy and the amount of risk that you are willing to take may affect what bid-ask spread you find acceptable.
The Bottom Line
The spread between the bid and ask prices generally represents a form of negotiation between two parties—the buyer and the seller. There are many compounding factors that can affect how wide or narrow the spread is between the ask and bid price. By understanding the different factors, investors can make more informed decisions on their investments and limit their risk.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.
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https://www.investopedia.com/transfer-on-death-cd-taxation-5295869 | Are Transfer-on-Death CD Accounts Subject to Estate Taxes? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Certificates of deposit (CDs) are a low-risk way of putting some money aside for the short- to medium-term future and are a popular way for seniors to earn a modest return on their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a>. As a result, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificates of deposit </a> are often included in inheritance settlements, where they can be passed on <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-inherit-a-cd-5268099">in a number of ways</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"> To avoid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/probate.asp">probate</a>, many CD owners choose to name a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transferondeath.asp">transfer-on-death</a> (TOD) beneficiary to their account—that is, someone who will automatically inherit it when the original owner passes away. While doing this can help keep the CD out of probate proceedings, it doesn’t allow you to avoid <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estatetax.asp">estate taxes</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_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> In this guide, we’ll explain how these taxes apply to CDs and why naming a TOD beneficiary is still a good idea.
</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>Naming a transfer-on-death (TOD) beneficiary for your certificate of deposit (CD) accounts can keep some of your assets out of probate, because the assets in your CDs will pass to your named TOD beneficiary without having to go through probate.<span class="ql-inline-citation" data-cite="7"></span> </li><li>Putting TOD beneficiaries on accounts does not mean that you or your heirs avoid estate taxes.</li><li>The value of CDs counts toward federal and state estate tax thresholds even if heirs can avoid probate.<span class="ql-inline-citation" data-cite="6"></span></li><li>The federal threshold for estate taxes is very high (as of 2024, it is $13.61 million), and few states impose this tax.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span> This means that the vast majority of estates don’t have to pay estate taxes.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-estate-taxes"></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 Estate Taxes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> To understand when and why estate taxes apply to TOD beneficiaries named on CD accounts, it’s worth reviewing how estate taxes work more generally.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> When a person dies, the value of their estate is assessed, and they may be subject to estate taxes and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inheritancetax.asp">inheritance taxes</a>. For these to apply, however, an estate must be of a particular size, and this depends on where the person lived. While the threat of estate taxes and inheritance taxes does exist, in reality, the vast majority of estates are too small to be charged a federal estate tax.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> In 2023, federal estate tax only applied only if the assets of the deceased person were <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715">worth $12.92 million or more</a>—so it only applied to a small number of people.<span class="ql-inline-citation" data-cite="2"></span> To account for inflation, the threshold increased to $13.61 million in 2024.<span class="ql-inline-citation" data-cite="5"></span> Similarly, most states don’t have estate tax, which is levied on the actual estate, or an inheritance tax, which is assessed against those who receive an inheritance from an estate. That said, 12 states and the District of Columbia do have estate taxes, and some of their exemption amounts are much lower than the federal threshold. For example, exemptions are just $1 million in Oregon.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> It’s quite uncommon for any estate to be taxed. If you are one of the few Americans to leave a large enough estate for taxes to apply, however, it’s important to understand how your estate tax will be calculated. Specifically, with regard to TOD beneficiaries, it’s critical to understand that your probate estate and your taxable estate are two different things. A taxable estate is the value of everything owned at the time of death, regardless of whether it requires probate to transfer to a living beneficiary.<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"> This means that although naming a TOD beneficiary on a CD account will keep the account out of probate, it won’t help you to avoid estate tax. Your CD will count toward the total value of your estate whether you’ve named a TOD beneficiary or not, and your heirs will be liable to pay this tax.<span class="ql-inline-citation" data-cite="7"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_20-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_21-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The vast majority of estates aren’t large enough to attract federal estate tax, and only a few states have their own estate taxes. Assets held in a CD—whether with a TOD beneficiary named or not—count toward tax thresholds.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<span class="heading-toc" id="toc-inheriting-a-cd"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Inheriting a CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The rules outlined in the previous section mean that very few heirs have to pay estate tax, whether on their CDs or any other assets. However, there are tax consequences associated with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-inherit-a-cd-5268099">inheriting a CD</a>.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Generally, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> earned by a CD prior to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-to-my-cds-when-i-die-5270936">account owner’s death</a> is not taxable to the beneficiary, nor is the original amount that was deposited. But any interest earned after the account owner’s death would be taxable for beneficiaries. If you inherit a five- or six-figure CD, you might owe a significant amount of tax. If the amount of money in the CD is modest, the tax bill is likely to be modest as well.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> This rule applies whether an heir inherits a CD as a TOD beneficiary, as a co-owner, or through probate. In other words, while naming a TOD beneficiary can be a great way to simplify inheritance proceedings, it doesn’t confer any tax benefit on your heirs—whether for estate taxes or income taxes.<span class="ql-inline-citation" data-cite="7"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-are-the-thresholds-for-estate-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Thresholds for Estate Tax?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As of 2023, federal estate tax only applies only if the assets of the deceased person are worth $12.92 million or more—thus, it only applies to a small number of people. For the calendar year 2024, the threshold is $13.61 million.<span class="ql-inline-citation" data-cite="5"></span> Twelve states and the District of Columbia have estate taxes, and some of their exemption amounts are much lower than the federal threshold.<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_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-who-can-i-name-as-a-transfer-on-death-tod-beneficiary"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Can I Name As a Transfer-on-Death (TOD) Beneficiary?</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/transfer-on-death-beneficiary-5272315">Practically anyone</a>. A transfer-on-death (TOD) beneficiary can be a person, charity, business, or trust. If the beneficiary is a person, they can be a relative, child, spouse, friend, or anyone else whom you happen to know. However, if you are married, your spouse may have special rights over your assets that take precedence over your named TOD beneficiaries.</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-does-naming-a-tod-beneficiary-have-tax-benefits"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Naming a TOD Beneficiary Have Tax Benefits?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. While naming a TOD beneficiary can help your heirs avoid the probate process, it doesn’t confer any tax benefit. It doesn’t help you to avoid estate taxes, and your heirs will still have to pay income tax on the earnings of a certificate of deposit (CD) after you pass away.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Naming TOD beneficiaries on your CD accounts can help some of your assets avoid probate, because the assets in your CDs will pass to your named TOD beneficiary without having to go through probate. However, this will not help you (or your heirs) to avoid estate taxes, because the value of your CDs counts toward federal and state estate tax thresholds even if they don’t have to go through probate.
</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 federal threshold for estate taxes is high, and few states impose this tax. In other words, the vast majority of estates don’t have to pay estate taxes.
</p></div> | Certificates of deposit (CDs) are a low-risk way of putting some money aside for the short- to medium-term future and are a popular way for seniors to earn a modest return on their [savings](https://www.investopedia.com/terms/s/savings.asp). As a result, [certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) are often included in inheritance settlements, where they can be passed on [in a number of ways](https://www.investopedia.com/how-to-inherit-a-cd-5268099).
To avoid [probate](https://www.investopedia.com/terms/p/probate.asp), many CD owners choose to name a [transfer-on-death](https://www.investopedia.com/terms/t/transferondeath.asp) (TOD) beneficiary to their account—that is, someone who will automatically inherit it when the original owner passes away. While doing this can help keep the CD out of probate proceedings, it doesn’t allow you to avoid [estate taxes](https://www.investopedia.com/terms/e/estatetax.asp).
In this guide, we’ll explain how these taxes apply to CDs and why naming a TOD beneficiary is still a good idea.
### Key Takeaways
* Naming a transfer-on-death (TOD) beneficiary for your certificate of deposit (CD) accounts can keep some of your assets out of probate, because the assets in your CDs will pass to your named TOD beneficiary without having to go through probate.
* Putting TOD beneficiaries on accounts does not mean that you or your heirs avoid estate taxes.
* The value of CDs counts toward federal and state estate tax thresholds even if heirs can avoid probate.
* The federal threshold for estate taxes is very high (as of 2024, it is $13.61 million), and few states impose this tax. This means that the vast majority of estates don’t have to pay estate taxes.
## Understanding Estate Taxes
To understand when and why estate taxes apply to TOD beneficiaries named on CD accounts, it’s worth reviewing how estate taxes work more generally.
When a person dies, the value of their estate is assessed, and they may be subject to estate taxes and [inheritance taxes](https://www.investopedia.com/terms/i/inheritancetax.asp). For these to apply, however, an estate must be of a particular size, and this depends on where the person lived. While the threat of estate taxes and inheritance taxes does exist, in reality, the vast majority of estates are too small to be charged a federal estate tax.
In 2023, federal estate tax only applied only if the assets of the deceased person were [worth $12.92 million or more](https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715)—so it only applied to a small number of people. To account for inflation, the threshold increased to $13.61 million in 2024. Similarly, most states don’t have estate tax, which is levied on the actual estate, or an inheritance tax, which is assessed against those who receive an inheritance from an estate. That said, 12 states and the District of Columbia do have estate taxes, and some of their exemption amounts are much lower than the federal threshold. For example, exemptions are just $1 million in Oregon.
It’s quite uncommon for any estate to be taxed. If you are one of the few Americans to leave a large enough estate for taxes to apply, however, it’s important to understand how your estate tax will be calculated. Specifically, with regard to TOD beneficiaries, it’s critical to understand that your probate estate and your taxable estate are two different things. A taxable estate is the value of everything owned at the time of death, regardless of whether it requires probate to transfer to a living beneficiary.
This means that although naming a TOD beneficiary on a CD account will keep the account out of probate, it won’t help you to avoid estate tax. Your CD will count toward the total value of your estate whether you’ve named a TOD beneficiary or not, and your heirs will be liable to pay this tax.
###
The vast majority of estates aren’t large enough to attract federal estate tax, and only a few states have their own estate taxes. Assets held in a CD—whether with a TOD beneficiary named or not—count toward tax thresholds.
## Inheriting a CD
The rules outlined in the previous section mean that very few heirs have to pay estate tax, whether on their CDs or any other assets. However, there are tax consequences associated with [inheriting a CD](https://www.investopedia.com/how-to-inherit-a-cd-5268099).
Generally, the [interest](https://www.investopedia.com/terms/i/interest.asp) earned by a CD prior to the [account owner’s death](https://www.investopedia.com/what-happens-to-my-cds-when-i-die-5270936) is not taxable to the beneficiary, nor is the original amount that was deposited. But any interest earned after the account owner’s death would be taxable for beneficiaries. If you inherit a five- or six-figure CD, you might owe a significant amount of tax. If the amount of money in the CD is modest, the tax bill is likely to be modest as well.
This rule applies whether an heir inherits a CD as a TOD beneficiary, as a co-owner, or through probate. In other words, while naming a TOD beneficiary can be a great way to simplify inheritance proceedings, it doesn’t confer any tax benefit on your heirs—whether for estate taxes or income taxes.
## What Are the Thresholds for Estate Tax?
As of 2023, federal estate tax only applies only if the assets of the deceased person are worth $12.92 million or more—thus, it only applies to a small number of people. For the calendar year 2024, the threshold is $13.61 million. Twelve states and the District of Columbia have estate taxes, and some of their exemption amounts are much lower than the federal threshold.
## Who Can I Name As a Transfer-on-Death (TOD) Beneficiary?
[Practically anyone](https://www.investopedia.com/transfer-on-death-beneficiary-5272315). A transfer-on-death (TOD) beneficiary can be a person, charity, business, or trust. If the beneficiary is a person, they can be a relative, child, spouse, friend, or anyone else whom you happen to know. However, if you are married, your spouse may have special rights over your assets that take precedence over your named TOD beneficiaries.
## Does Naming a TOD Beneficiary Have Tax Benefits?
No. While naming a TOD beneficiary can help your heirs avoid the probate process, it doesn’t confer any tax benefit. It doesn’t help you to avoid estate taxes, and your heirs will still have to pay income tax on the earnings of a certificate of deposit (CD) after you pass away.
## The Bottom Line
Naming TOD beneficiaries on your CD accounts can help some of your assets avoid probate, because the assets in your CDs will pass to your named TOD beneficiary without having to go through probate. However, this will not help you (or your heirs) to avoid estate taxes, because the value of your CDs counts toward federal and state estate tax thresholds even if they don’t have to go through probate.
The federal threshold for estate taxes is high, and few states impose this tax. In other words, the vast majority of estates don’t have to pay estate taxes.
| Certificates of deposit (CDs) are a low-risk way of putting some money aside for the short- to medium-term future and are a popular way for seniors to earn a modest return on their savings. As a result, certificates of deposit are often included in inheritance settlements, where they can be passed on in a number of ways.
To avoid probate, many CD owners choose to name a transfer-on-death (TOD) beneficiary to their account—that is, someone who will automatically inherit it when the original owner passes away. While doing this can help keep the CD out of probate proceedings, it doesn’t allow you to avoid estate taxes.
In this guide, we’ll explain how these taxes apply to CDs and why naming a TOD beneficiary is still a good idea.
Key Takeaways
Naming a transfer-on-death (TOD) beneficiary for your certificate of deposit (CD) accounts can keep some of your assets out of probate, because the assets in your CDs will pass to your named TOD beneficiary without having to go through probate. Putting TOD beneficiaries on accounts does not mean that you or your heirs avoid estate taxes.The value of CDs counts toward federal and state estate tax thresholds even if heirs can avoid probate.The federal threshold for estate taxes is very high (as of 2024, it is $13.61 million), and few states impose this tax. This means that the vast majority of estates don’t have to pay estate taxes.
Understanding Estate Taxes
To understand when and why estate taxes apply to TOD beneficiaries named on CD accounts, it’s worth reviewing how estate taxes work more generally.
When a person dies, the value of their estate is assessed, and they may be subject to estate taxes and inheritance taxes. For these to apply, however, an estate must be of a particular size, and this depends on where the person lived. While the threat of estate taxes and inheritance taxes does exist, in reality, the vast majority of estates are too small to be charged a federal estate tax.
In 2023, federal estate tax only applied only if the assets of the deceased person were worth $12.92 million or more—so it only applied to a small number of people. To account for inflation, the threshold increased to $13.61 million in 2024. Similarly, most states don’t have estate tax, which is levied on the actual estate, or an inheritance tax, which is assessed against those who receive an inheritance from an estate. That said, 12 states and the District of Columbia do have estate taxes, and some of their exemption amounts are much lower than the federal threshold. For example, exemptions are just $1 million in Oregon.
It’s quite uncommon for any estate to be taxed. If you are one of the few Americans to leave a large enough estate for taxes to apply, however, it’s important to understand how your estate tax will be calculated. Specifically, with regard to TOD beneficiaries, it’s critical to understand that your probate estate and your taxable estate are two different things. A taxable estate is the value of everything owned at the time of death, regardless of whether it requires probate to transfer to a living beneficiary.
This means that although naming a TOD beneficiary on a CD account will keep the account out of probate, it won’t help you to avoid estate tax. Your CD will count toward the total value of your estate whether you’ve named a TOD beneficiary or not, and your heirs will be liable to pay this tax.
The vast majority of estates aren’t large enough to attract federal estate tax, and only a few states have their own estate taxes. Assets held in a CD—whether with a TOD beneficiary named or not—count toward tax thresholds.
Inheriting a CD
The rules outlined in the previous section mean that very few heirs have to pay estate tax, whether on their CDs or any other assets. However, there are tax consequences associated with inheriting a CD.
Generally, the interest earned by a CD prior to the account owner’s death is not taxable to the beneficiary, nor is the original amount that was deposited. But any interest earned after the account owner’s death would be taxable for beneficiaries. If you inherit a five- or six-figure CD, you might owe a significant amount of tax. If the amount of money in the CD is modest, the tax bill is likely to be modest as well.
This rule applies whether an heir inherits a CD as a TOD beneficiary, as a co-owner, or through probate. In other words, while naming a TOD beneficiary can be a great way to simplify inheritance proceedings, it doesn’t confer any tax benefit on your heirs—whether for estate taxes or income taxes.
What Are the Thresholds for Estate Tax?
As of 2023, federal estate tax only applies only if the assets of the deceased person are worth $12.92 million or more—thus, it only applies to a small number of people. For the calendar year 2024, the threshold is $13.61 million. Twelve states and the District of Columbia have estate taxes, and some of their exemption amounts are much lower than the federal threshold.
Who Can I Name As a Transfer-on-Death (TOD) Beneficiary?
Practically anyone. A transfer-on-death (TOD) beneficiary can be a person, charity, business, or trust. If the beneficiary is a person, they can be a relative, child, spouse, friend, or anyone else whom you happen to know. However, if you are married, your spouse may have special rights over your assets that take precedence over your named TOD beneficiaries.
Does Naming a TOD Beneficiary Have Tax Benefits?
No. While naming a TOD beneficiary can help your heirs avoid the probate process, it doesn’t confer any tax benefit. It doesn’t help you to avoid estate taxes, and your heirs will still have to pay income tax on the earnings of a certificate of deposit (CD) after you pass away.
The Bottom Line
Naming TOD beneficiaries on your CD accounts can help some of your assets avoid probate, because the assets in your CDs will pass to your named TOD beneficiary without having to go through probate. However, this will not help you (or your heirs) to avoid estate taxes, because the value of your CDs counts toward federal and state estate tax thresholds even if they don’t have to go through probate.
The federal threshold for estate taxes is high, and few states impose this tax. In other words, the vast majority of estates don’t have to pay estate taxes.
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https://www.investopedia.com/marcus-savings-account-interest-rates-7500585 | Marcus Savings Account Interest Rates: May 2024 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-marcus-savings-account-interest-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Marcus Savings Account Interest Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> You’ve heard of the famous Wall Street investment bank Goldman Sachs, but did you know that it offers a surprisingly good high-yield online savings account?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> It’s a particularly good option if you’re looking for a place to keep your savings away from your everyday bank to earn a higher rate and reduce any temptation to spend those savings early. We’ll cover what you need to know to use this account to the fullest.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_6-0"> <div class="mntl-sc-block-table__table-wrapper">
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<th><b>Account Name</b></th>
<th><b>Balance for Highest APY</b></th>
<th><b>APY Range</b></th>
<th><b>Monthly Fee</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>High-Yield Online Savings Account</td>
<td>$0</td>
<td>4.40%</td>
<td>$0<span data-cite="2"></span></td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>See the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings account rates</a> today before choosing the savings account that is best for you.</p></div></div></div>
<span class="heading-toc" id="toc-marcus-savings-accounts-key-features"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Marcus Savings Accounts: Key Features </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_11-0"> <div class="mntl-sc-block-table__table-wrapper">
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<th class="mntl-sc-block-table__title" colspan="2">High-Yield Online Savings Account Key Features</th>
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<th><b>APY Range</b></th>
<td>4.40%<span data-cite="2"></span></td>
</tr>
<tr>
<th><b>Minimum Balance to Earn Highest APY</b></th>
<td>$0</td>
</tr>
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<th><b>Minimum Deposit</b></th>
<td>$0</td>
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<th><b>Withdrawal Limit</b></th>
<td>None</td>
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<th><b>Monthly Service Fee</b></th>
<td>None<span data-cite="1"></span></td>
</tr>
</tbody>
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</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Marcus by Goldman Sachs’s high-yield online savings account is about as good of a savings account as you’d hope to see from any bank. Even for an online bank, it has very few limitations and red tape.
</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"> There are no fees for anything—even <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wiretransfer.asp">wire transfers</a>, which most banks charge for. (You’re limited to sending wire transfers only to other accounts that you own, however, rather than third-party accounts.) There are no withdrawal limitations either, nor any minimum balances you’ll need to keep. You can even open an account with $0, as long as you deposit something—even just a penny—within the first 60 days. (If you don’t, the bank will close your account.)<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The real selling point, however, is the high interest rate. There are no tiers or minimum balance levels to worry about—you’ll earn the same amount of interest on your entire balance, no matter how much you have on deposit.
</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 rate that Marcus by Goldman Sachs usually pays is typically reserved for the highest-tier balances at other banks, if they even offer rates that high at all (although Marcus doesn’t usually offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">the highest rates available</a>). Interest is compounded on your balance every day, and paid out on a monthly basis.<span class="ql-inline-citation" data-cite="2"></span> Marcus even offers a referral bonus in which you and a friend can get a three-month 1.00% APY boost to your savings accounts.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<span class="heading-toc" id="toc-about-marcus-other-savings-options"></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"> About Marcus: Other Savings Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/marcus-by-goldman-sachs-bank-review-4843783">Goldman Sachs’s</a> primary focus is working with businesses and investors, not personal banking.<span class="ql-inline-citation" data-cite="4"></span> But the bank needs to get its cash from somewhere, and that’s where you come in. It operates its personal banking division, Marcus by Goldman Sachs (named after the bank’s founder, Marcus Goldman), offering savings accounts with ultra-high rates to woo you into storing your cash with the bank.<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_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Marcus by Goldman Sachs is a bit different from other online banks. It doesn’t offer any checking accounts, so you won’t be able to use it for your everyday banking. It offers a smattering of a few other products, notably its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/marcus-cd-rates-7482142">high-yield CDs</a>, investments, and co-branded General Motors credit cards.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Instead, Marcus by Goldman Sachs is a perfect choice if you’re hoping to park your savings away from your everyday checking account, to help you avoid any temptation to spend the money before you need it for your intended goal. It’s a wise strategy that many people use, and you can benefit from the high interest rate to help propel you even faster toward your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-save-money-4589942">savings goals</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<span class="heading-toc" id="toc-compare-savings-account-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> Compare Savings Account Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Marcus provides a simple savings account with a decent rate, but you may be able to earn more elsewhere. See a selection of other accounts below, but take note of the minimum deposit requirements.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_33-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_34-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p><strong>In the News: </strong>Savings account rates reached higher in 2023 than we’d seen in more than 20 years, pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame decades-high inflation. The Fed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952">held rates steady</a> for a sixth consecutive time at its meeting that concluded May 1, 2024. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span></p>
<p>Because savings account yields closely follow the fed funds rate, the Fed’s current holding pattern has caused savings rates to plateau, and declines should be expected once it appears the Fed is ready to make its first cut.<br/></p></div></div></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-how-do-i-open-a-savings-account-with-marcus-by-goldman-sachs"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Open a Savings Account With Marcus by Goldman Sachs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631">open a high-yield savings account</a> with Marcus directly on its website, or through the Marcus by Goldman Sachs mobile app.<span class="ql-inline-citation" data-cite="9"></span> You’ll need to provide basic information about yourself such as your name, address, and Social Security number. There is no minimum required deposit to open a savings account with Marcus, but you will need to deposit something within the first 60 days; otherwise, the bank will close the account.<span class="ql-inline-citation" data-cite="10"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-how-much-money-do-you-need-for-a-marcus-by-goldman-sachs-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Money Do You Need for a Marcus by Goldman Sachs Savings Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There is no <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 requirement</a> to open or maintain a savings account with Marcus by Goldman Sachs. You can even open an account with a $0 balance if you want, although you will need to add at least $0.01 to the account within 60 days for it to remain open.<span class="ql-inline-citation" data-cite="10"></span> </p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-how-much-money-can-you-have-in-a-marcus-by-goldman-sachs-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Money Can You Have in a Marcus by Goldman Sachs Savings Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can keep up to $1,000,000 in a Marcus by Goldman Sachs high-yield online savings account. You’re also limited to keeping a total of $3,000,000 in all of your Marcus by Goldman Sachs deposit accounts, such as in its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/marcus-cd-rates-7482142">high-yield CDs</a> and savings account.<span class="ql-inline-citation" data-cite="10"></span> </p><p>Although Marcus by Goldman Sachs will let you keep up to $1,000,000 in its online high-yield savings account, it’s best not to go over $250,000. That’s the limit of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">FDIC insurance</a>, and if the bank fails, that’s the most you’ll be able to get back.<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_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-marcus-by-goldman-sachs-good-for-savings"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Marcus by Goldman Sachs Good for Savings?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, Marcus by Goldman Sachs is an excellent choice for an online high-yield savings account. It features some of the highest rates you can find these days (although it’s usually still possible to find <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">even <em>higher</em> rates</a>), has no fees, and has no balance requirements—all things that make it a customer-friendly option.<span class="ql-inline-citation" data-cite="10"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<span class="heading-toc" id="toc-your-guide-to-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> Your Guide to Savings Accounts </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">What Is a Savings Account and How Does It Work?</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">What Is a High-Yield Savings Account?</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631">How to Open a High-Yield Savings Account</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-close-a-savings-account-7500880">How to Close a Savings Account</a></li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp">Besides a Savings Account, Where Is the Safest Place to Keep My Money?</a></li>
<li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-many-savings-accounts-should-i-have-7775519">How Many Savings Accounts Should I Have?</a></li>
<li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/043015/what-economic-factors-affect-savings-account-rates.asp">How Savings Account Interest Rates Are Determined</a></li>
<li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp">How Interest Works on Savings Accounts</a></li>
<li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/052515/how-savings-account-taxed.asp">How Is a Savings Account Taxed?</a></li>
<li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp">Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?</a></li>
<li><a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cds-vs-savings-accounts-5270287">Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?</a></li>
<li><a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp">4 Savings Accounts for Investors</a></li>
<li><a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">Best High-Yield Savings Accounts</a></li>
<li><a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-free-savings-accounts-5191103">Best Free Savings Accounts</a></li>
<li><a data-component="link" data-ordinal="15" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-accounts-for-kids-5179494">Best Savings Accounts for Kids and Teens</a></li>
</ul></div> | ## Marcus Savings Account Interest Rates
You’ve heard of the famous Wall Street investment bank Goldman Sachs, but did you know that it offers a surprisingly good high-yield online savings account?
It’s a particularly good option if you’re looking for a place to keep your savings away from your everyday bank to earn a higher rate and reduce any temptation to spend those savings early. We’ll cover what you need to know to use this account to the fullest.
| **Account Name** | **Balance for Highest APY** | **APY Range** | **Monthly Fee** |
| --- | --- | --- | --- |
| High-Yield Online Savings Account | $0 | 4.40% | $0 |
###
See the [best high-yield savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) today before choosing the savings account that is best for you.
## Marcus Savings Accounts: Key Features
| High-Yield Online Savings Account Key Features | |
| --- | --- |
| **APY Range** | 4.40% |
| **Minimum Balance to Earn Highest APY** | $0 |
| **Minimum Deposit** | $0 |
| **Withdrawal Limit** | None |
| **Monthly Service Fee** | None |
Marcus by Goldman Sachs’s high-yield online savings account is about as good of a savings account as you’d hope to see from any bank. Even for an online bank, it has very few limitations and red tape.
There are no fees for anything—even [wire transfers](https://www.investopedia.com/terms/w/wiretransfer.asp), which most banks charge for. (You’re limited to sending wire transfers only to other accounts that you own, however, rather than third-party accounts.) There are no withdrawal limitations either, nor any minimum balances you’ll need to keep. You can even open an account with $0, as long as you deposit something—even just a penny—within the first 60 days. (If you don’t, the bank will close your account.)
The real selling point, however, is the high interest rate. There are no tiers or minimum balance levels to worry about—you’ll earn the same amount of interest on your entire balance, no matter how much you have on deposit.
The rate that Marcus by Goldman Sachs usually pays is typically reserved for the highest-tier balances at other banks, if they even offer rates that high at all (although Marcus doesn’t usually offer [the highest rates available](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)). Interest is compounded on your balance every day, and paid out on a monthly basis. Marcus even offers a referral bonus in which you and a friend can get a three-month 1.00% APY boost to your savings accounts.
## About Marcus: Other Savings Options
[Goldman Sachs’s](https://www.investopedia.com/marcus-by-goldman-sachs-bank-review-4843783) primary focus is working with businesses and investors, not personal banking. But the bank needs to get its cash from somewhere, and that’s where you come in. It operates its personal banking division, Marcus by Goldman Sachs (named after the bank’s founder, Marcus Goldman), offering savings accounts with ultra-high rates to woo you into storing your cash with the bank.
Marcus by Goldman Sachs is a bit different from other online banks. It doesn’t offer any checking accounts, so you won’t be able to use it for your everyday banking. It offers a smattering of a few other products, notably its [high-yield CDs](https://www.investopedia.com/marcus-cd-rates-7482142), investments, and co-branded General Motors credit cards.
Instead, Marcus by Goldman Sachs is a perfect choice if you’re hoping to park your savings away from your everyday checking account, to help you avoid any temptation to spend the money before you need it for your intended goal. It’s a wise strategy that many people use, and you can benefit from the high interest rate to help propel you even faster toward your [savings goals](https://www.investopedia.com/how-to-save-money-4589942).
## Compare Savings Account Rates
Marcus provides a simple savings account with a decent rate, but you may be able to earn more elsewhere. See a selection of other accounts below, but take note of the minimum deposit requirements.
###
**In the News:** Savings account rates reached higher in 2023 than we’d seen in more than 20 years, 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 that concluded May 1, 2024. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.
Because savings account yields closely follow the fed funds rate, the Fed’s current holding pattern has caused savings rates to plateau, and declines should be expected once it appears the Fed is ready to make its first cut.
## How Do I Open a Savings Account With Marcus by Goldman Sachs?
You can [open a high-yield savings account](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631) with Marcus directly on its website, or through the Marcus by Goldman Sachs mobile app. You’ll need to provide basic information about yourself such as your name, address, and Social Security number. There is no minimum required deposit to open a savings account with Marcus, but you will need to deposit something within the first 60 days; otherwise, the bank will close the account.
## How Much Money Do You Need for a Marcus by Goldman Sachs Savings Account?
There is no [minimum balance requirement](https://www.investopedia.com/terms/m/minimum-balance.asp) to open or maintain a savings account with Marcus by Goldman Sachs. You can even open an account with a $0 balance if you want, although you will need to add at least $0.01 to the account within 60 days for it to remain open.
## How Much Money Can You Have in a Marcus by Goldman Sachs Savings Account?
You can keep up to $1,000,000 in a Marcus by Goldman Sachs high-yield online savings account. You’re also limited to keeping a total of $3,000,000 in all of your Marcus by Goldman Sachs deposit accounts, such as in its [high-yield CDs](https://www.investopedia.com/marcus-cd-rates-7482142) and savings account.
Although Marcus by Goldman Sachs will let you keep up to $1,000,000 in its online high-yield savings account, it’s best not to go over $250,000. That’s the limit of [FDIC insurance](https://www.investopedia.com/terms/f/fdic.asp), and if the bank fails, that’s the most you’ll be able to get back.
## Is Marcus by Goldman Sachs Good for Savings?
Yes, Marcus by Goldman Sachs is an excellent choice for an online high-yield savings account. It features some of the highest rates you can find these days (although it’s usually still possible to find [even *higher* rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)), has no fees, and has no balance requirements—all things that make it a customer-friendly option.
## Your Guide to Savings Accounts
* [What Is a Savings Account and How Does It Work?](https://www.investopedia.com/terms/s/savingsaccount.asp)
* [What Is a High-Yield Savings Account?](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp)
* [How to Open a High-Yield Savings Account](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631)
* [How to Close a Savings Account](https://www.investopedia.com/how-to-close-a-savings-account-7500880)
* [Besides a Savings Account, Where Is the Safest Place to Keep My Money?](https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp)
* [How Many Savings Accounts Should I Have?](https://www.investopedia.com/how-many-savings-accounts-should-i-have-7775519)
* [How Savings Account Interest Rates Are Determined](https://www.investopedia.com/ask/answers/043015/what-economic-factors-affect-savings-account-rates.asp)
* [How Interest Works on Savings Accounts](https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp)
* [How Is a Savings Account Taxed?](https://www.investopedia.com/ask/answers/052515/how-savings-account-taxed.asp)
* [Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?](https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp)
* [Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?](https://www.investopedia.com/cds-vs-savings-accounts-5270287)
* [4 Savings Accounts for Investors](https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp)
* [Best High-Yield Savings Accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)
* [Best Free Savings Accounts](https://www.investopedia.com/best-free-savings-accounts-5191103)
* [Best Savings Accounts for Kids and Teens](https://www.investopedia.com/best-savings-accounts-for-kids-5179494)
| Marcus Savings Account Interest Rates
You’ve heard of the famous Wall Street investment bank Goldman Sachs, but did you know that it offers a surprisingly good high-yield online savings account?
It’s a particularly good option if you’re looking for a place to keep your savings away from your everyday bank to earn a higher rate and reduce any temptation to spend those savings early. We’ll cover what you need to know to use this account to the fullest.
Account Name
Balance for Highest APY
APY Range
Monthly Fee
High-Yield Online Savings Account
$0
4.40%
$0
See the best high-yield savings account rates today before choosing the savings account that is best for you.
Marcus Savings Accounts: Key Features
High-Yield Online Savings Account Key Features
APY Range
4.40%
Minimum Balance to Earn Highest APY
$0
Minimum Deposit
$0
Withdrawal Limit
None
Monthly Service Fee
None
Marcus by Goldman Sachs’s high-yield online savings account is about as good of a savings account as you’d hope to see from any bank. Even for an online bank, it has very few limitations and red tape.
There are no fees for anything—even wire transfers, which most banks charge for. (You’re limited to sending wire transfers only to other accounts that you own, however, rather than third-party accounts.) There are no withdrawal limitations either, nor any minimum balances you’ll need to keep. You can even open an account with $0, as long as you deposit something—even just a penny—within the first 60 days. (If you don’t, the bank will close your account.)
The real selling point, however, is the high interest rate. There are no tiers or minimum balance levels to worry about—you’ll earn the same amount of interest on your entire balance, no matter how much you have on deposit.
The rate that Marcus by Goldman Sachs usually pays is typically reserved for the highest-tier balances at other banks, if they even offer rates that high at all (although Marcus doesn’t usually offer the highest rates available). Interest is compounded on your balance every day, and paid out on a monthly basis. Marcus even offers a referral bonus in which you and a friend can get a three-month 1.00% APY boost to your savings accounts.
About Marcus: Other Savings Options
Goldman Sachs’s primary focus is working with businesses and investors, not personal banking. But the bank needs to get its cash from somewhere, and that’s where you come in. It operates its personal banking division, Marcus by Goldman Sachs (named after the bank’s founder, Marcus Goldman), offering savings accounts with ultra-high rates to woo you into storing your cash with the bank.
Marcus by Goldman Sachs is a bit different from other online banks. It doesn’t offer any checking accounts, so you won’t be able to use it for your everyday banking. It offers a smattering of a few other products, notably its high-yield CDs, investments, and co-branded General Motors credit cards.
Instead, Marcus by Goldman Sachs is a perfect choice if you’re hoping to park your savings away from your everyday checking account, to help you avoid any temptation to spend the money before you need it for your intended goal. It’s a wise strategy that many people use, and you can benefit from the high interest rate to help propel you even faster toward your savings goals.
Compare Savings Account Rates
Marcus provides a simple savings account with a decent rate, but you may be able to earn more elsewhere. See a selection of other accounts below, but take note of the minimum deposit requirements.
In the News: Savings account rates reached higher in 2023 than we’d seen in more than 20 years, 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 that concluded May 1, 2024. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.
Because savings account yields closely follow the fed funds rate, the Fed’s current holding pattern has caused savings rates to plateau, and declines should be expected once it appears the Fed is ready to make its first cut.
How Do I Open a Savings Account With Marcus by Goldman Sachs?
You can open a high-yield savings account with Marcus directly on its website, or through the Marcus by Goldman Sachs mobile app. You’ll need to provide basic information about yourself such as your name, address, and Social Security number. There is no minimum required deposit to open a savings account with Marcus, but you will need to deposit something within the first 60 days; otherwise, the bank will close the account.
How Much Money Do You Need for a Marcus by Goldman Sachs Savings Account?
There is no minimum balance requirement to open or maintain a savings account with Marcus by Goldman Sachs. You can even open an account with a $0 balance if you want, although you will need to add at least $0.01 to the account within 60 days for it to remain open.
How Much Money Can You Have in a Marcus by Goldman Sachs Savings Account?
You can keep up to $1,000,000 in a Marcus by Goldman Sachs high-yield online savings account. You’re also limited to keeping a total of $3,000,000 in all of your Marcus by Goldman Sachs deposit accounts, such as in its high-yield CDs and savings account. Although Marcus by Goldman Sachs will let you keep up to $1,000,000 in its online high-yield savings account, it’s best not to go over $250,000. That’s the limit of FDIC insurance, and if the bank fails, that’s the most you’ll be able to get back.
Is Marcus by Goldman Sachs Good for Savings?
Yes, Marcus by Goldman Sachs is an excellent choice for an online high-yield savings account. It features some of the highest rates you can find these days (although it’s usually still possible to find even higher rates), has no fees, and has no balance requirements—all things that make it a customer-friendly option.
Your Guide to Savings Accounts
What Is a Savings Account and How Does It Work?
What Is a High-Yield Savings Account?
How to Open a High-Yield Savings Account
How to Close a Savings Account
Besides a Savings Account, Where Is the Safest Place to Keep My Money?
How Many Savings Accounts Should I Have?
How Savings Account Interest Rates Are Determined
How Interest Works on Savings Accounts
How Is a Savings Account Taxed?
Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?
Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?
4 Savings Accounts for Investors
Best High-Yield Savings Accounts
Best Free Savings Accounts
Best Savings Accounts for Kids and Teens
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https://www.investopedia.com/articles/investing/082313/perpetual-bonds-overview.asp | An Overview of Perpetual Bonds | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 companies and governments aspire to raise money, they may issue <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>. Investors who purchase those bonds are essentially extending loans to the issuing entities. In this situation, in exchange for these loans, the issuer agrees to make interest payments to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bondbuyer.asp">the bond buyer</a>, for a specific period.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> As the name suggests, with perpetual bonds, the agreed-upon period over which interest will be paid, is forever—<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/perpetuity.asp">perpetuity</a>. In this respect, perpetual bonds function similarly to dividend-paying stocks or certain preferred securities. Just as owners of such stock receive dividend payments for the entire time the stock is held, perpetual bond owners receive interest payments, for as long as they hold onto the bond.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>With perpetual bonds, the agreed-upon period of time over which interest will be paid is forever.</li><li>Perpetual bonds are recognized as a viable money-raising solution during troubled economic times.</li><li>Perpetual bonds have carry-on credit risk, where bond issuers can experience financial trouble or shut down.</li></ul></div></div></div>
<span class="heading-toc" id="toc-calculating-perpetual-bond-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 Perpetual Bond Value </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Investors can determine what they will earn (the bond’s yield if held until maturity) by performing a relatively simple calculation, using the following formula:</p>
<p><span data-value="\text{Current Yield} = \frac{\text{Annual Dollar Interest Paid}}{\text{Market Price}}*100\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mtext>
Current Yield
</mtext>
<mo>
=
</mo>
<mfrac>
<mtext>
Annual Dollar Interest Paid
</mtext>
<mtext>
Market Price
</mtext>
</mfrac>
<mo>
∗
</mo>
<mn>
100
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
\text{Current Yield} = \frac{\text{Annual Dollar Interest Paid}}{\text{Market Price}}*100\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">Current Yield</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">Market Price</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">Annual Dollar Interest Paid</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><span class="base"><span class="strut"></span><span class="mord">100%</span></span></span></span></span></p>
<p>As an example, a bond with a $100 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/parvalue.asp">par value</a>, paying a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon-rate.asp">coupon rate</a> of 5%, and trading at the discounted price of $95.92 would have a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currentyield.asp">current yield</a> of 5.21%. Thus the calculation would be as follows:</p>
<p><span data-value="\frac{(\$100*0.05)} {\$95.92} * 100\% = 5.21\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mfrac>
<mrow>
<mo>
(
</mo>
<mi>
$
</mi>
<mn>
100
</mn>
<mo>
∗
</mo>
<mn>
0.05
</mn>
<mo>
)
</mo>
</mrow>
<mrow>
<mi>
$
</mi>
<mn>
95.92
</mn>
</mrow>
</mfrac>
<mo>
∗
</mo>
<mn>
100
</mn>
<mi>
%
</mi>
<mo>
=
</mo>
<mn>
5.21
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
\frac{(\$100*0.05)} {\$95.92} * 100\% = 5.21\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">$95.92</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="mopen mtight">(</span><span class="mord mtight">$100</span><span class="mbin mtight">∗</span><span class="mord mtight">0.05</span><span class="mclose mtight">)</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span><span class="mspace"></span><span class="mbin">∗</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">100%</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">5.21%</span></span></span></span></span></p><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<p>Keep in mind that perpetual bonds have no <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturitydate.asp">maturity date</a>, therefore payments theoretically continue forever.<span class="ql-inline-citation" data-cite="6"></span></p>
<p>Since money loses value over time, due to inflation and other causes, over time, the interest rate payments made by a perpetual bond have less value to investors. The price of a perpetual bond is, therefore, the fixed interest payment, or coupon amount, divided by the <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountrate.asp">discount rate</a>, with the discount rate representing the speed at which money loses value over time. For perpetual bonds that offer growing perpetuity, yet another mathematical formula can be employed to determine its value.
</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-a-history-of-perpetual-bonds"></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"> A History of Perpetual Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The British government is widely credited with creating the first perpetual bond, back in the 18th century.<span class="ql-inline-citation" data-cite="6"></span> Although they’re currently not nearly as popular as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">Treasury bonds</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/municipalbond.asp">municipal bonds</a>, many economists believe perpetual bonds are attractive capital raising solutions for indebted global governments. On the other hand, fiscal conservatives generally oppose the prospect of issuing any debt – let alone bonds that perpetually pay interest to holders. Nevertheless, perpetual bonds are recognized as a viable money-raising solution, during troubled economic times.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Yale’s Beinecke Rare Book & Manuscript Library has a bond issued by Dutch water authority Stichtse Rijnlanden in 1648, which still pays interest.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div>
<span class="heading-toc" id="toc-the-appeal-of-perpetual-bonds"></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"> The Appeal of Perpetual Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Perpetual bonds fundamentally afford fiscally-challenged governments an opportunity to raise money without the obligation of paying it back. Several factors support this phenomenon. Primarily, interest rates are extraordinarily low for longer-term debt. Secondly, in periods of rising inflation, investors actually lose money on loans they make to governments.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> For example, when investors receive a 0.5% interest rate, where inflation is 1%, the resulting <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation_adjusted_return.asp">inflation-adjusted interest rate of return</a> is -0.5%. Consequently, when investors receive money back from the government, their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyingpower.asp">buying power</a> is drastically diminished.
</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"> Consider a scenario where an investor loans the government $100, and one year later, the investment's value climbs to $100.50, courtesy of the 0.5% interest rate. However, due to a 1% inflation rate, it now requires $101 to purchase the same <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basket_of_goods.asp">basket of goods</a> that cost just $100 one year ago, therefore the investor’s <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> fails to keep pace with rising inflation.
</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 economists expect inflation to increase over time. As such, lending out money at a hypothetical 4% interest rate seems like a bargain to government bean counters, who believe the future inflation rate could spike to 5% in the near future. Of course, most perpetual bonds are issued with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/callprovision.asp">call provisions</a> that let issuers make <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repayment.asp">repayments</a> after a designated time period. In this regard, the “perpetual” part of the package is often a choice, rather than a mandate, because issuers can effectively squash the perpetual obligation if they have enough cash on hand to repay the loan in full<strong>.</strong><span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<span class="heading-toc" id="toc-benefits-of-perpetual-bonds"></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"> Benefits of Perpetual Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Perpetual bonds are of interest to investors because they offer steady, predictable sources of income, with payments made on a set schedule. Furthermore, some perpetual bonds boast “step-up” features that increase the interest payment at predetermined points in the future. Technically referred to as “growing perpetuity,” this function can be quite lucrative for investors. For example, perpetual bonds may increase their yield by 1% after 10 years. They may similarly offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/periodic_interest_rate.asp">periodic interest rate</a> increases. Therefore, investors should pay close attention to any step-up provisions, when comparison-shopping for different perpetual bond offerings.
</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-comparisonlist mntl-block" id="mntl-sc-block_27-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_28-0"> <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>Steady, predictable source of income with payments on a set schedule</p></li>
<li><p>Some perpetual bonds increase interest at predetermined points in the future</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>Investors are subject to perpetual credit risk exposure</p></li>
<li><p>Issuers may be able to recall some perpetual bonds</p></li>
<li><p>Rising general interest rates could diminish the value of the perpetual bond</p></li>
</ul>
</div>
</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-risks-of-perpetual-bonds"></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"> Risks of Perpetual Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> There are risks associated with perpetual bonds. Notably, they subject investors to perpetual credit risk exposure, because as time progresses, both governmental and corporate bond issuers can encounter financial troubles, and theoretically even shut down. Perpetual bonds may also be subject to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/callrisk.asp">call risk</a>, which means that issuers can recall them. Finally, there is the ever-present risk of the general interest rates rising over time. In such cases where the perpetual bond’s locked in interest is significantly lower than the current interest rate, investors could earn more money by holding a different bond. However, to swap out an old perpetual bond for a newer, higher interest bond, the investor must sell their existing bond on the open market, at which time it may be worth less than the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/purchaseprice.asp">purchase price</a> because investors discount their offers based on the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest-rate-differential.asp">interest rate differential</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If perpetual bonds have sparked your interest, there are copious opportunities to fold them into your investment portfolio, including overseas offerings in markets such as India, China, and the Philippines. A quick online search can easily refer you to such investments, like those issued by Ayala Corporation, Agile Property Holdings and Reliance Industries.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span> Investors may also consult with brokers, who can furnish lists of offerings, and highlight the pros and cons of specific securities.
</p></div> | When companies and governments aspire to raise money, they may issue [bonds](https://www.investopedia.com/terms/b/bond.asp). Investors who purchase those bonds are essentially extending loans to the issuing entities. In this situation, in exchange for these loans, the issuer agrees to make interest payments to [the bond buyer](https://www.investopedia.com/terms/b/bondbuyer.asp), for a specific period.
As the name suggests, with perpetual bonds, the agreed-upon period over which interest will be paid, is forever—[perpetuity](https://www.investopedia.com/terms/p/perpetuity.asp). In this respect, perpetual bonds function similarly to dividend-paying stocks or certain preferred securities. Just as owners of such stock receive dividend payments for the entire time the stock is held, perpetual bond owners receive interest payments, for as long as they hold onto the bond.
### Key Takeaways
* With perpetual bonds, the agreed-upon period of time over which interest will be paid is forever.
* Perpetual bonds are recognized as a viable money-raising solution during troubled economic times.
* Perpetual bonds have carry-on credit risk, where bond issuers can experience financial trouble or shut down.
## Calculating Perpetual Bond Value
Investors can determine what they will earn (the bond’s yield if held until maturity) by performing a relatively simple calculation, using the following formula:
Current Yield
=
Annual Dollar Interest Paid
Market Price
∗
100
%
\text{Current Yield} = \frac{\text{Annual Dollar Interest Paid}}{\text{Market Price}}\*100\%
Current Yield=Market PriceAnnual Dollar Interest Paid∗100%
As an example, a bond with a $100 [par value](https://www.investopedia.com/terms/p/parvalue.asp), paying a [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp) of 5%, and trading at the discounted price of $95.92 would have a [current yield](https://www.investopedia.com/terms/c/currentyield.asp) of 5.21%. Thus the calculation would be as follows:
(
$
100
∗
0.05
)
$
95.92
∗
100
%
=
5.21
%
\frac{(\$100\*0.05)} {\$95.92} \* 100\% = 5.21\%
$95.92($100∗0.05)∗100%=5.21%
Keep in mind that perpetual bonds have no [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp), therefore payments theoretically continue forever.
Since money loses value over time, due to inflation and other causes, over time, the interest rate payments made by a perpetual bond have less value to investors. The price of a perpetual bond is, therefore, the fixed interest payment, or coupon amount, divided by the [discount rate](https://www.investopedia.com/terms/d/discountrate.asp), with the discount rate representing the speed at which money loses value over time. For perpetual bonds that offer growing perpetuity, yet another mathematical formula can be employed to determine its value.
## A History of Perpetual Bonds
The British government is widely credited with creating the first perpetual bond, back in the 18th century. Although they’re currently not nearly as popular as [Treasury bonds](https://www.investopedia.com/terms/t/treasurybond.asp) and [municipal bonds](https://www.investopedia.com/terms/m/municipalbond.asp), many economists believe perpetual bonds are attractive capital raising solutions for indebted global governments. On the other hand, fiscal conservatives generally oppose the prospect of issuing any debt – let alone bonds that perpetually pay interest to holders. Nevertheless, perpetual bonds are recognized as a viable money-raising solution, during troubled economic times.
###
Yale’s Beinecke Rare Book & Manuscript Library has a bond issued by Dutch water authority Stichtse Rijnlanden in 1648, which still pays interest.
## The Appeal of Perpetual Bonds
Perpetual bonds fundamentally afford fiscally-challenged governments an opportunity to raise money without the obligation of paying it back. Several factors support this phenomenon. Primarily, interest rates are extraordinarily low for longer-term debt. Secondly, in periods of rising inflation, investors actually lose money on loans they make to governments.
For example, when investors receive a 0.5% interest rate, where inflation is 1%, the resulting [inflation-adjusted interest rate of return](https://www.investopedia.com/terms/i/inflation_adjusted_return.asp) is -0.5%. Consequently, when investors receive money back from the government, their [buying power](https://www.investopedia.com/terms/b/buyingpower.asp) is drastically diminished.
Consider a scenario where an investor loans the government $100, and one year later, the investment's value climbs to $100.50, courtesy of the 0.5% interest rate. However, due to a 1% inflation rate, it now requires $101 to purchase the same [basket of goods](https://www.investopedia.com/terms/b/basket_of_goods.asp) that cost just $100 one year ago, therefore the investor’s [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) fails to keep pace with rising inflation.
Most economists expect inflation to increase over time. As such, lending out money at a hypothetical 4% interest rate seems like a bargain to government bean counters, who believe the future inflation rate could spike to 5% in the near future. Of course, most perpetual bonds are issued with [call provisions](https://www.investopedia.com/terms/c/callprovision.asp) that let issuers make [repayments](https://www.investopedia.com/terms/r/repayment.asp) after a designated time period. In this regard, the “perpetual” part of the package is often a choice, rather than a mandate, because issuers can effectively squash the perpetual obligation if they have enough cash on hand to repay the loan in full**.**
## Benefits of Perpetual Bonds
Perpetual bonds are of interest to investors because they offer steady, predictable sources of income, with payments made on a set schedule. Furthermore, some perpetual bonds boast “step-up” features that increase the interest payment at predetermined points in the future. Technically referred to as “growing perpetuity,” this function can be quite lucrative for investors. For example, perpetual bonds may increase their yield by 1% after 10 years. They may similarly offer [periodic interest rate](https://www.investopedia.com/terms/p/periodic_interest_rate.asp) increases. Therefore, investors should pay close attention to any step-up provisions, when comparison-shopping for different perpetual bond offerings.
Pros
* Steady, predictable source of income with payments on a set schedule
* Some perpetual bonds increase interest at predetermined points in the future
Cons
* Investors are subject to perpetual credit risk exposure
* Issuers may be able to recall some perpetual bonds
* Rising general interest rates could diminish the value of the perpetual bond
## Risks of Perpetual Bonds
There are risks associated with perpetual bonds. Notably, they subject investors to perpetual credit risk exposure, because as time progresses, both governmental and corporate bond issuers can encounter financial troubles, and theoretically even shut down. Perpetual bonds may also be subject to [call risk](https://www.investopedia.com/terms/c/callrisk.asp), which means that issuers can recall them. Finally, there is the ever-present risk of the general interest rates rising over time. In such cases where the perpetual bond’s locked in interest is significantly lower than the current interest rate, investors could earn more money by holding a different bond. However, to swap out an old perpetual bond for a newer, higher interest bond, the investor must sell their existing bond on the open market, at which time it may be worth less than the [purchase price](https://www.investopedia.com/terms/p/purchaseprice.asp) because investors discount their offers based on the [interest rate differential](https://www.investopedia.com/terms/i/interest-rate-differential.asp).
## The Bottom Line
If perpetual bonds have sparked your interest, there are copious opportunities to fold them into your investment portfolio, including overseas offerings in markets such as India, China, and the Philippines. A quick online search can easily refer you to such investments, like those issued by Ayala Corporation, Agile Property Holdings and Reliance Industries. Investors may also consult with brokers, who can furnish lists of offerings, and highlight the pros and cons of specific securities.
| When companies and governments aspire to raise money, they may issue bonds. Investors who purchase those bonds are essentially extending loans to the issuing entities. In this situation, in exchange for these loans, the issuer agrees to make interest payments to the bond buyer, for a specific period.
As the name suggests, with perpetual bonds, the agreed-upon period over which interest will be paid, is forever—perpetuity. In this respect, perpetual bonds function similarly to dividend-paying stocks or certain preferred securities. Just as owners of such stock receive dividend payments for the entire time the stock is held, perpetual bond owners receive interest payments, for as long as they hold onto the bond.
Key Takeaways
With perpetual bonds, the agreed-upon period of time over which interest will be paid is forever.Perpetual bonds are recognized as a viable money-raising solution during troubled economic times.Perpetual bonds have carry-on credit risk, where bond issuers can experience financial trouble or shut down.
Calculating Perpetual Bond Value
Investors can determine what they will earn (the bond’s yield if held until maturity) by performing a relatively simple calculation, using the following formula:
Current Yield
=
Annual Dollar Interest Paid
Market Price
∗
100
%
\text{Current Yield} = \frac{\text{Annual Dollar Interest Paid}}{\text{Market Price}}*100\%
Current Yield=Market PriceAnnual Dollar Interest Paid∗100%
As an example, a bond with a $100 par value, paying a coupon rate of 5%, and trading at the discounted price of $95.92 would have a current yield of 5.21%. Thus the calculation would be as follows:
(
$
100
∗
0.05
)
$
95.92
∗
100
%
=
5.21
%
\frac{(\$100*0.05)} {\$95.92} * 100\% = 5.21\%
$95.92($100∗0.05)∗100%=5.21%
Keep in mind that perpetual bonds have no maturity date, therefore payments theoretically continue forever.
Since money loses value over time, due to inflation and other causes, over time, the interest rate payments made by a perpetual bond have less value to investors. The price of a perpetual bond is, therefore, the fixed interest payment, or coupon amount, divided by the discount rate, with the discount rate representing the speed at which money loses value over time. For perpetual bonds that offer growing perpetuity, yet another mathematical formula can be employed to determine its value.
A History of Perpetual Bonds
The British government is widely credited with creating the first perpetual bond, back in the 18th century. Although they’re currently not nearly as popular as Treasury bonds and municipal bonds, many economists believe perpetual bonds are attractive capital raising solutions for indebted global governments. On the other hand, fiscal conservatives generally oppose the prospect of issuing any debt – let alone bonds that perpetually pay interest to holders. Nevertheless, perpetual bonds are recognized as a viable money-raising solution, during troubled economic times.
Yale’s Beinecke Rare Book & Manuscript Library has a bond issued by Dutch water authority Stichtse Rijnlanden in 1648, which still pays interest.
The Appeal of Perpetual Bonds
Perpetual bonds fundamentally afford fiscally-challenged governments an opportunity to raise money without the obligation of paying it back. Several factors support this phenomenon. Primarily, interest rates are extraordinarily low for longer-term debt. Secondly, in periods of rising inflation, investors actually lose money on loans they make to governments.
For example, when investors receive a 0.5% interest rate, where inflation is 1%, the resulting inflation-adjusted interest rate of return is -0.5%. Consequently, when investors receive money back from the government, their buying power is drastically diminished.
Consider a scenario where an investor loans the government $100, and one year later, the investment's value climbs to $100.50, courtesy of the 0.5% interest rate. However, due to a 1% inflation rate, it now requires $101 to purchase the same basket of goods that cost just $100 one year ago, therefore the investor’s rate of return fails to keep pace with rising inflation.
Most economists expect inflation to increase over time. As such, lending out money at a hypothetical 4% interest rate seems like a bargain to government bean counters, who believe the future inflation rate could spike to 5% in the near future. Of course, most perpetual bonds are issued with call provisions that let issuers make repayments after a designated time period. In this regard, the “perpetual” part of the package is often a choice, rather than a mandate, because issuers can effectively squash the perpetual obligation if they have enough cash on hand to repay the loan in full.
Benefits of Perpetual Bonds
Perpetual bonds are of interest to investors because they offer steady, predictable sources of income, with payments made on a set schedule. Furthermore, some perpetual bonds boast “step-up” features that increase the interest payment at predetermined points in the future. Technically referred to as “growing perpetuity,” this function can be quite lucrative for investors. For example, perpetual bonds may increase their yield by 1% after 10 years. They may similarly offer periodic interest rate increases. Therefore, investors should pay close attention to any step-up provisions, when comparison-shopping for different perpetual bond offerings.
Pros
Steady, predictable source of income with payments on a set schedule
Some perpetual bonds increase interest at predetermined points in the future
Cons
Investors are subject to perpetual credit risk exposure
Issuers may be able to recall some perpetual bonds
Rising general interest rates could diminish the value of the perpetual bond
Risks of Perpetual Bonds
There are risks associated with perpetual bonds. Notably, they subject investors to perpetual credit risk exposure, because as time progresses, both governmental and corporate bond issuers can encounter financial troubles, and theoretically even shut down. Perpetual bonds may also be subject to call risk, which means that issuers can recall them. Finally, there is the ever-present risk of the general interest rates rising over time. In such cases where the perpetual bond’s locked in interest is significantly lower than the current interest rate, investors could earn more money by holding a different bond. However, to swap out an old perpetual bond for a newer, higher interest bond, the investor must sell their existing bond on the open market, at which time it may be worth less than the purchase price because investors discount their offers based on the interest rate differential.
The Bottom Line
If perpetual bonds have sparked your interest, there are copious opportunities to fold them into your investment portfolio, including overseas offerings in markets such as India, China, and the Philippines. A quick online search can easily refer you to such investments, like those issued by Ayala Corporation, Agile Property Holdings and Reliance Industries. Investors may also consult with brokers, who can furnish lists of offerings, and highlight the pros and cons of specific securities.
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https://www.investopedia.com/financial-advisor-advice-for-millennials-8598158 | Financial Advisors’ Advice for Millennials | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Many millennials, born in the years 1981 to 1996, entered the workforce right on the cusp of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great-recession.asp">Great Recession</a>.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="11"></span> The unsteady first working years, the high average student loan balances, and the disappearance of defined benefit plans (or pensions) mean <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/millennial.asp">millennials</a> have been fighting an uphill battle most of their working lives.<span class="ql-inline-citation" data-cite="12"></span><span class="ql-inline-citation" data-cite="1"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Still, many financial advisors are impressed with millennials and how they have prioritized their finances, and for good reason. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/digital-native.asp">digital native</a> generation is also tech-savvy when it comes to figuring out the best ways to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-literacy-survey-5223919">save for their futures</a>.
</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"> But even the most dedicated saver can use expert advice on juggling competing financial priorities. We asked top financial advisors for their insight for millennials who want to get the most out of their money.
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/millennials-are-financially-confident-but-stressed-5224413">Sixty-four percent of millennials</a> have investments, making them the most invested generation.</li>
<li>Many millennials graduated at the height of the Great Recession, which left them with high levels of student loan debt.</li>
<li>Social media platforms like LinkedIn, X (formerly Twitter), YouTube, and TikTok are rising in popularity among millennials as sources of financial information.<span class="ql-inline-citation" data-cite="3"></span></li>
<li>Financial advisors emphasize the importance of emergency savings in helping millennials stay on track.</li>
<li>The 50/30/20 budget rule is a simple way for millennials to allocate their after-tax dollars to account for needs, wants, and savings.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-first-what-millennials-are-getting-right"></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"> First: What Millennials Are Getting Right </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Avocado toast and craft coffees aren’t making planning for their financial future hard for millennials. Millennials earn 20% less than baby boomers earned at the same age.<span class="ql-inline-citation" data-cite="4"></span> Arguably, millennials have gotten the fuzzy end of the lollipop regarding their financial health.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Still, according to financial advisors like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/douglas-boneparth-7553273">Douglas Boneparth</a>, president of Bone Fide Wealth, millennials use the past to fuel their financial futures. Boneparth “thinks the trauma of the Great Recession has made millennials very aware of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/how-to-build-emergency-fund/">emergency funds</a>,” which creates a stronger foundation that allows them to be in the accumulation phase during their higher earning years.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://pearlplan.com/about/team/melissa-joy/" rel="nofollow">Melissa Joy</a>, certified financial planner (CFP) and certified divorce financial analyst (CDFA), agrees. She says, “Millennials are responsible for their money and making great choices.” Joy is particularly encouraged by how comfortably millennials navigate retirement through company programs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Joy also finds in her practice that once millennials feel they have a handle on balancing their debt, earnings, and current savings, they seek information about the next steps.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Even for millennials with no prior savings or plans for the future, all is not lost. Joy says, “If you feel like you are behind, now is such a good time to get to investing. Now, you are entering your high-earning years. There is no better time than the present to use your human capital to improve your picture.”
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<span class="heading-toc" id="toc-emergency-savings-are-very-important"></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"> Emergency Savings Are Very Important </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> All the financial advisors interviewed in this article agreed that having emergency savings is the foundation of a sound financial plan. Life happens, and Joy emphasizes that the security of an emergency savings account can help millennials stick to their goals.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Sure, millennials could skip the emergency fund and instead invest that money. However, the average credit card interest rate for users with a balance is 22.75% as of November 2023.<span class="ql-inline-citation" data-cite="5"></span> Even the best investment will have a hard time outpacing 22.75% interest.
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Individuals without emergency savings are more likely to use credit cards or debt to cover emergency costs.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Boneparth sums up the importance of emergency savings by saying, “Give yourself the opportunity to feel safe and secure before you even start investing. Starting early is important, but what good is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a> if you can’t stay invested? This way, you can navigate the ups and downs of life without having to worry. The ability to navigate that and stay on your path separates good and bad investors.”
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<span class="heading-toc" id="toc-set-clear-priorities"></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"> Set Clear Priorities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Millennials who are most successful in planning their financial futures have clear priorities, say financial advisors.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> “You cannot have everything you want, so what is the most important thing to you? You need to list it out and really prioritize it,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.thomaskopelman.com/about" rel="nofollow">Thomas Kopelman</a>, co-founder and financial planner at AllStreet Wealth. “Also, do the opposite. Make a list of things that you can cut.”
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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 people think <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/save-for-a-home-or-retirement-8599275">investing and planning for the future</a> is just about dollars and cents, but financial advisors know that many money moves are psychological. By clearly establishing priorities and knowing “what it is that you are truly after,” Boneparth says, your goals will motivate you to keep going.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Millennials struggling to figure out what is most important can talk to 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> about prioritizing their goals.
</p>
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<span class="heading-toc" id="toc-give-every-dollar-a-job"></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"> Give Every Dollar a Job </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Millennials earn $8 for every $10 that the boomers earned.<span class="ql-inline-citation" data-cite="4"></span> With that in mind, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.hoskincapital.com/about" rel="nofollow">Nathaniel Hoskin</a>, CFP, accredited wealth management advisor (AWMA), and founder and lead advisor at Hoskin Capital, recommends “giving every dollar a job.” The best way to do that is to create a realistic <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx">budget</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Budgeting is a critical part of a financial plan, and while there are as many different ways to budget as there are stars in the sky, the most important part of budgeting is seeing where your money is going. Financial advisors know this is an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/common-budgeting-challenges-overcome/">uncomfortable truth</a> for many millennials and that the further we get away from tangible money, the easier it is to ignore. In fact, 65% of people do not know how much money they spent last month.<span class="ql-inline-citation" data-cite="7"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Boneparth echoes that he has seen this in his practice and encourages millennials to be honest about their budgets by budgeting “not based on what you think you are spending but what you know you are spending.”
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> To face budgeting woes head-on, some financial advisors, like Hoskin, recommend that millennials look at their spending for the three months before they lay out a budget for future expenditures. Hoskin recommends <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">smartphone apps</a> as a quick way to see income vs. expenses for the three prior months without having to backtrack every expense with pencil and paper.
</p>
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<span class="heading-toc" id="toc-focus-on-reverse-budgeting"></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"> Focus on Reverse Budgeting </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/budget.asp">Budgeting</a> will reveal either a surplus or a deficit for millennials. Once millennials know where their money is going, “even if their money is not spreading as far as they want it to,” they can focus on reverse budgeting, says Hoskin. Reverse budgeting means putting money aside for your future self first.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Kopelman agrees wholeheartedly with Hoskin on reverse budgeting. Hoskin further recommends that millennials take advantage of automated investing and savings. He sees automation as tricking your brain and nervous system into sticking to the strategies. Setting money aside for your future self first by automatic withdrawals or transfers means you are working toward your goals before any of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> is spent.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Budgeting is not a set-it-and-forget-it endeavor. Millennials should continue to track their budget and adjust goals as their priorities and income change. An easy place to continually track your budget is with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/budgeting-calculator-5101411">calculator</a>.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> “The best we can do is our best,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.linkedin.com/in/colinoverweg/" rel="sponsored nofollow">Colin Overweg</a>, CFP, founder of Advize Wealth Management. “We cannot predict the future, so we will put together a plan, stick to it, and adjust accordingly.”
</p>
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<span class="heading-toc" id="toc-be-a-goal-getter-with-free-money"></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"> Be a Goal-Getter with ‘Free Money’ </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Another way millennials can slay their financial futures is to make sure that they take advantage of all the “free money” offered by their employers.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> We know that an overwhelming percentage of millennials are participating in employer-sponsored retirement plans, and they should pat themselves on the back for that. Participating is the first step; taking advantage of employer matching is the next logical step. Hoskin says this should be the watermark for millennials with few extra means. Leaving <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/matchingcontribution.asp">matching contributions</a> on the table is like walking away from free money.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div>
<span class="heading-toc" id="toc-create-a-financial-plan"></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"> Create a Financial Plan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Once millennials have established emergency savings and taken advantage of all matching employer contributions, financial advisors recommend working toward tackling those financial goals and priorities based on their budgets.
</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"> There are some universally accepted future-focused budgeting tactics, like 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 budget rule</a>, where 50% of income is spent on needs, 30% on wants, and 20% on savings. While the 50/30/20 rule is simple, financial advisors tend to agree that saving 20% of income is a solid target, but <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisors/122815/how-much-millennials-should-save-retire-comfortably.asp">15%</a> is a great starting point.
</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"> Those incapable of saving 20% of their income today should ideally save no less than 10% and incrementally increase it. Joy calls this “matching your lifestyle creep with your savings creep.” Managing the lifestyle creep is where a financial advisor can come in handy as well, because they can help millennials continually reassess the percentage of gross income they’re investing.
</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"> Financial advisors want their clients to invest based on their priorities, but they also emphasize the importance of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth individual retirement accounts (Roth IRAs)</a> for those who qualify. Roth IRAs are accounts in which millennials can invest after-tax dollars. That is beneficial because millennials who wait to withdraw this money until after they are 59½ years old can withdraw this money and its growth tax-free.<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_69-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_70-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_71-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>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>
<span class="heading-toc" id="toc-additional-considerations"></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"> Additional Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> The most popular source for millennials to get financial advice is social media.<span class="ql-inline-citation" data-cite="9"></span> Many advisors today exist in the social media space and practice radical generosity with their knowledge and expertise.
</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"> However, as with anything, only some on the internet are experts. Millennials should approach some free financial literacy with the same caution that they might approach an unusual, spam-like social media direct message.
</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"> Millennials investing in company-sponsored plans need to talk with their plan provider to ensure that their money works for them by being invested appropriately for their <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/">target retirement date</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a>. Plan providers can discuss this with millennials, but millennials can also address this with financial advisors as part of their overall picture.
</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"> Joy also encourages millennials to talk with someone if they have stock options as part of their overall compensation. She has seen ill-prepared millennials make very reactive decisions regarding their stock options. She says planning can make these stock options more integrated into millennials’ financial plans.
</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-do-millennials-get-financial-advice"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Do Millennials Get Financial Advice?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>According to a survey from the National Association of Personal Financial Advisors, most millennials get financial advice from a family member (31%), a website (27%), a trusted friend (26%), a parent (26%), a financial advisor (21%), or social media (20%). Thirty-four percent of millennials and Gen Z respondents said that lack of financial guidance was hurting their ability to manage their retirement plans.<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_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-are-millennials-investing-their-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Are Millennials Investing Their Money?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Millennials who are eligible are doing an excellent job of participating in their employer-sponsored plans. Millennials also leverage technology to help them <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/target-date-funds-millennials-8553556">invest in vehicles of their choice</a>.</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-how-much-should-millennials-save-for-retirement"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Should Millennials Save for Retirement?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A quick calculation to determine how much money millennials need to save for retirement is known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/">4% rule</a>. Millennials should estimate how much money they would like in retirement per year and divide that amount by 0.04. This number assumes a 30-year life span and a 5% rate of return.</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"> Millennials are DIY-ing their financial future more than any generation before them, but financial advisors agree they’re doing an OK job. Still, millennials who desire the best outcomes should prioritize goals and budgeting, take advantage of “free money” from their employer, make a savings plan, and stick to it.
</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"> Financial advisor Melissa Joy reminds us that perception is not always reality because “you always think everyone is doing better than you are, and that is not always the case.” However, millennials worried about how they stack up should not quit before they begin. It’s not too late to plan for your financial future.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Douglas Boneparth reiterates, “The first best time is yesterday. The second best time is today.”
</p></div> | Many millennials, born in the years 1981 to 1996, entered the workforce right on the cusp of the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp). The unsteady first working years, the high average student loan balances, and the disappearance of defined benefit plans (or pensions) mean [millennials](https://www.investopedia.com/terms/m/millennial.asp) have been fighting an uphill battle most of their working lives.
Still, many financial advisors are impressed with millennials and how they have prioritized their finances, and for good reason. The [digital native](https://www.investopedia.com/terms/d/digital-native.asp) generation is also tech-savvy when it comes to figuring out the best ways to [save for their futures](https://www.investopedia.com/financial-literacy-survey-5223919).
But even the most dedicated saver can use expert advice on juggling competing financial priorities. We asked top financial advisors for their insight for millennials who want to get the most out of their money.
### Key Takeaways
* [Sixty-four percent of millennials](https://www.investopedia.com/millennials-are-financially-confident-but-stressed-5224413) have investments, making them the most invested generation.
* Many millennials graduated at the height of the Great Recession, which left them with high levels of student loan debt.
* Social media platforms like LinkedIn, X (formerly Twitter), YouTube, and TikTok are rising in popularity among millennials as sources of financial information.
* Financial advisors emphasize the importance of emergency savings in helping millennials stay on track.
* The 50/30/20 budget rule is a simple way for millennials to allocate their after-tax dollars to account for needs, wants, and savings.
## First: What Millennials Are Getting Right
Avocado toast and craft coffees aren’t making planning for their financial future hard for millennials. Millennials earn 20% less than baby boomers earned at the same age. Arguably, millennials have gotten the fuzzy end of the lollipop regarding their financial health.
Still, according to financial advisors like [Douglas Boneparth](https://www.investopedia.com/douglas-boneparth-7553273), president of Bone Fide Wealth, millennials use the past to fuel their financial futures. Boneparth “thinks the trauma of the Great Recession has made millennials very aware of [savings](https://www.investopedia.com/terms/s/savings.asp) and [emergency funds](https://www.investopedia.com/personal-finance/how-to-build-emergency-fund/),” which creates a stronger foundation that allows them to be in the accumulation phase during their higher earning years.
[Melissa Joy](https://pearlplan.com/about/team/melissa-joy/), certified financial planner (CFP) and certified divorce financial analyst (CDFA), agrees. She says, “Millennials are responsible for their money and making great choices.” Joy is particularly encouraged by how comfortably millennials navigate retirement through company programs.
Joy also finds in her practice that once millennials feel they have a handle on balancing their debt, earnings, and current savings, they seek information about the next steps.
Even for millennials with no prior savings or plans for the future, all is not lost. Joy says, “If you feel like you are behind, now is such a good time to get to investing. Now, you are entering your high-earning years. There is no better time than the present to use your human capital to improve your picture.”
## Emergency Savings Are Very Important
All the financial advisors interviewed in this article agreed that having emergency savings is the foundation of a sound financial plan. Life happens, and Joy emphasizes that the security of an emergency savings account can help millennials stick to their goals.
Sure, millennials could skip the emergency fund and instead invest that money. However, the average credit card interest rate for users with a balance is 22.75% as of November 2023. Even the best investment will have a hard time outpacing 22.75% interest.
### Tip
Individuals without emergency savings are more likely to use credit cards or debt to cover emergency costs.
Boneparth sums up the importance of emergency savings by saying, “Give yourself the opportunity to feel safe and secure before you even start investing. Starting early is important, but what good is [compounding](https://www.investopedia.com/terms/c/compounding.asp) if you can’t stay invested? This way, you can navigate the ups and downs of life without having to worry. The ability to navigate that and stay on your path separates good and bad investors.”
## Set Clear Priorities
Millennials who are most successful in planning their financial futures have clear priorities, say financial advisors.
“You cannot have everything you want, so what is the most important thing to you? You need to list it out and really prioritize it,” says [Thomas Kopelman](https://www.thomaskopelman.com/about), co-founder and financial planner at AllStreet Wealth. “Also, do the opposite. Make a list of things that you can cut.”
Many people think [investing and planning for the future](https://www.investopedia.com/save-for-a-home-or-retirement-8599275) is just about dollars and cents, but financial advisors know that many money moves are psychological. By clearly establishing priorities and knowing “what it is that you are truly after,” Boneparth says, your goals will motivate you to keep going.
Millennials struggling to figure out what is most important can talk to a [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) about prioritizing their goals.
## Give Every Dollar a Job
Millennials earn $8 for every $10 that the boomers earned. With that in mind, [Nathaniel Hoskin](https://www.hoskincapital.com/about), CFP, accredited wealth management advisor (AWMA), and founder and lead advisor at Hoskin Capital, recommends “giving every dollar a job.” The best way to do that is to create a realistic [budget](https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx).
Budgeting is a critical part of a financial plan, and while there are as many different ways to budget as there are stars in the sky, the most important part of budgeting is seeing where your money is going. Financial advisors know this is an [uncomfortable truth](https://www.investopedia.com/personal-finance/common-budgeting-challenges-overcome/) for many millennials and that the further we get away from tangible money, the easier it is to ignore. In fact, 65% of people do not know how much money they spent last month.
Boneparth echoes that he has seen this in his practice and encourages millennials to be honest about their budgets by budgeting “not based on what you think you are spending but what you know you are spending.”
To face budgeting woes head-on, some financial advisors, like Hoskin, recommend that millennials look at their spending for the three months before they lay out a budget for future expenditures. Hoskin recommends [smartphone apps](https://www.investopedia.com/best-budgeting-apps-5085405) as a quick way to see income vs. expenses for the three prior months without having to backtrack every expense with pencil and paper.
## Focus on Reverse Budgeting
[Budgeting](https://www.investopedia.com/terms/b/budget.asp) will reveal either a surplus or a deficit for millennials. Once millennials know where their money is going, “even if their money is not spreading as far as they want it to,” they can focus on reverse budgeting, says Hoskin. Reverse budgeting means putting money aside for your future self first.
Kopelman agrees wholeheartedly with Hoskin on reverse budgeting. Hoskin further recommends that millennials take advantage of automated investing and savings. He sees automation as tricking your brain and nervous system into sticking to the strategies. Setting money aside for your future self first by automatic withdrawals or transfers means you are working toward your goals before any of your [income](https://www.investopedia.com/terms/i/income.asp) is spent.
Budgeting is not a set-it-and-forget-it endeavor. Millennials should continue to track their budget and adjust goals as their priorities and income change. An easy place to continually track your budget is with a [calculator](https://www.investopedia.com/budgeting-calculator-5101411).
“The best we can do is our best,” says [Colin Overweg](https://www.linkedin.com/in/colinoverweg/), CFP, founder of Advize Wealth Management. “We cannot predict the future, so we will put together a plan, stick to it, and adjust accordingly.”
## Be a Goal-Getter with ‘Free Money’
Another way millennials can slay their financial futures is to make sure that they take advantage of all the “free money” offered by their employers.
We know that an overwhelming percentage of millennials are participating in employer-sponsored retirement plans, and they should pat themselves on the back for that. Participating is the first step; taking advantage of employer matching is the next logical step. Hoskin says this should be the watermark for millennials with few extra means. Leaving [matching contributions](https://www.investopedia.com/terms/m/matchingcontribution.asp) on the table is like walking away from free money.
## Create a Financial Plan
Once millennials have established emergency savings and taken advantage of all matching employer contributions, financial advisors recommend working toward tackling those financial goals and priorities based on their budgets.
There are some universally accepted future-focused budgeting tactics, like the [50/30/20 budget rule](https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp), where 50% of income is spent on needs, 30% on wants, and 20% on savings. While the 50/30/20 rule is simple, financial advisors tend to agree that saving 20% of income is a solid target, but [15%](https://www.investopedia.com/articles/financial-advisors/122815/how-much-millennials-should-save-retire-comfortably.asp) is a great starting point.
Those incapable of saving 20% of their income today should ideally save no less than 10% and incrementally increase it. Joy calls this “matching your lifestyle creep with your savings creep.” Managing the lifestyle creep is where a financial advisor can come in handy as well, because they can help millennials continually reassess the percentage of gross income they’re investing.
Financial advisors want their clients to invest based on their priorities, but they also emphasize the importance of [Roth individual retirement accounts (Roth IRAs)](https://www.investopedia.com/terms/r/rothira.asp) for those who qualify. Roth IRAs are accounts in which millennials can invest after-tax dollars. That is beneficial because millennials who wait to withdraw this money until after they are 59½ years old can withdraw this money and its growth tax-free.
###
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.
## Additional Considerations
The most popular source for millennials to get financial advice is social media. Many advisors today exist in the social media space and practice radical generosity with their knowledge and expertise.
However, as with anything, only some on the internet are experts. Millennials should approach some free financial literacy with the same caution that they might approach an unusual, spam-like social media direct message.
Millennials investing in company-sponsored plans need to talk with their plan provider to ensure that their money works for them by being invested appropriately for their [target retirement date](https://www.investopedia.com/retirement/when-should-i-retire-pros-and-cons-different-ages/) and [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp). Plan providers can discuss this with millennials, but millennials can also address this with financial advisors as part of their overall picture.
Joy also encourages millennials to talk with someone if they have stock options as part of their overall compensation. She has seen ill-prepared millennials make very reactive decisions regarding their stock options. She says planning can make these stock options more integrated into millennials’ financial plans.
## Where Do Millennials Get Financial Advice?
According to a survey from the National Association of Personal Financial Advisors, most millennials get financial advice from a family member (31%), a website (27%), a trusted friend (26%), a parent (26%), a financial advisor (21%), or social media (20%). Thirty-four percent of millennials and Gen Z respondents said that lack of financial guidance was hurting their ability to manage their retirement plans.
## How Are Millennials Investing Their Money?
Millennials who are eligible are doing an excellent job of participating in their employer-sponsored plans. Millennials also leverage technology to help them [invest in vehicles of their choice](https://www.investopedia.com/target-date-funds-millennials-8553556).
## How Much Should Millennials Save for Retirement?
A quick calculation to determine how much money millennials need to save for retirement is known as the [4% rule](https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/). Millennials should estimate how much money they would like in retirement per year and divide that amount by 0.04. This number assumes a 30-year life span and a 5% rate of return.
## The Bottom Line
Millennials are DIY-ing their financial future more than any generation before them, but financial advisors agree they’re doing an OK job. Still, millennials who desire the best outcomes should prioritize goals and budgeting, take advantage of “free money” from their employer, make a savings plan, and stick to it.
Financial advisor Melissa Joy reminds us that perception is not always reality because “you always think everyone is doing better than you are, and that is not always the case.” However, millennials worried about how they stack up should not quit before they begin. It’s not too late to plan for your financial future.
Douglas Boneparth reiterates, “The first best time is yesterday. The second best time is today.”
| Many millennials, born in the years 1981 to 1996, entered the workforce right on the cusp of the Great Recession. The unsteady first working years, the high average student loan balances, and the disappearance of defined benefit plans (or pensions) mean millennials have been fighting an uphill battle most of their working lives.
Still, many financial advisors are impressed with millennials and how they have prioritized their finances, and for good reason. The digital native generation is also tech-savvy when it comes to figuring out the best ways to save for their futures.
But even the most dedicated saver can use expert advice on juggling competing financial priorities. We asked top financial advisors for their insight for millennials who want to get the most out of their money.
Key Takeaways
Sixty-four percent of millennials have investments, making them the most invested generation.
Many millennials graduated at the height of the Great Recession, which left them with high levels of student loan debt.
Social media platforms like LinkedIn, X (formerly Twitter), YouTube, and TikTok are rising in popularity among millennials as sources of financial information.
Financial advisors emphasize the importance of emergency savings in helping millennials stay on track.
The 50/30/20 budget rule is a simple way for millennials to allocate their after-tax dollars to account for needs, wants, and savings.
First: What Millennials Are Getting Right
Avocado toast and craft coffees aren’t making planning for their financial future hard for millennials. Millennials earn 20% less than baby boomers earned at the same age. Arguably, millennials have gotten the fuzzy end of the lollipop regarding their financial health.
Still, according to financial advisors like Douglas Boneparth, president of Bone Fide Wealth, millennials use the past to fuel their financial futures. Boneparth “thinks the trauma of the Great Recession has made millennials very aware of savings and emergency funds,” which creates a stronger foundation that allows them to be in the accumulation phase during their higher earning years.
Melissa Joy, certified financial planner (CFP) and certified divorce financial analyst (CDFA), agrees. She says, “Millennials are responsible for their money and making great choices.” Joy is particularly encouraged by how comfortably millennials navigate retirement through company programs.
Joy also finds in her practice that once millennials feel they have a handle on balancing their debt, earnings, and current savings, they seek information about the next steps.
Even for millennials with no prior savings or plans for the future, all is not lost. Joy says, “If you feel like you are behind, now is such a good time to get to investing. Now, you are entering your high-earning years. There is no better time than the present to use your human capital to improve your picture.”
Emergency Savings Are Very Important
All the financial advisors interviewed in this article agreed that having emergency savings is the foundation of a sound financial plan. Life happens, and Joy emphasizes that the security of an emergency savings account can help millennials stick to their goals.
Sure, millennials could skip the emergency fund and instead invest that money. However, the average credit card interest rate for users with a balance is 22.75% as of November 2023. Even the best investment will have a hard time outpacing 22.75% interest.
Tip
Individuals without emergency savings are more likely to use credit cards or debt to cover emergency costs.
Boneparth sums up the importance of emergency savings by saying, “Give yourself the opportunity to feel safe and secure before you even start investing. Starting early is important, but what good is compounding if you can’t stay invested? This way, you can navigate the ups and downs of life without having to worry. The ability to navigate that and stay on your path separates good and bad investors.”
Set Clear Priorities
Millennials who are most successful in planning their financial futures have clear priorities, say financial advisors.
“You cannot have everything you want, so what is the most important thing to you? You need to list it out and really prioritize it,” says Thomas Kopelman, co-founder and financial planner at AllStreet Wealth. “Also, do the opposite. Make a list of things that you can cut.”
Many people think investing and planning for the future is just about dollars and cents, but financial advisors know that many money moves are psychological. By clearly establishing priorities and knowing “what it is that you are truly after,” Boneparth says, your goals will motivate you to keep going.
Millennials struggling to figure out what is most important can talk to a financial advisor about prioritizing their goals.
Give Every Dollar a Job
Millennials earn $8 for every $10 that the boomers earned. With that in mind, Nathaniel Hoskin, CFP, accredited wealth management advisor (AWMA), and founder and lead advisor at Hoskin Capital, recommends “giving every dollar a job.” The best way to do that is to create a realistic budget.
Budgeting is a critical part of a financial plan, and while there are as many different ways to budget as there are stars in the sky, the most important part of budgeting is seeing where your money is going. Financial advisors know this is an uncomfortable truth for many millennials and that the further we get away from tangible money, the easier it is to ignore. In fact, 65% of people do not know how much money they spent last month.
Boneparth echoes that he has seen this in his practice and encourages millennials to be honest about their budgets by budgeting “not based on what you think you are spending but what you know you are spending.”
To face budgeting woes head-on, some financial advisors, like Hoskin, recommend that millennials look at their spending for the three months before they lay out a budget for future expenditures. Hoskin recommends smartphone apps as a quick way to see income vs. expenses for the three prior months without having to backtrack every expense with pencil and paper.
Focus on Reverse Budgeting
Budgeting will reveal either a surplus or a deficit for millennials. Once millennials know where their money is going, “even if their money is not spreading as far as they want it to,” they can focus on reverse budgeting, says Hoskin. Reverse budgeting means putting money aside for your future self first.
Kopelman agrees wholeheartedly with Hoskin on reverse budgeting. Hoskin further recommends that millennials take advantage of automated investing and savings. He sees automation as tricking your brain and nervous system into sticking to the strategies. Setting money aside for your future self first by automatic withdrawals or transfers means you are working toward your goals before any of your income is spent.
Budgeting is not a set-it-and-forget-it endeavor. Millennials should continue to track their budget and adjust goals as their priorities and income change. An easy place to continually track your budget is with a calculator.
“The best we can do is our best,” says Colin Overweg, CFP, founder of Advize Wealth Management. “We cannot predict the future, so we will put together a plan, stick to it, and adjust accordingly.”
Be a Goal-Getter with ‘Free Money’
Another way millennials can slay their financial futures is to make sure that they take advantage of all the “free money” offered by their employers.
We know that an overwhelming percentage of millennials are participating in employer-sponsored retirement plans, and they should pat themselves on the back for that. Participating is the first step; taking advantage of employer matching is the next logical step. Hoskin says this should be the watermark for millennials with few extra means. Leaving matching contributions on the table is like walking away from free money.
Create a Financial Plan
Once millennials have established emergency savings and taken advantage of all matching employer contributions, financial advisors recommend working toward tackling those financial goals and priorities based on their budgets.
There are some universally accepted future-focused budgeting tactics, like the 50/30/20 budget rule, where 50% of income is spent on needs, 30% on wants, and 20% on savings. While the 50/30/20 rule is simple, financial advisors tend to agree that saving 20% of income is a solid target, but 15% is a great starting point.
Those incapable of saving 20% of their income today should ideally save no less than 10% and incrementally increase it. Joy calls this “matching your lifestyle creep with your savings creep.” Managing the lifestyle creep is where a financial advisor can come in handy as well, because they can help millennials continually reassess the percentage of gross income they’re investing.
Financial advisors want their clients to invest based on their priorities, but they also emphasize the importance of Roth individual retirement accounts (Roth IRAs) for those who qualify. Roth IRAs are accounts in which millennials can invest after-tax dollars. That is beneficial because millennials who wait to withdraw this money until after they are 59½ years old can withdraw this money and its growth tax-free.
If you’re a millennial with your eyes on retirement, there are more resources here to help support your financial future.
Additional Considerations
The most popular source for millennials to get financial advice is social media. Many advisors today exist in the social media space and practice radical generosity with their knowledge and expertise.
However, as with anything, only some on the internet are experts. Millennials should approach some free financial literacy with the same caution that they might approach an unusual, spam-like social media direct message.
Millennials investing in company-sponsored plans need to talk with their plan provider to ensure that their money works for them by being invested appropriately for their target retirement date and risk tolerance. Plan providers can discuss this with millennials, but millennials can also address this with financial advisors as part of their overall picture.
Joy also encourages millennials to talk with someone if they have stock options as part of their overall compensation. She has seen ill-prepared millennials make very reactive decisions regarding their stock options. She says planning can make these stock options more integrated into millennials’ financial plans.
Where Do Millennials Get Financial Advice?
According to a survey from the National Association of Personal Financial Advisors, most millennials get financial advice from a family member (31%), a website (27%), a trusted friend (26%), a parent (26%), a financial advisor (21%), or social media (20%). Thirty-four percent of millennials and Gen Z respondents said that lack of financial guidance was hurting their ability to manage their retirement plans.
How Are Millennials Investing Their Money?
Millennials who are eligible are doing an excellent job of participating in their employer-sponsored plans. Millennials also leverage technology to help them invest in vehicles of their choice.
How Much Should Millennials Save for Retirement?
A quick calculation to determine how much money millennials need to save for retirement is known as the 4% rule. Millennials should estimate how much money they would like in retirement per year and divide that amount by 0.04. This number assumes a 30-year life span and a 5% rate of return.
The Bottom Line
Millennials are DIY-ing their financial future more than any generation before them, but financial advisors agree they’re doing an OK job. Still, millennials who desire the best outcomes should prioritize goals and budgeting, take advantage of “free money” from their employer, make a savings plan, and stick to it.
Financial advisor Melissa Joy reminds us that perception is not always reality because “you always think everyone is doing better than you are, and that is not always the case.” However, millennials worried about how they stack up should not quit before they begin. It’s not too late to plan for your financial future.
Douglas Boneparth reiterates, “The first best time is yesterday. The second best time is today.”
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https://www.investopedia.com/articles/personal-finance/120315/how-create-budget-your-spouse.asp | How To Create a Budget With Your Spouse (in 7 Steps) | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Creating a budget with your spouse is one of those less-discussed issues of being married. Working it out is a significant part of learning to be married, or getting better at it.
</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"> Marriage is variously described as an equal partnership, a merger, or a union. No matter how you describe yours, you likely agree that communication is key to your happiness. You and your spouse will need to communicate on all major issues including lifestyle choices, parenting, sex, and, of course, money. In fact, money issues are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/marriage-killing-money-issues.asp">among the major reasons marriages fail</a>.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>Lack of communication about money is among the top reasons marriages fail.</li><li>Creating a budget together will provide a framework for avoiding conflict about finances.</li><li>Using software to track your money can increase your efficiency and make it easier to stay on top of spending.</li><li>A once-a-week “money date” can foster continued communication and help you achieve your financial goals and life dreams.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-budget-solution"></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 Budget Solution </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Money doesn’t have to be a contentious issue. Whether your marital status is “soon-to-be,” “newlywed,” or “been in the trenches awhile,” <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx">the key to handling money</a> is having a financial agenda or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/budget.asp">budget</a>. Budgets can sound complex and difficult, but they don’t have to be. A budget is simply a best guess regarding the amount of income you and your spouse will receive over a set time period, along with <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-planning-can-save-marriage-4684269">how you plan to use it</a>.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Start by sketching out a basic budget plan together. Then, once you and your spouse have a budget, following your plan is just a matter of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-talk-about-money-with-partner-8612447">checking in with each other</a> on a regular basis. Ideally, you will do this using free or inexpensive software to track your ongoing financial success in a way that is easy, accurate, and quick (see more on this in Step 6). Here are the seven steps to follow.
</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-step-1-set-smart-goals"></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"> Step 1: Set S.M.A.R.T. Goals </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0">
<li>Divide your financial goals into short-, medium-, and long-range categories to make sure you are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/guide-to-family-financial-planning-8418295">planning for your present and your future</a>. Your short-term, medium-term, and long-term financial goals will have a huge impact on your overall budget.</li>
<li>Short-term goals typically take one or two years to achieve and include things like creating a three-to-six-month emergency fund, paying off credit card debt, and saving for a special vacation.</li>
<li>Medium-term goals include saving for a down payment on a house, paying cash for a new car, or paying off student loan debt. This can take up to 10 years.</li>
<li>The most important long-term goal anyone can have is saving for retirement and that requires saving and investing for most of your working life, which can be up to 40 years—or even longer.</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> When it comes to setting goals, many people rely on the S.M.A.R.T. acronym. The words have varied, but the ones often used for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/">financial goal-setting</a> are:<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_16-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <li><strong>S</strong>pecific—State your goal in a few well-chosen words. <em>“We want to own a condo in the Bahamas.”</em></li><li><strong>M</strong>easurable—How will you know you’ve achieved your goal? <em>“How much will it cost?”</em></li><li><strong>A</strong>chievable—It must be something you can accomplish financially given your means. <em>“Can we save that much given our current and predicted future income?”</em></li><li><strong>R</strong>ealistic—Even if achievable, does it make sense in your situation? <em>“What will we have to give up and is that OK?”</em></li><li><strong>T</strong>ime-based—Your timeline will tell you whether this is a short-, medium-, or long-term goal. <em>“How long will this take?”</em></li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Use S.M.A.R.T. to test and, if necessary, adjust your goals. If buying a condo in the Bahamas is out of reach or takes too long to achieve, how about a timeshare? Or opting for a stateside beach resort instead?
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>You may have to set some goals aside to be revisited later—say, after you get a big raise or promotion.</p></div></div></div>
<span class="heading-toc" id="toc-step-2-determine-your-net-income"></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"> Step 2: Determine Your Net Income </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Once your financial goals are set, take stock of your monthly income. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossincome.asp">Gross income</a> is the amount you have before taxes and deductions. That isn’t helpful for creating a budget, although any amount that comes out for retirement, a pension, or Social Security does come into play later so be sure to note it in the money you use to budget. For purposes of creating a budget, use your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netincome.asp">net monthly income</a>—your take-home pay. This is the amount you receive before spending begins.
</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"> If you and your spouse are paid a salary or an hourly wage, your net income is likely stable. If <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/5-ways-manage-wide-income-swings/">either of you has irregular income</a> through seasonal work, self-employment, or sales commissions, you will need to revisit the income section at least monthly.
</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-step-3-add-up-mandatory-expenses"></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"> Step 3: Add Up Mandatory Expenses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Mandatory expenses consist of costs you must pay every month. Examples include housing, which could be in the form of a mortgage payment or rent, car payments, gasoline, parking, utilities, student or other loan payments, insurance, credit card payments, and food. For some people food becomes “what’s left over after all the bills are paid,” but you and your spouse should have a rough idea of the minimum amount you need to spend on groceries and include it as a mandatory expense. Subtract mandatory expenses from your net income. If your combined monthly net income is $8,000 and your mandatory expenses total $4,000, for example, you have $4,000 to carry forward to Step 4.
</p>
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<span class="heading-toc" id="toc-step-4-calculate-what-you-need-to-save"></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"> Step 4: Calculate What You Need To Save </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Refer to Steps 1 and 2 to determine how much you need to save to reach your financial goals (Step 1), as well as how much is covered by tax <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deduction.asp">deductions</a> for 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>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">IRA</a>, or <a class="pseudoStyle" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp">pension</a> (Step 2). Include all of this in Step 4 before moving on. Subtract the amount you need to save (<a class="pseudoStyle" data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/092414/retirement-what-percentage-salary-save.asp">for retirement</a> and other goals) from the amount left over in Step 3. That is the amount available for the next category—discretionary spending.
</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"> Let's say the total amount you need to save each month is $1,600. Subtract that from the $4,000 left over in Step 3, and you have $2,400 for the next step.
</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-step-5-divvy-up-discretionary-spending"></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"> Step 5: Divvy Up Discretionary Spending </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discretionary-expense.asp">Discretionary spending</a> is just what it sounds like—spending on things you want but don’t need. You and your spouse will likely have your most interesting “discussions” about discretionary spending, so buckle up. Discretionary spending means paying for the things you do or enjoy together such as eating out, vacations, watching cable/streaming shows, or wearing matching outfits for this year’s ugly Christmas sweater party. It also includes how much you spend individually. This could include individual nights out with friends, sports (e.g., tennis for one of you, golf for the other), or any of several different types of activities that each of you does with others or by yourself. Beyond the basics, it could include clothes, electronics, and how fancy a car you drive.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> List all potential discretionary spending and categorize it as “joint” or “individual” spending. Discretionary spending typically is its own mini budget, created monthly based on available discretionary funds. In the example above, you have $2,400 left over for discretionary spending. That will not likely be the case every month, which means you and your spouse will need to negotiate discretionary spending with each other monthly. This will often require sacrifices from both of you. If you both accept an equal amount of pain, conflict can be minimized. And despite the need for negotiation, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0412/why-marriage-makes-financial-sense.aspx">marriage does tend to have a positive impact</a> on your financial picture.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<span class="heading-toc" id="toc-step-6-select-your-budgeting-software"></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"> Step 6: Select Your Budgeting Software </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Now comes the fun part. Armed with your basic budget, you’re going to look for budgeting software that meets your needs and that both of you feel comfortable using. While almost any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">budgeting software program or app</a> will work, some have features that are specifically designed to be used by couples. Three are described here.
</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"> You Need A Budget (YNAB) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> You Need A Budget (YNAB for short) is designed around the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/zbb.asp">zero-based budgeting</a> principle that requires you to “Give Every Dollar a Job.”<span class="ql-inline-citation" data-cite="1"></span> It works best for people who are willing to be involved in their finances and change old habits in order to make the system work.
</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"> YNAB runs on Windows and Mac computers and via Alexa. It has both iPhone and Android apps available, making it a true cross-platform system. The software connects to bank and credit card accounts but does not track investments. YNAB budgets can be shared among multiple users and the YNAB site even offers information on how to budget as a couple. Designed for budgeting beginners, the platform features tutorials, videos, and a weekly podcast. YNAB comes with a 34-day free trial, after which it costs $14.99 per month (or $99 for the whole year).
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-subheading__text"> Honeydue </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> A budgeting app specifically designed for couples, Honeydue includes a feature that lets you and your partner decide how much you want to share with each other. This allows for the tracking of shared expenses as well as individual spending. The app is available for both iPhone and Android but has no web or computer version so everything must be done on a smartphone.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> You and your partner can set monthly limits for each spending category, chat within the app, react to transactions, and ask each other about questionable spending (from a shared account). More than 20,000 financial institutions across five countries support the app, and best of all, Honeydue is free.<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_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"> Goodbudget </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Goodbudget, formerly known as EEBA, uses the familiar envelope budgeting system that requires you to divide monthly income into virtual “envelopes” for each spending category.<span class="ql-inline-citation" data-cite="8"></span> When the money in an envelope is gone, that category is closed for the rest of the month. All budgets are synced between devices, and the web version, which can be viewed on any computer, makes this program (like YNAB) cross-platform as well.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> The paid version of Goodbudget automatically adds transactions from multiple accounts. With the free version, everything must be entered manually. Graphs and reports of spending help reinforce the easy-to-understand envelope concept and Goodbudget’s Getting Started tutorial makes setup easy.
</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"> The free version of Goodbudget allows you to create up to 20 categories or envelopes on two devices with one bank account. The paid version, which runs $10 per month or $80 per year, allows unlimited envelopes and bank accounts on up to five devices and provides email support.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div>
<span class="heading-toc" id="toc-step-7-schedule-a-weekly-money-date"></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"> Step 7: Schedule a Weekly Money Date </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> With software selected and up and running, the final step is to keep communication open and ongoing. Schedule a “money date” once a week to check in and re-evaluate your goals. Talking about finances regularly will keep you and your spouse on the same page and motivated to meet your goals. It doesn’t have to be a five-hour conversation, especially since your budgeting software will be doing most of the work. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx">Discussing your budget </a>over a glass of wine or while cooking dinner can be an enjoyable way to spend time together while keeping finances under control.
</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-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_64-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Setting up a budget, keeping track of it, and checking in with each other once a week to review where you are can keep money conflicts to a minimum and help you, as a couple, meet the goals you set out for yourselves. What better way to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/so-you-re-getting-married-4687193">start a new marriage</a> on the best footing—or solidify a long-established union?
</p></div> | Creating a budget with your spouse is one of those less-discussed issues of being married. Working it out is a significant part of learning to be married, or getting better at it.
Marriage is variously described as an equal partnership, a merger, or a union. No matter how you describe yours, you likely agree that communication is key to your happiness. You and your spouse will need to communicate on all major issues including lifestyle choices, parenting, sex, and, of course, money. In fact, money issues are [among the major reasons marriages fail](https://www.investopedia.com/articles/pf/09/marriage-killing-money-issues.asp).
### Key Takeaways
* Lack of communication about money is among the top reasons marriages fail.
* Creating a budget together will provide a framework for avoiding conflict about finances.
* Using software to track your money can increase your efficiency and make it easier to stay on top of spending.
* A once-a-week “money date” can foster continued communication and help you achieve your financial goals and life dreams.
## The Budget Solution
Money doesn’t have to be a contentious issue. Whether your marital status is “soon-to-be,” “newlywed,” or “been in the trenches awhile,” [the key to handling money](https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx) is having a financial agenda or [budget](https://www.investopedia.com/terms/b/budget.asp). Budgets can sound complex and difficult, but they don’t have to be. A budget is simply a best guess regarding the amount of income you and your spouse will receive over a set time period, along with [how you plan to use it](https://www.investopedia.com/financial-planning-can-save-marriage-4684269).
Start by sketching out a basic budget plan together. Then, once you and your spouse have a budget, following your plan is just a matter of [checking in with each other](https://www.investopedia.com/how-to-talk-about-money-with-partner-8612447) on a regular basis. Ideally, you will do this using free or inexpensive software to track your ongoing financial success in a way that is easy, accurate, and quick (see more on this in Step 6). Here are the seven steps to follow.
## Step 1: Set S.M.A.R.T. Goals
* Divide your financial goals into short-, medium-, and long-range categories to make sure you are [planning for your present and your future](https://www.investopedia.com/guide-to-family-financial-planning-8418295). Your short-term, medium-term, and long-term financial goals will have a huge impact on your overall budget.
* Short-term goals typically take one or two years to achieve and include things like creating a three-to-six-month emergency fund, paying off credit card debt, and saving for a special vacation.
* Medium-term goals include saving for a down payment on a house, paying cash for a new car, or paying off student loan debt. This can take up to 10 years.
* The most important long-term goal anyone can have is saving for retirement and that requires saving and investing for most of your working life, which can be up to 40 years—or even longer.
When it comes to setting goals, many people rely on the S.M.A.R.T. acronym. The words have varied, but the ones often used for [financial goal-setting](https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/) are:
* **S**pecific—State your goal in a few well-chosen words. *“We want to own a condo in the Bahamas.”*
* **M**easurable—How will you know you’ve achieved your goal? *“How much will it cost?”*
* **A**chievable—It must be something you can accomplish financially given your means. *“Can we save that much given our current and predicted future income?”*
* **R**ealistic—Even if achievable, does it make sense in your situation? *“What will we have to give up and is that OK?”*
* **T**ime-based—Your timeline will tell you whether this is a short-, medium-, or long-term goal. *“How long will this take?”*
Use S.M.A.R.T. to test and, if necessary, adjust your goals. If buying a condo in the Bahamas is out of reach or takes too long to achieve, how about a timeshare? Or opting for a stateside beach resort instead?
###
You may have to set some goals aside to be revisited later—say, after you get a big raise or promotion.
## Step 2: Determine Your Net Income
Once your financial goals are set, take stock of your monthly income. [Gross income](https://www.investopedia.com/terms/g/grossincome.asp) is the amount you have before taxes and deductions. That isn’t helpful for creating a budget, although any amount that comes out for retirement, a pension, or Social Security does come into play later so be sure to note it in the money you use to budget. For purposes of creating a budget, use your [net monthly income](https://www.investopedia.com/terms/n/netincome.asp)—your take-home pay. This is the amount you receive before spending begins.
If you and your spouse are paid a salary or an hourly wage, your net income is likely stable. If [either of you has irregular income](https://www.investopedia.com/personal-finance/5-ways-manage-wide-income-swings/) through seasonal work, self-employment, or sales commissions, you will need to revisit the income section at least monthly.
## Step 3: Add Up Mandatory Expenses
Mandatory expenses consist of costs you must pay every month. Examples include housing, which could be in the form of a mortgage payment or rent, car payments, gasoline, parking, utilities, student or other loan payments, insurance, credit card payments, and food. For some people food becomes “what’s left over after all the bills are paid,” but you and your spouse should have a rough idea of the minimum amount you need to spend on groceries and include it as a mandatory expense. Subtract mandatory expenses from your net income. If your combined monthly net income is $8,000 and your mandatory expenses total $4,000, for example, you have $4,000 to carry forward to Step 4.
## Step 4: Calculate What You Need To Save
Refer to Steps 1 and 2 to determine how much you need to save to reach your financial goals (Step 1), as well as how much is covered by tax [deductions](https://www.investopedia.com/terms/d/deduction.asp) for a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp), [IRA](https://www.investopedia.com/terms/i/ira.asp), or [pension](https://www.investopedia.com/terms/p/pensionplan.asp) (Step 2). Include all of this in Step 4 before moving on. Subtract the amount you need to save ([for retirement](https://www.investopedia.com/articles/personal-finance/092414/retirement-what-percentage-salary-save.asp) and other goals) from the amount left over in Step 3. That is the amount available for the next category—discretionary spending.
Let's say the total amount you need to save each month is $1,600. Subtract that from the $4,000 left over in Step 3, and you have $2,400 for the next step.
## Step 5: Divvy Up Discretionary Spending
[Discretionary spending](https://www.investopedia.com/terms/d/discretionary-expense.asp) is just what it sounds like—spending on things you want but don’t need. You and your spouse will likely have your most interesting “discussions” about discretionary spending, so buckle up. Discretionary spending means paying for the things you do or enjoy together such as eating out, vacations, watching cable/streaming shows, or wearing matching outfits for this year’s ugly Christmas sweater party. It also includes how much you spend individually. This could include individual nights out with friends, sports (e.g., tennis for one of you, golf for the other), or any of several different types of activities that each of you does with others or by yourself. Beyond the basics, it could include clothes, electronics, and how fancy a car you drive.
List all potential discretionary spending and categorize it as “joint” or “individual” spending. Discretionary spending typically is its own mini budget, created monthly based on available discretionary funds. In the example above, you have $2,400 left over for discretionary spending. That will not likely be the case every month, which means you and your spouse will need to negotiate discretionary spending with each other monthly. This will often require sacrifices from both of you. If you both accept an equal amount of pain, conflict can be minimized. And despite the need for negotiation, [marriage does tend to have a positive impact](https://www.investopedia.com/financial-edge/0412/why-marriage-makes-financial-sense.aspx) on your financial picture.
## Step 6: Select Your Budgeting Software
Now comes the fun part. Armed with your basic budget, you’re going to look for budgeting software that meets your needs and that both of you feel comfortable using. While almost any [budgeting software program or app](https://www.investopedia.com/best-budgeting-apps-5085405) will work, some have features that are specifically designed to be used by couples. Three are described here.
### You Need A Budget (YNAB)
You Need A Budget (YNAB for short) is designed around the [zero-based budgeting](https://www.investopedia.com/terms/z/zbb.asp) principle that requires you to “Give Every Dollar a Job.” It works best for people who are willing to be involved in their finances and change old habits in order to make the system work.
YNAB runs on Windows and Mac computers and via Alexa. It has both iPhone and Android apps available, making it a true cross-platform system. The software connects to bank and credit card accounts but does not track investments. YNAB budgets can be shared among multiple users and the YNAB site even offers information on how to budget as a couple. Designed for budgeting beginners, the platform features tutorials, videos, and a weekly podcast. YNAB comes with a 34-day free trial, after which it costs $14.99 per month (or $99 for the whole year).
### Honeydue
A budgeting app specifically designed for couples, Honeydue includes a feature that lets you and your partner decide how much you want to share with each other. This allows for the tracking of shared expenses as well as individual spending. The app is available for both iPhone and Android but has no web or computer version so everything must be done on a smartphone.
You and your partner can set monthly limits for each spending category, chat within the app, react to transactions, and ask each other about questionable spending (from a shared account). More than 20,000 financial institutions across five countries support the app, and best of all, Honeydue is free.
### Goodbudget
Goodbudget, formerly known as EEBA, uses the familiar envelope budgeting system that requires you to divide monthly income into virtual “envelopes” for each spending category. When the money in an envelope is gone, that category is closed for the rest of the month. All budgets are synced between devices, and the web version, which can be viewed on any computer, makes this program (like YNAB) cross-platform as well.
The paid version of Goodbudget automatically adds transactions from multiple accounts. With the free version, everything must be entered manually. Graphs and reports of spending help reinforce the easy-to-understand envelope concept and Goodbudget’s Getting Started tutorial makes setup easy.
The free version of Goodbudget allows you to create up to 20 categories or envelopes on two devices with one bank account. The paid version, which runs $10 per month or $80 per year, allows unlimited envelopes and bank accounts on up to five devices and provides email support.
## Step 7: Schedule a Weekly Money Date
With software selected and up and running, the final step is to keep communication open and ongoing. Schedule a “money date” once a week to check in and re-evaluate your goals. Talking about finances regularly will keep you and your spouse on the same page and motivated to meet your goals. It doesn’t have to be a five-hour conversation, especially since your budgeting software will be doing most of the work. [Discussing your budget](https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx) over a glass of wine or while cooking dinner can be an enjoyable way to spend time together while keeping finances under control.
## The Bottom Line
Setting up a budget, keeping track of it, and checking in with each other once a week to review where you are can keep money conflicts to a minimum and help you, as a couple, meet the goals you set out for yourselves. What better way to [start a new marriage](https://www.investopedia.com/so-you-re-getting-married-4687193) on the best footing—or solidify a long-established union?
| Creating a budget with your spouse is one of those less-discussed issues of being married. Working it out is a significant part of learning to be married, or getting better at it.
Marriage is variously described as an equal partnership, a merger, or a union. No matter how you describe yours, you likely agree that communication is key to your happiness. You and your spouse will need to communicate on all major issues including lifestyle choices, parenting, sex, and, of course, money. In fact, money issues are among the major reasons marriages fail.
Key Takeaways
Lack of communication about money is among the top reasons marriages fail.Creating a budget together will provide a framework for avoiding conflict about finances.Using software to track your money can increase your efficiency and make it easier to stay on top of spending.A once-a-week “money date” can foster continued communication and help you achieve your financial goals and life dreams.
The Budget Solution
Money doesn’t have to be a contentious issue. Whether your marital status is “soon-to-be,” “newlywed,” or “been in the trenches awhile,” the key to handling money is having a financial agenda or budget. Budgets can sound complex and difficult, but they don’t have to be. A budget is simply a best guess regarding the amount of income you and your spouse will receive over a set time period, along with how you plan to use it.
Start by sketching out a basic budget plan together. Then, once you and your spouse have a budget, following your plan is just a matter of checking in with each other on a regular basis. Ideally, you will do this using free or inexpensive software to track your ongoing financial success in a way that is easy, accurate, and quick (see more on this in Step 6). Here are the seven steps to follow.
Step 1: Set S.M.A.R.T. Goals
Divide your financial goals into short-, medium-, and long-range categories to make sure you are planning for your present and your future. Your short-term, medium-term, and long-term financial goals will have a huge impact on your overall budget.
Short-term goals typically take one or two years to achieve and include things like creating a three-to-six-month emergency fund, paying off credit card debt, and saving for a special vacation.
Medium-term goals include saving for a down payment on a house, paying cash for a new car, or paying off student loan debt. This can take up to 10 years.
The most important long-term goal anyone can have is saving for retirement and that requires saving and investing for most of your working life, which can be up to 40 years—or even longer.
When it comes to setting goals, many people rely on the S.M.A.R.T. acronym. The words have varied, but the ones often used for financial goal-setting are:
Specific—State your goal in a few well-chosen words. “We want to own a condo in the Bahamas.”Measurable—How will you know you’ve achieved your goal? “How much will it cost?”Achievable—It must be something you can accomplish financially given your means. “Can we save that much given our current and predicted future income?”Realistic—Even if achievable, does it make sense in your situation? “What will we have to give up and is that OK?”Time-based—Your timeline will tell you whether this is a short-, medium-, or long-term goal. “How long will this take?”
Use S.M.A.R.T. to test and, if necessary, adjust your goals. If buying a condo in the Bahamas is out of reach or takes too long to achieve, how about a timeshare? Or opting for a stateside beach resort instead?
You may have to set some goals aside to be revisited later—say, after you get a big raise or promotion.
Step 2: Determine Your Net Income
Once your financial goals are set, take stock of your monthly income. Gross income is the amount you have before taxes and deductions. That isn’t helpful for creating a budget, although any amount that comes out for retirement, a pension, or Social Security does come into play later so be sure to note it in the money you use to budget. For purposes of creating a budget, use your net monthly income—your take-home pay. This is the amount you receive before spending begins.
If you and your spouse are paid a salary or an hourly wage, your net income is likely stable. If either of you has irregular income through seasonal work, self-employment, or sales commissions, you will need to revisit the income section at least monthly.
Step 3: Add Up Mandatory Expenses
Mandatory expenses consist of costs you must pay every month. Examples include housing, which could be in the form of a mortgage payment or rent, car payments, gasoline, parking, utilities, student or other loan payments, insurance, credit card payments, and food. For some people food becomes “what’s left over after all the bills are paid,” but you and your spouse should have a rough idea of the minimum amount you need to spend on groceries and include it as a mandatory expense. Subtract mandatory expenses from your net income. If your combined monthly net income is $8,000 and your mandatory expenses total $4,000, for example, you have $4,000 to carry forward to Step 4.
Step 4: Calculate What You Need To Save
Refer to Steps 1 and 2 to determine how much you need to save to reach your financial goals (Step 1), as well as how much is covered by tax deductions for a 401(k), IRA, or pension (Step 2). Include all of this in Step 4 before moving on. Subtract the amount you need to save (for retirement and other goals) from the amount left over in Step 3. That is the amount available for the next category—discretionary spending.
Let's say the total amount you need to save each month is $1,600. Subtract that from the $4,000 left over in Step 3, and you have $2,400 for the next step.
Step 5: Divvy Up Discretionary Spending
Discretionary spending is just what it sounds like—spending on things you want but don’t need. You and your spouse will likely have your most interesting “discussions” about discretionary spending, so buckle up. Discretionary spending means paying for the things you do or enjoy together such as eating out, vacations, watching cable/streaming shows, or wearing matching outfits for this year’s ugly Christmas sweater party. It also includes how much you spend individually. This could include individual nights out with friends, sports (e.g., tennis for one of you, golf for the other), or any of several different types of activities that each of you does with others or by yourself. Beyond the basics, it could include clothes, electronics, and how fancy a car you drive.
List all potential discretionary spending and categorize it as “joint” or “individual” spending. Discretionary spending typically is its own mini budget, created monthly based on available discretionary funds. In the example above, you have $2,400 left over for discretionary spending. That will not likely be the case every month, which means you and your spouse will need to negotiate discretionary spending with each other monthly. This will often require sacrifices from both of you. If you both accept an equal amount of pain, conflict can be minimized. And despite the need for negotiation, marriage does tend to have a positive impact on your financial picture.
Step 6: Select Your Budgeting Software
Now comes the fun part. Armed with your basic budget, you’re going to look for budgeting software that meets your needs and that both of you feel comfortable using. While almost any budgeting software program or app will work, some have features that are specifically designed to be used by couples. Three are described here.
You Need A Budget (YNAB)
You Need A Budget (YNAB for short) is designed around the zero-based budgeting principle that requires you to “Give Every Dollar a Job.” It works best for people who are willing to be involved in their finances and change old habits in order to make the system work.
YNAB runs on Windows and Mac computers and via Alexa. It has both iPhone and Android apps available, making it a true cross-platform system. The software connects to bank and credit card accounts but does not track investments. YNAB budgets can be shared among multiple users and the YNAB site even offers information on how to budget as a couple. Designed for budgeting beginners, the platform features tutorials, videos, and a weekly podcast. YNAB comes with a 34-day free trial, after which it costs $14.99 per month (or $99 for the whole year).
Honeydue
A budgeting app specifically designed for couples, Honeydue includes a feature that lets you and your partner decide how much you want to share with each other. This allows for the tracking of shared expenses as well as individual spending. The app is available for both iPhone and Android but has no web or computer version so everything must be done on a smartphone.
You and your partner can set monthly limits for each spending category, chat within the app, react to transactions, and ask each other about questionable spending (from a shared account). More than 20,000 financial institutions across five countries support the app, and best of all, Honeydue is free.
Goodbudget
Goodbudget, formerly known as EEBA, uses the familiar envelope budgeting system that requires you to divide monthly income into virtual “envelopes” for each spending category. When the money in an envelope is gone, that category is closed for the rest of the month. All budgets are synced between devices, and the web version, which can be viewed on any computer, makes this program (like YNAB) cross-platform as well.
The paid version of Goodbudget automatically adds transactions from multiple accounts. With the free version, everything must be entered manually. Graphs and reports of spending help reinforce the easy-to-understand envelope concept and Goodbudget’s Getting Started tutorial makes setup easy.
The free version of Goodbudget allows you to create up to 20 categories or envelopes on two devices with one bank account. The paid version, which runs $10 per month or $80 per year, allows unlimited envelopes and bank accounts on up to five devices and provides email support.
Step 7: Schedule a Weekly Money Date
With software selected and up and running, the final step is to keep communication open and ongoing. Schedule a “money date” once a week to check in and re-evaluate your goals. Talking about finances regularly will keep you and your spouse on the same page and motivated to meet your goals. It doesn’t have to be a five-hour conversation, especially since your budgeting software will be doing most of the work. Discussing your budget over a glass of wine or while cooking dinner can be an enjoyable way to spend time together while keeping finances under control.
The Bottom Line
Setting up a budget, keeping track of it, and checking in with each other once a week to review where you are can keep money conflicts to a minimum and help you, as a couple, meet the goals you set out for yourselves. What better way to start a new marriage on the best footing—or solidify a long-established union?
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https://www.investopedia.com/personal-finance/american-debt-auto-loan-debt/ | American Debt: Auto Loan Balances Hit $1.61 Trillion in Q4 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"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Americans shoulder $1.61 trillion in auto loan debt, according to the Q4 2023 Quarterly Report on Household Debt and Credit from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal-reserve-bank-of-new-york.asp">Federal Reserve Bank of New York</a>. The level of auto loan debt is nearly double what it was just 10 years ago in 2013, and the figure has risen almost every quarter since 2010. In the fourth quarter of 2023, credit bureau TransUnion estimated that the average auto borrower had an outstanding balance of $23,945.<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="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Auto loan debt held by Americans rose to a record $1.61 trillion in the fourth quarter of 2023.</li><li>Auto loans now make up 9.18% of all household debt, the second-largest debt category behind mortgages.</li><li>The percentage of delinquencies that were 90 days and over on auto loans increased.</li></ul></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:34.6%;">
<img alt="Auto Loans" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/R3KhYioHc7tr-3o6hZE1SQPzXvc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-03-18at11.17.47AM-e4fabe0185634237959cf1e01ea37071.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/R3KhYioHc7tr-3o6hZE1SQPzXvc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-03-18at11.17.47AM-e4fabe0185634237959cf1e01ea37071.png" data-srcset="https://www.investopedia.com/thmb/fXuFw_l7ULA-4DgOoscW7bfmKSI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-03-18at11.17.47AM-e4fabe0185634237959cf1e01ea37071.png 750w" data-tracking-container="true" height="908" id="mntl-sc-block-image_1-0" width="2622"/>
<noscript>
<img alt="Auto Loans" class="img--noscript universal-image__image" height="908" sizes="750px" src="https://www.investopedia.com/thmb/R3KhYioHc7tr-3o6hZE1SQPzXvc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-03-18at11.17.47AM-e4fabe0185634237959cf1e01ea37071.png" srcset="https://www.investopedia.com/thmb/fXuFw_l7ULA-4DgOoscW7bfmKSI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Screenshot2024-03-18at11.17.47AM-e4fabe0185634237959cf1e01ea37071.png 750w" width="2622"/>
</noscript>
</div> </div>
</figure>
<span class="heading-toc" id="toc-auto-loan-debt-increases-with-total-household-debt"></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"> Auto Loan Debt Increases With Total Household Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Both our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-research-data-hub-5192040">research</a> and the research from the Federal Reserve of New York show that auto loan debt currently makes up over 9% of all outstanding household debt. Its growth accompanied a rise in total household debt, which stood at $17.50 trillion as of Q4 2023, an increase of $604 billion from the previous year. Auto loan debt ($1.607 trillion) is the second-largest category of American household debt after mortgage debt ($12.252 trillion).<span class="ql-inline-citation" data-cite="15"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> While the total balance on auto loans increased, the number of originations, or new loans, declined slightly. TransUnion reported that the number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination.asp">originations</a> was down 3.1% year-over-year, with 6.3 million new loans opened in Q4 2023, compared to 6.5 million in the same quarter of 2022. TransUnion reported that high interest rates and inflation, make the affordability of automobiles difficult.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Lenders benefit from the higher costs due to the increased <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> environment. Some may continue to offer lower interest rates to attract new consumers, giving them an edge over their competition. However, borrowers have found it challenging to keep up with the cost of borrowing, which has resulted in increased delinquencies on loans.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> 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> remains cautious about what impact rising prices and rising interest rates might have on consumers, particularly noting that auto loan delinquencies have increased as elevated car prices put stress on household budgets."<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>
<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>When buying a car, make sure to take steps to improve your credit score beforehand so that you can ensure you'll be approved for a loan and one with a good interest rate.</p></div></div></div>
<span class="heading-toc" id="toc-auto-loan-borrower-profiles-look-good"></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"> Auto Loan Borrower Profiles Look Good </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Americans have had difficulty keeping up with payments on auto loans, where 5% of the auto loan balance of borrowers was 90 days or more delinquent. This level has remained fairly flat from 2021.<span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> After 90 to 120 days of delinquency, lenders consider borrowers to be in default and can repossess their vehicles, although some lenders became more lenient during the coronavirus pandemic.<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 median credit score for auto loan borrowers was over 700, close to 725, which is little changed from a year before, but the overall trend has been increasing. That score is considered "good," but not a "very good" or "excellent" credit score.<span class="ql-inline-citation" data-cite="14"></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_23-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_24-0"><span class="heading-toc" id="toc-what-is-the-smartest-way-to-finance-a-car"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Smartest Way to Finance a Car?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The smartest way to finance a car is to get quotes from different lenders, including dealers and financial institutions. Generally, banks will have better loan terms than a dealer, but you can negotiate the price of the car with a dealer, particularly if you obtain the loan from them. The best way is to just determine the best price you will receive, which includes the price of the car and the interest rate on your loan.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_26-0"><span class="heading-toc" id="toc-should-you-tell-a-dealership-you-are-pre-approved"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should You Tell a Dealership You Are Pre-Approved?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, telling a dealership that you are pre-approved for an auto loan will signal to them that you are serious about purchasing a car and have already taken important steps to do so. This way, they will spend serious time assisting you in buying a car and possibly helping you find a good deal as they know you are not just looking without a serious commitment.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-do-high-interest-rates-make-a-car-more-expensive"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do High Interest Rates Make a Car More Expensive?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Generally, yes, high interest rates make a car more expensive. The reason is that most cars are not purchased entirely with cash but with an auto loan. When interest rates are high, the interest rates on auto loans will usually be high, making the car more costly to purchase.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The higher inflation and high interest rate environment have made borrowing costly for consumers. Auto loan delinquencies have increased, however, demand for automobiles has remained strong, as seen by the continued demand for auto loans, which decreased only slightly YOY.
</p></div> | Americans shoulder $1.61 trillion in auto loan debt, according to the Q4 2023 Quarterly Report on Household Debt and Credit from the [Federal Reserve Bank of New York](https://www.investopedia.com/terms/f/federal-reserve-bank-of-new-york.asp). The level of auto loan debt is nearly double what it was just 10 years ago in 2013, and the figure has risen almost every quarter since 2010. In the fourth quarter of 2023, credit bureau TransUnion estimated that the average auto borrower had an outstanding balance of $23,945.
### Key Takeaways
* Auto loan debt held by Americans rose to a record $1.61 trillion in the fourth quarter of 2023.
* Auto loans now make up 9.18% of all household debt, the second-largest debt category behind mortgages.
* The percentage of delinquencies that were 90 days and over on auto loans increased.
![Auto Loans]()
:max_bytes(150000):strip_icc()/Screenshot2024-03-18at11.17.47AM-e4fabe0185634237959cf1e01ea37071.png)
## Auto Loan Debt Increases With Total Household Debt
Both our [research](https://www.investopedia.com/financial-research-data-hub-5192040) and the research from the Federal Reserve of New York show that auto loan debt currently makes up over 9% of all outstanding household debt. Its growth accompanied a rise in total household debt, which stood at $17.50 trillion as of Q4 2023, an increase of $604 billion from the previous year. Auto loan debt ($1.607 trillion) is the second-largest category of American household debt after mortgage debt ($12.252 trillion).
While the total balance on auto loans increased, the number of originations, or new loans, declined slightly. TransUnion reported that the number of [originations](https://www.investopedia.com/terms/o/origination.asp) was down 3.1% year-over-year, with 6.3 million new loans opened in Q4 2023, compared to 6.5 million in the same quarter of 2022. TransUnion reported that high interest rates and inflation, make the affordability of automobiles difficult.
Lenders benefit from the higher costs due to the increased [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) environment. Some may continue to offer lower interest rates to attract new consumers, giving them an edge over their competition. However, borrowers have found it challenging to keep up with the cost of borrowing, which has resulted in increased delinquencies on loans.
The [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) remains cautious about what impact rising prices and rising interest rates might have on consumers, particularly noting that auto loan delinquencies have increased as elevated car prices put stress on household budgets."
###
When buying a car, make sure to take steps to improve your credit score beforehand so that you can ensure you'll be approved for a loan and one with a good interest rate.
## Auto Loan Borrower Profiles Look Good
Americans have had difficulty keeping up with payments on auto loans, where 5% of the auto loan balance of borrowers was 90 days or more delinquent. This level has remained fairly flat from 2021.
After 90 to 120 days of delinquency, lenders consider borrowers to be in default and can repossess their vehicles, although some lenders became more lenient during the coronavirus pandemic.
The median credit score for auto loan borrowers was over 700, close to 725, which is little changed from a year before, but the overall trend has been increasing. That score is considered "good," but not a "very good" or "excellent" credit score.
## What Is the Smartest Way to Finance a Car?
The smartest way to finance a car is to get quotes from different lenders, including dealers and financial institutions. Generally, banks will have better loan terms than a dealer, but you can negotiate the price of the car with a dealer, particularly if you obtain the loan from them. The best way is to just determine the best price you will receive, which includes the price of the car and the interest rate on your loan.
## Should You Tell a Dealership You Are Pre-Approved?
Yes, telling a dealership that you are pre-approved for an auto loan will signal to them that you are serious about purchasing a car and have already taken important steps to do so. This way, they will spend serious time assisting you in buying a car and possibly helping you find a good deal as they know you are not just looking without a serious commitment.
## Do High Interest Rates Make a Car More Expensive?
Generally, yes, high interest rates make a car more expensive. The reason is that most cars are not purchased entirely with cash but with an auto loan. When interest rates are high, the interest rates on auto loans will usually be high, making the car more costly to purchase.
## The Bottom Line
The higher inflation and high interest rate environment have made borrowing costly for consumers. Auto loan delinquencies have increased, however, demand for automobiles has remained strong, as seen by the continued demand for auto loans, which decreased only slightly YOY.
| Americans shoulder $1.61 trillion in auto loan debt, according to the Q4 2023 Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York. The level of auto loan debt is nearly double what it was just 10 years ago in 2013, and the figure has risen almost every quarter since 2010. In the fourth quarter of 2023, credit bureau TransUnion estimated that the average auto borrower had an outstanding balance of $23,945.
Key Takeaways
Auto loan debt held by Americans rose to a record $1.61 trillion in the fourth quarter of 2023.Auto loans now make up 9.18% of all household debt, the second-largest debt category behind mortgages.The percentage of delinquencies that were 90 days and over on auto loans increased.
Auto Loan Debt Increases With Total Household Debt
Both our research and the research from the Federal Reserve of New York show that auto loan debt currently makes up over 9% of all outstanding household debt. Its growth accompanied a rise in total household debt, which stood at $17.50 trillion as of Q4 2023, an increase of $604 billion from the previous year. Auto loan debt ($1.607 trillion) is the second-largest category of American household debt after mortgage debt ($12.252 trillion).
While the total balance on auto loans increased, the number of originations, or new loans, declined slightly. TransUnion reported that the number of originations was down 3.1% year-over-year, with 6.3 million new loans opened in Q4 2023, compared to 6.5 million in the same quarter of 2022. TransUnion reported that high interest rates and inflation, make the affordability of automobiles difficult.
Lenders benefit from the higher costs due to the increased interest rate environment. Some may continue to offer lower interest rates to attract new consumers, giving them an edge over their competition. However, borrowers have found it challenging to keep up with the cost of borrowing, which has resulted in increased delinquencies on loans.
The Federal Reserve remains cautious about what impact rising prices and rising interest rates might have on consumers, particularly noting that auto loan delinquencies have increased as elevated car prices put stress on household budgets."
When buying a car, make sure to take steps to improve your credit score beforehand so that you can ensure you'll be approved for a loan and one with a good interest rate.
Auto Loan Borrower Profiles Look Good
Americans have had difficulty keeping up with payments on auto loans, where 5% of the auto loan balance of borrowers was 90 days or more delinquent. This level has remained fairly flat from 2021.
After 90 to 120 days of delinquency, lenders consider borrowers to be in default and can repossess their vehicles, although some lenders became more lenient during the coronavirus pandemic.
The median credit score for auto loan borrowers was over 700, close to 725, which is little changed from a year before, but the overall trend has been increasing. That score is considered "good," but not a "very good" or "excellent" credit score.
What Is the Smartest Way to Finance a Car?
The smartest way to finance a car is to get quotes from different lenders, including dealers and financial institutions. Generally, banks will have better loan terms than a dealer, but you can negotiate the price of the car with a dealer, particularly if you obtain the loan from them. The best way is to just determine the best price you will receive, which includes the price of the car and the interest rate on your loan.
Should You Tell a Dealership You Are Pre-Approved?
Yes, telling a dealership that you are pre-approved for an auto loan will signal to them that you are serious about purchasing a car and have already taken important steps to do so. This way, they will spend serious time assisting you in buying a car and possibly helping you find a good deal as they know you are not just looking without a serious commitment.
Do High Interest Rates Make a Car More Expensive?
Generally, yes, high interest rates make a car more expensive. The reason is that most cars are not purchased entirely with cash but with an auto loan. When interest rates are high, the interest rates on auto loans will usually be high, making the car more costly to purchase.
The Bottom Line
The higher inflation and high interest rate environment have made borrowing costly for consumers. Auto loan delinquencies have increased, however, demand for automobiles has remained strong, as seen by the continued demand for auto loans, which decreased only slightly YOY.
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]
] |
https://www.investopedia.com/news/how-prime-day-impacts-amazon-stock/ | Does Prime Day Impact Amazon's Stock (AMZN)? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> In each of the years since Prime Day's inception, gross merchandise sales have increased, growing from $0.9 billion in 2015 to $12.09 billion in 2022. But as a $1.3 trillion company with annual revenue of almost half a trillion dollars, sales of $12 billion are not likely to have a major impact on the value of the company as a whole.
</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 close look at Amazon's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>) daily price chart since the beginning of the century shows the company has been in an impressive uptrend since well before the launch of Prime Day in 2015. In fact, if we were to look for bumps in share price as a result of Prime Day sales, the result would likely be insignificant at best.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Prime Day was launched in July 2015 to celebrate 20 years of being in business.</li><li>In 2021 Amazon had 200 million Prime members worldwide.</li><li>As $1.3 trillion company with annual revenue of almost half a trillion dollars, Prime Day's sales of $12 billion in 2022 are not likely to have a significant impact on the value of the company as a whole.</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"> That's not to say there's no impact. The first Prime Day lasted for 24 hours and included nine countries. Amazon reported that the next Prime Day, which was on July 12, 2016, saw subscriber offers jump 60% from the prior year. The success of Prime Day led to Amazon extending the sale in 2017 to 30 hours.
</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 2018, Amazon added more markets and extended the sale to 36 hours. By 2019, Amazon had expanded the sale to include more countries and two full days. In its 2021 letter to shareholders, Amazon reported that it had 200 million Prime members worldwide.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> On a price-adjusted basis, AMZN was trading at $0.80 at the close of trading on July 15, 2002. By close of trading on July 15, 2022, the adjusted stock price was $113.55 for a price increase of 14,040%. With such impressive sales numbers, it is interesting to look at whether opportunities for short-term traders to take advantage of any bump in share price caused by the effects of Prime Day sales exist.
</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-amazons-history"></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"> Amazon's History </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Amazon is one of the most valuable companies in the world, with a market capitalization exceeding $1.3 trillion. The company continued to grow by introducing new products and acquiring complementary businesses. One such product is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/is-amazon-prime-worth-it-5081871">Amazon Prime</a>. This membership service gives subscribers certain perks like free two-day shipping of products, access to movies, music, and more. Amazon Prime's popularity encouraged the company to add another perk to reward its members. Prime Day was created in July 2015 to celebrate 20 years of being in business.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<span class="heading-toc" id="toc-amzns-performance-before-and-after-prime-day-began"></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"> AMZN's Performance Before and After Prime Day Began </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> There have only been seven Prime Day sales events, constituting too small a number to reach any statistically significant conclusions. But nevertheless, it is interesting to look at the stock price before and after Prime Day for any short-term tradable price action.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If you were to buy the shares of AMZN at the close on the day prior to the first Prime Day sales and hold for a period ranging from one day, five days (one week) and 20 days (one month) after Prime Day, would there be any appreciable difference in price from the period a month earlier?<br>
</br></p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<span class="heading-toc" id="toc-amzn-prime-day-short-term-returns"></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"> AMZN Prime Day Short-Term Returns </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The first table below shows the profits or losses to be gained from buying shares of AMZN at the close prior to Prime Day and then selling at the close one day, five days (one week), or 20 days (one month) after Prime Day. The results are not impressive and produce a combined loss for all time periods. If your trading strategy had been to buy at the close the day before Prime for the last seven years and sell one day, one week, or one month later. Each time period results in negative returns.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The second table moves the time that shares are purchased approximately one month before Prime Day in each of the seven years. This is to provide a comparison of a random time frame. We can see that this random time period produces slightly better results across all time frames. (When dates fall on a weekend, days are moved back or forward to the next tradable day). For the one-day strategy, the average results are slightly better at $0.65 than the results for the post-Prime period at -$1.53. For the one-week strategy, the results are also slightly better than the post-Prime period at -$6.26 as opposed to -$10.81. The most impressive results are for the pre-Prime period of holding for one month at gains of $35.81 as opposed to the losses in the post-Prime period of -$8.27.<br><br/>
</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-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_26-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style="width: 100px;"></colgroup>
<colgroup span="1" style="width: 86px;"></colgroup>
<colgroup span="1" style="width: 97px;"></colgroup>
<colgroup span="1" style="width: 139px;"></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">Post Prime Day Trades</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td> <b>Date</b></td>
<td> <b>1 Day</b></td>
<td> <b>5 Days</b></td>
<td> <b>10 Days</b></td>
</tr>
<tr>
<td> 7/13/2015</td>
<td> 1.08</td>
<td> 2.23</td>
<td> 4.02</td>
</tr>
<tr>
<td> 7/12/2016</td>
<td> -0.56</td>
<td> 0.69</td>
<td> 0.73</td>
</tr>
<tr>
<td> 7/10/2017</td>
<td> 0.77</td>
<td> 1.56</td>
<td> 0.67</td>
</tr>
<tr>
<td> 7/16/2018</td>
<td> 1.50</td>
<td> 0.81</td>
<td> 5.33</td>
</tr>
<tr>
<td> 7/15/2019</td>
<td> 0.05</td>
<td> -1.27</td>
<td> -11.30</td>
</tr>
<tr>
<td> 10/13/2020</td>
<td> -5.22</td>
<td> -12.90</td>
<td> -15.28</td>
</tr>
<tr>
<td> 6/21/2021</td>
<td> 0.85</td>
<td> -1.93</td>
<td> 7.56</td>
</tr>
<tr>
<td><b> TOTAL</b></td>
<td> <b>-1.53</b></td>
<td> <b>-10.81</b></td>
<td> <b>-8.27</b></td>
</tr>
</tbody>
</table>
<figcaption>Table Shows Results of Prime Day Trading Strategy for Three Different Time Periods.</figcaption>
</div></figure>
<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="width: 112px;"></colgroup>
<colgroup span="1" style="width: 104px;"></colgroup>
<colgroup span="1" style="width: 115px;"></colgroup>
<colgroup span="1" style="width: 133px;"></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">Pre-Prime Day Trades</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td> <b>Date</b></td>
<td> <b>1 Day</b></td>
<td> <b>5 Days</b></td>
<td><b> 10 Days</b></td>
</tr>
<tr>
<td> 6/13/2015</td>
<td> -0.14</td>
<td> 0.31</td>
<td> 1.78</td>
</tr>
<tr>
<td> 6/12/2016</td>
<td> 0.07</td>
<td> -0.20</td>
<td> 1.51</td>
</tr>
<tr>
<td> 6/10/2017</td>
<td> 0.12</td>
<td> 0.84</td>
<td> 0.79</td>
</tr>
<tr>
<td> 6/16/2018</td>
<td> 0.39</td>
<td> -0.02</td>
<td> 5.32</td>
</tr>
<tr>
<td> 6/15/2019</td>
<td> 1.00</td>
<td> 2.08</td>
<td> 7.57</td>
</tr>
<tr>
<td> 9/13/2020</td>
<td> -0.66</td>
<td> -8.06</td>
<td> 8.52</td>
</tr>
<tr>
<td> 5/21/2021</td>
<td> -0.13</td>
<td> -1.23</td>
<td> 10.32</td>
</tr>
<tr>
<td> <b>TOTAL</b></td>
<td> <b>0.65</b></td>
<td> <b>-6.28</b></td>
<td> <b>35.81</b></td>
</tr>
</tbody>
</table>
<figcaption>Trades are Moved One Calendar Month Back for Comparison</figcaption>
</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-primes-impact-on-amazon"></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"> Prime's Impact on Amazon </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Amazon is a juggernaut. Even though Prime Day sales of $12 billion in 2022 seem impressive. It is worth noting that the total revenue for this company in 2021 was $469,822,000. $12 billion is less than 3% of its total revenue. From this perspective it makes sense that the impact of Prime Day sales on the company's share price would be insignificant at best.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<span class="heading-toc" id="toc-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"> It is useful to remember that the stock market acts as a forward-looking discounting mechanism. This means that the market will usually incorporate all publicly available information into the price of the stock. By the time the news is out about a particular event that had been anticipated by the market, it is usually too late to profit from it. Shocks to the market and individual stock prices usually happen when information that had not been expected occurs.
</p></div> | In each of the years since Prime Day's inception, gross merchandise sales have increased, growing from $0.9 billion in 2015 to $12.09 billion in 2022. But as a $1.3 trillion company with annual revenue of almost half a trillion dollars, sales of $12 billion are not likely to have a major impact on the value of the company as a whole.
A close look at Amazon's ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)) daily price chart since the beginning of the century shows the company has been in an impressive uptrend since well before the launch of Prime Day in 2015. In fact, if we were to look for bumps in share price as a result of Prime Day sales, the result would likely be insignificant at best.
### Key Takeaways
* Prime Day was launched in July 2015 to celebrate 20 years of being in business.
* In 2021 Amazon had 200 million Prime members worldwide.
* As $1.3 trillion company with annual revenue of almost half a trillion dollars, Prime Day's sales of $12 billion in 2022 are not likely to have a significant impact on the value of the company as a whole.
That's not to say there's no impact. The first Prime Day lasted for 24 hours and included nine countries. Amazon reported that the next Prime Day, which was on July 12, 2016, saw subscriber offers jump 60% from the prior year. The success of Prime Day led to Amazon extending the sale in 2017 to 30 hours.
In 2018, Amazon added more markets and extended the sale to 36 hours. By 2019, Amazon had expanded the sale to include more countries and two full days. In its 2021 letter to shareholders, Amazon reported that it had 200 million Prime members worldwide.
On a price-adjusted basis, AMZN was trading at $0.80 at the close of trading on July 15, 2002. By close of trading on July 15, 2022, the adjusted stock price was $113.55 for a price increase of 14,040%. With such impressive sales numbers, it is interesting to look at whether opportunities for short-term traders to take advantage of any bump in share price caused by the effects of Prime Day sales exist.
## Amazon's History
Amazon is one of the most valuable companies in the world, with a market capitalization exceeding $1.3 trillion. The company continued to grow by introducing new products and acquiring complementary businesses. One such product is [Amazon Prime](https://www.investopedia.com/is-amazon-prime-worth-it-5081871). This membership service gives subscribers certain perks like free two-day shipping of products, access to movies, music, and more. Amazon Prime's popularity encouraged the company to add another perk to reward its members. Prime Day was created in July 2015 to celebrate 20 years of being in business.
## AMZN's Performance Before and After Prime Day Began
There have only been seven Prime Day sales events, constituting too small a number to reach any statistically significant conclusions. But nevertheless, it is interesting to look at the stock price before and after Prime Day for any short-term tradable price action.
If you were to buy the shares of AMZN at the close on the day prior to the first Prime Day sales and hold for a period ranging from one day, five days (one week) and 20 days (one month) after Prime Day, would there be any appreciable difference in price from the period a month earlier?
## AMZN Prime Day Short-Term Returns
The first table below shows the profits or losses to be gained from buying shares of AMZN at the close prior to Prime Day and then selling at the close one day, five days (one week), or 20 days (one month) after Prime Day. The results are not impressive and produce a combined loss for all time periods. If your trading strategy had been to buy at the close the day before Prime for the last seven years and sell one day, one week, or one month later. Each time period results in negative returns.
The second table moves the time that shares are purchased approximately one month before Prime Day in each of the seven years. This is to provide a comparison of a random time frame. We can see that this random time period produces slightly better results across all time frames. (When dates fall on a weekend, days are moved back or forward to the next tradable day). For the one-day strategy, the average results are slightly better at $0.65 than the results for the post-Prime period at -$1.53. For the one-week strategy, the results are also slightly better than the post-Prime period at -$6.26 as opposed to -$10.81. The most impressive results are for the pre-Prime period of holding for one month at gains of $35.81 as opposed to the losses in the post-Prime period of -$8.27.
| Post Prime Day Trades | | | |
| --- | --- | --- | --- |
| **Date** | **1 Day** | **5 Days** | **10 Days** |
| 7/13/2015 | 1.08 | 2.23 | 4.02 |
| 7/12/2016 | -0.56 | 0.69 | 0.73 |
| 7/10/2017 | 0.77 | 1.56 | 0.67 |
| 7/16/2018 | 1.50 | 0.81 | 5.33 |
| 7/15/2019 | 0.05 | -1.27 | -11.30 |
| 10/13/2020 | -5.22 | -12.90 | -15.28 |
| 6/21/2021 | 0.85 | -1.93 | 7.56 |
| **TOTAL** | **-1.53** | **-10.81** | **-8.27** |
Table Shows Results of Prime Day Trading Strategy for Three Different Time Periods.
| Pre-Prime Day Trades | | | |
| --- | --- | --- | --- |
| **Date** | **1 Day** | **5 Days** | **10 Days** |
| 6/13/2015 | -0.14 | 0.31 | 1.78 |
| 6/12/2016 | 0.07 | -0.20 | 1.51 |
| 6/10/2017 | 0.12 | 0.84 | 0.79 |
| 6/16/2018 | 0.39 | -0.02 | 5.32 |
| 6/15/2019 | 1.00 | 2.08 | 7.57 |
| 9/13/2020 | -0.66 | -8.06 | 8.52 |
| 5/21/2021 | -0.13 | -1.23 | 10.32 |
| **TOTAL** | **0.65** | **-6.28** | **35.81** |
Trades are Moved One Calendar Month Back for Comparison
## Prime's Impact on Amazon
Amazon is a juggernaut. Even though Prime Day sales of $12 billion in 2022 seem impressive. It is worth noting that the total revenue for this company in 2021 was $469,822,000. $12 billion is less than 3% of its total revenue. From this perspective it makes sense that the impact of Prime Day sales on the company's share price would be insignificant at best.
## The Bottom Line
It is useful to remember that the stock market acts as a forward-looking discounting mechanism. This means that the market will usually incorporate all publicly available information into the price of the stock. By the time the news is out about a particular event that had been anticipated by the market, it is usually too late to profit from it. Shocks to the market and individual stock prices usually happen when information that had not been expected occurs.
| In each of the years since Prime Day's inception, gross merchandise sales have increased, growing from $0.9 billion in 2015 to $12.09 billion in 2022. But as a $1.3 trillion company with annual revenue of almost half a trillion dollars, sales of $12 billion are not likely to have a major impact on the value of the company as a whole.
A close look at Amazon's (AMZN) daily price chart since the beginning of the century shows the company has been in an impressive uptrend since well before the launch of Prime Day in 2015. In fact, if we were to look for bumps in share price as a result of Prime Day sales, the result would likely be insignificant at best.
Key Takeaways
Prime Day was launched in July 2015 to celebrate 20 years of being in business.In 2021 Amazon had 200 million Prime members worldwide.As $1.3 trillion company with annual revenue of almost half a trillion dollars, Prime Day's sales of $12 billion in 2022 are not likely to have a significant impact on the value of the company as a whole.
That's not to say there's no impact. The first Prime Day lasted for 24 hours and included nine countries. Amazon reported that the next Prime Day, which was on July 12, 2016, saw subscriber offers jump 60% from the prior year. The success of Prime Day led to Amazon extending the sale in 2017 to 30 hours.
In 2018, Amazon added more markets and extended the sale to 36 hours. By 2019, Amazon had expanded the sale to include more countries and two full days. In its 2021 letter to shareholders, Amazon reported that it had 200 million Prime members worldwide.
On a price-adjusted basis, AMZN was trading at $0.80 at the close of trading on July 15, 2002. By close of trading on July 15, 2022, the adjusted stock price was $113.55 for a price increase of 14,040%. With such impressive sales numbers, it is interesting to look at whether opportunities for short-term traders to take advantage of any bump in share price caused by the effects of Prime Day sales exist.
Amazon's History
Amazon is one of the most valuable companies in the world, with a market capitalization exceeding $1.3 trillion. The company continued to grow by introducing new products and acquiring complementary businesses. One such product is Amazon Prime. This membership service gives subscribers certain perks like free two-day shipping of products, access to movies, music, and more. Amazon Prime's popularity encouraged the company to add another perk to reward its members. Prime Day was created in July 2015 to celebrate 20 years of being in business.
AMZN's Performance Before and After Prime Day Began
There have only been seven Prime Day sales events, constituting too small a number to reach any statistically significant conclusions. But nevertheless, it is interesting to look at the stock price before and after Prime Day for any short-term tradable price action.
If you were to buy the shares of AMZN at the close on the day prior to the first Prime Day sales and hold for a period ranging from one day, five days (one week) and 20 days (one month) after Prime Day, would there be any appreciable difference in price from the period a month earlier?
AMZN Prime Day Short-Term Returns
The first table below shows the profits or losses to be gained from buying shares of AMZN at the close prior to Prime Day and then selling at the close one day, five days (one week), or 20 days (one month) after Prime Day. The results are not impressive and produce a combined loss for all time periods. If your trading strategy had been to buy at the close the day before Prime for the last seven years and sell one day, one week, or one month later. Each time period results in negative returns.
The second table moves the time that shares are purchased approximately one month before Prime Day in each of the seven years. This is to provide a comparison of a random time frame. We can see that this random time period produces slightly better results across all time frames. (When dates fall on a weekend, days are moved back or forward to the next tradable day). For the one-day strategy, the average results are slightly better at $0.65 than the results for the post-Prime period at -$1.53. For the one-week strategy, the results are also slightly better than the post-Prime period at -$6.26 as opposed to -$10.81. The most impressive results are for the pre-Prime period of holding for one month at gains of $35.81 as opposed to the losses in the post-Prime period of -$8.27.
Post Prime Day Trades
Date
1 Day
5 Days
10 Days
7/13/2015
1.08
2.23
4.02
7/12/2016
-0.56
0.69
0.73
7/10/2017
0.77
1.56
0.67
7/16/2018
1.50
0.81
5.33
7/15/2019
0.05
-1.27
-11.30
10/13/2020
-5.22
-12.90
-15.28
6/21/2021
0.85
-1.93
7.56
TOTAL
-1.53
-10.81
-8.27
Table Shows Results of Prime Day Trading Strategy for Three Different Time Periods.
Pre-Prime Day Trades
Date
1 Day
5 Days
10 Days
6/13/2015
-0.14
0.31
1.78
6/12/2016
0.07
-0.20
1.51
6/10/2017
0.12
0.84
0.79
6/16/2018
0.39
-0.02
5.32
6/15/2019
1.00
2.08
7.57
9/13/2020
-0.66
-8.06
8.52
5/21/2021
-0.13
-1.23
10.32
TOTAL
0.65
-6.28
35.81
Trades are Moved One Calendar Month Back for Comparison
Prime's Impact on Amazon
Amazon is a juggernaut. Even though Prime Day sales of $12 billion in 2022 seem impressive. It is worth noting that the total revenue for this company in 2021 was $469,822,000. $12 billion is less than 3% of its total revenue. From this perspective it makes sense that the impact of Prime Day sales on the company's share price would be insignificant at best.
The Bottom Line
It is useful to remember that the stock market acts as a forward-looking discounting mechanism. This means that the market will usually incorporate all publicly available information into the price of the stock. By the time the news is out about a particular event that had been anticipated by the market, it is usually too late to profit from it. Shocks to the market and individual stock prices usually happen when information that had not been expected occurs.
| [
[
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],
[
"Amazon Prime",
"https://www.investopedia.com/is-amazon-prime-worth-it-5081871"
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https://www.investopedia.com/terms/q/quality-of-life.asp | What Is Quality of Life? Why It's Important and How to Improve It | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-quality-of-life"></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 Quality of Life? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Quality of life is a highly subjective measure of happiness that is an essential component of many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personalfinance.asp">financial decisions</a>. Factors that play a role in the quality of life vary according to personal preferences but often include financial security as well as job satisfaction, family life, social connections, health, and safety.
</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"> Financial decisions often involve a tradeoff in which present quality of life is decreased to save money or earn more money for the future.
</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>Quality of life is often directly related to job satisfaction.</li><li>Quality of life factors include the availability of free time, a reasonable commute, harmonious relationships with colleagues, and the satisfaction of a job well done.</li><li>The relative importance of the many factors that make up quality of life varies among individuals.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-quality-of-life"></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 Quality of Life </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Quality of life is strongly associated with financial factors beyond the basic necessities of food and shelter. More money often means access to greater comfort, freedom from many anxieties, and an optimistic outlook for the future.
</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"> Inevitably, job satisfaction is a key component of quality of life. For many of us, it determines our degree of satisfaction with half of our waking hours. Add in the importance of a paycheck and it affects many other aspects of our lives.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> If a job provides time to enjoy life but leaves the worker too tired, injured, stressed out, or otherwise unable to enjoy their earnings, it subtracts from quality of life. Today, it is common to weigh both salary and quality of life when considering how good or bad a job is.
</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"> Quality of life is also an issue when developing a personal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a> plan. In this case, the tradeoff involves sacrificing current quality of life to improve future quality of life. This may include postponing luxuries and leisure activities that improve our overall sense of well-being.
</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-quality-of-life-factors"></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"> Quality of Life Factors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commutingexpenses.asp">Commuting</a> to work is a good quality of life example. It is often possible to save money on housing by living farther away from work. The trade-off is less time to spend with family or hobbies and more time sitting in traffic or waiting for a train.
</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"> Cheaper housing areas also tend to be located farther from art, culture, and entertainment. Some people consider this tradeoff worthwhile, while others choose to maximize quality of life by living closer to a vibrant city center.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Some jobs expose employees to potential hazards such as harmful chemicals, heavy machinery, high risks, or physical strain. The possibility of harm that could lessen their enjoyment of life is weighed against earning a higher salary for doing an unpleasant job.
</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"> Hours spent at the job versus free time can be another measure of the quality of life. Professionals may choose to take high-paying jobs that regularly require extended or late work hours to earn the income they desire. This may include prolonged business travel. While such choices can increase income it limits the hours available to enjoy it.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_26-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_27-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Quality of life depends on the individual, but access to good healthcare, clean and safe housing, healthy food, and a living wage are near-universal factors.</p></div></div></div>
<span class="heading-toc" id="toc-countries-with-the-best-quality-of-life"></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"> Countries With the Best Quality of Life </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Norway, Denmark, Finland, Switzerland, and the Netherlands consistently rank in the world's top 10 countries in terms of quality of life or standing of living, according to a 2024 World Population Review analysis of recent results from three sources.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> In fact, the top 10 list from Numbeo, one of the sources, included nine European nations. Oman was number seven.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Safety, health care, economic factors, and education were commonly used factors in the reports.
</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 United States did not appear in the top 10 list of any of the three sources, which included the United Nations Human Development Index and U.S. News & World Report as well as Numbeo.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<span class="heading-toc" id="toc-how-to-improve-quality-of-life"></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"> How to Improve Quality of Life </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> If you feel your quality of life is lacking, considering how you define a good quality of life is an excellent first step towards improvement. While everyone's idea of a high-quality life varies, there are some universal markers.
</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"> These markers may include access to good healthcare, loving relationships, meaningful work or volunteerism, leisure time for hobbies you enjoy, good rest, healthy food, and the ability to perform an enjoyable form of exercise.
</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"> Studies have found that practicing gratitude and meditation can improve your quality of life.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="8"></span> Experts recommend adequate sleep (at least seven hours per night) to improve the quality of life and better control mood and energy levels.<span class="ql-inline-citation" data-cite="10"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<span class="heading-toc" id="toc-how-governments-can-improve-quality-of-life"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-heading__text"> How Governments Can Improve Quality of Life </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Governments can look to data collected from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/happiness-economics.asp">happiness economic</a> studies and indices to find places to improve the population's quality of life. One such index is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gnh.asp">Gross National Happiness</a> (GNH) index.
</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 latest version of the index, based on a survey of 5,000 Americans, concludes that Delaware residents have the highest life satisfaction, while Oregon residents are in last place.<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_48-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> There are many ways that a government can improve the quality of its citizens' lives. Actions include funding good public schools, offering affordable access to healthcare, and supporting family-friendly policies like paid leave to take care of sick family members or newborn or adopted children. These policy movements help families thrive.
</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"> Many of the governments in countries listed as having a high quality of life provide services and programs to their citizens to help them improve their lives. These include access to living-wage jobs, affordable or free higher education, better gun control laws, and access to high-quality and affordable healthcare.<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_52-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> The quality of life in the U.S. is lower than in many developed nations due to declines in personal safety, high healthcare costs, and uneven access to high-quality public education.<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_54-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_55-0"><span class="heading-toc" id="toc-what-are-the-primary-indicators-of-quality-of-life"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Primary Indicators of Quality of Life?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Some primary indicators of quality of life include sufficient income, job satisfaction, decent housing, access to high-quality education, a reasonable life-work balance, rewarding personal relationships, and access to cultural and leisure activities.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_57-0"><span class="heading-toc" id="toc-how-can-we-improve-quality-of-life"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can We Improve Quality of Life?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Work on improving your work-life balance, relationships, home, and health.</p><p>Governments can improve the quality of life in their countries by offering affordable and accessible healthcare, investing in education, providing affordable housing, offering family-friendly policies, and putting laws into place for workers to earn living wages.</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-how-is-quality-of-life-calculated"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is Quality of Life Calculated?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Quality of life can be calculated in many ways. One is from the World Health Organization: "WHO defines Quality of Life as an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards, and concerns."<span class="ql-inline-citation" data-cite="5"></span><br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Quality of life is, above all, an individual calculation. Most of us, however, include good health, good friends, loving relationships, and some degree of creature comforts in the factors they assess. It may sound distasteful, but the money we have and the ways we get it have a big role in many of the factors that make up quality of life.<br/>
</p></div> | ## What Is Quality of Life?
Quality of life is a highly subjective measure of happiness that is an essential component of many [financial decisions](https://www.investopedia.com/terms/p/personalfinance.asp). Factors that play a role in the quality of life vary according to personal preferences but often include financial security as well as job satisfaction, family life, social connections, health, and safety.
Financial decisions often involve a tradeoff in which present quality of life is decreased to save money or earn more money for the future.
### Key Takeaways
* Quality of life is often directly related to job satisfaction.
* Quality of life factors include the availability of free time, a reasonable commute, harmonious relationships with colleagues, and the satisfaction of a job well done.
* The relative importance of the many factors that make up quality of life varies among individuals.
## Understanding Quality of Life
Quality of life is strongly associated with financial factors beyond the basic necessities of food and shelter. More money often means access to greater comfort, freedom from many anxieties, and an optimistic outlook for the future.
Inevitably, job satisfaction is a key component of quality of life. For many of us, it determines our degree of satisfaction with half of our waking hours. Add in the importance of a paycheck and it affects many other aspects of our lives.
If a job provides time to enjoy life but leaves the worker too tired, injured, stressed out, or otherwise unable to enjoy their earnings, it subtracts from quality of life. Today, it is common to weigh both salary and quality of life when considering how good or bad a job is.
Quality of life is also an issue when developing a personal [savings](https://www.investopedia.com/terms/s/savings.asp) plan. In this case, the tradeoff involves sacrificing current quality of life to improve future quality of life. This may include postponing luxuries and leisure activities that improve our overall sense of well-being.
## Quality of Life Factors
[Commuting](https://www.investopedia.com/terms/c/commutingexpenses.asp) to work is a good quality of life example. It is often possible to save money on housing by living farther away from work. The trade-off is less time to spend with family or hobbies and more time sitting in traffic or waiting for a train.
Cheaper housing areas also tend to be located farther from art, culture, and entertainment. Some people consider this tradeoff worthwhile, while others choose to maximize quality of life by living closer to a vibrant city center.
Some jobs expose employees to potential hazards such as harmful chemicals, heavy machinery, high risks, or physical strain. The possibility of harm that could lessen their enjoyment of life is weighed against earning a higher salary for doing an unpleasant job.
Hours spent at the job versus free time can be another measure of the quality of life. Professionals may choose to take high-paying jobs that regularly require extended or late work hours to earn the income they desire. This may include prolonged business travel. While such choices can increase income it limits the hours available to enjoy it.
###
Quality of life depends on the individual, but access to good healthcare, clean and safe housing, healthy food, and a living wage are near-universal factors.
## Countries With the Best Quality of Life
Norway, Denmark, Finland, Switzerland, and the Netherlands consistently rank in the world's top 10 countries in terms of quality of life or standing of living, according to a 2024 World Population Review analysis of recent results from three sources.
In fact, the top 10 list from Numbeo, one of the sources, included nine European nations. Oman was number seven.
Safety, health care, economic factors, and education were commonly used factors in the reports.
The United States did not appear in the top 10 list of any of the three sources, which included the United Nations Human Development Index and U.S. News & World Report as well as Numbeo.
## How to Improve Quality of Life
If you feel your quality of life is lacking, considering how you define a good quality of life is an excellent first step towards improvement. While everyone's idea of a high-quality life varies, there are some universal markers.
These markers may include access to good healthcare, loving relationships, meaningful work or volunteerism, leisure time for hobbies you enjoy, good rest, healthy food, and the ability to perform an enjoyable form of exercise.
Studies have found that practicing gratitude and meditation can improve your quality of life. Experts recommend adequate sleep (at least seven hours per night) to improve the quality of life and better control mood and energy levels.
## How Governments Can Improve Quality of Life
Governments can look to data collected from [happiness economic](https://www.investopedia.com/terms/h/happiness-economics.asp) studies and indices to find places to improve the population's quality of life. One such index is the [Gross National Happiness](https://www.investopedia.com/terms/g/gnh.asp) (GNH) index.
The latest version of the index, based on a survey of 5,000 Americans, concludes that Delaware residents have the highest life satisfaction, while Oregon residents are in last place.
There are many ways that a government can improve the quality of its citizens' lives. Actions include funding good public schools, offering affordable access to healthcare, and supporting family-friendly policies like paid leave to take care of sick family members or newborn or adopted children. These policy movements help families thrive.
Many of the governments in countries listed as having a high quality of life provide services and programs to their citizens to help them improve their lives. These include access to living-wage jobs, affordable or free higher education, better gun control laws, and access to high-quality and affordable healthcare.
The quality of life in the U.S. is lower than in many developed nations due to declines in personal safety, high healthcare costs, and uneven access to high-quality public education.
## What Are the Primary Indicators of Quality of Life?
Some primary indicators of quality of life include sufficient income, job satisfaction, decent housing, access to high-quality education, a reasonable life-work balance, rewarding personal relationships, and access to cultural and leisure activities.
## How Can We Improve Quality of Life?
Work on improving your work-life balance, relationships, home, and health.
Governments can improve the quality of life in their countries by offering affordable and accessible healthcare, investing in education, providing affordable housing, offering family-friendly policies, and putting laws into place for workers to earn living wages.
## How Is Quality of Life Calculated?
Quality of life can be calculated in many ways. One is from the World Health Organization: "WHO defines Quality of Life as an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards, and concerns."
## The Bottom Line
Quality of life is, above all, an individual calculation. Most of us, however, include good health, good friends, loving relationships, and some degree of creature comforts in the factors they assess. It may sound distasteful, but the money we have and the ways we get it have a big role in many of the factors that make up quality of life.
| What Is Quality of Life?
Quality of life is a highly subjective measure of happiness that is an essential component of many financial decisions. Factors that play a role in the quality of life vary according to personal preferences but often include financial security as well as job satisfaction, family life, social connections, health, and safety.
Financial decisions often involve a tradeoff in which present quality of life is decreased to save money or earn more money for the future.
Key Takeaways
Quality of life is often directly related to job satisfaction.Quality of life factors include the availability of free time, a reasonable commute, harmonious relationships with colleagues, and the satisfaction of a job well done.The relative importance of the many factors that make up quality of life varies among individuals.
Understanding Quality of Life
Quality of life is strongly associated with financial factors beyond the basic necessities of food and shelter. More money often means access to greater comfort, freedom from many anxieties, and an optimistic outlook for the future.
Inevitably, job satisfaction is a key component of quality of life. For many of us, it determines our degree of satisfaction with half of our waking hours. Add in the importance of a paycheck and it affects many other aspects of our lives.
If a job provides time to enjoy life but leaves the worker too tired, injured, stressed out, or otherwise unable to enjoy their earnings, it subtracts from quality of life. Today, it is common to weigh both salary and quality of life when considering how good or bad a job is.
Quality of life is also an issue when developing a personal savings plan. In this case, the tradeoff involves sacrificing current quality of life to improve future quality of life. This may include postponing luxuries and leisure activities that improve our overall sense of well-being.
Quality of Life Factors
Commuting to work is a good quality of life example. It is often possible to save money on housing by living farther away from work. The trade-off is less time to spend with family or hobbies and more time sitting in traffic or waiting for a train.
Cheaper housing areas also tend to be located farther from art, culture, and entertainment. Some people consider this tradeoff worthwhile, while others choose to maximize quality of life by living closer to a vibrant city center.
Some jobs expose employees to potential hazards such as harmful chemicals, heavy machinery, high risks, or physical strain. The possibility of harm that could lessen their enjoyment of life is weighed against earning a higher salary for doing an unpleasant job.
Hours spent at the job versus free time can be another measure of the quality of life. Professionals may choose to take high-paying jobs that regularly require extended or late work hours to earn the income they desire. This may include prolonged business travel. While such choices can increase income it limits the hours available to enjoy it.
Quality of life depends on the individual, but access to good healthcare, clean and safe housing, healthy food, and a living wage are near-universal factors.
Countries With the Best Quality of Life
Norway, Denmark, Finland, Switzerland, and the Netherlands consistently rank in the world's top 10 countries in terms of quality of life or standing of living, according to a 2024 World Population Review analysis of recent results from three sources.
In fact, the top 10 list from Numbeo, one of the sources, included nine European nations. Oman was number seven.
Safety, health care, economic factors, and education were commonly used factors in the reports.
The United States did not appear in the top 10 list of any of the three sources, which included the United Nations Human Development Index and U.S. News & World Report as well as Numbeo.
How to Improve Quality of Life
If you feel your quality of life is lacking, considering how you define a good quality of life is an excellent first step towards improvement. While everyone's idea of a high-quality life varies, there are some universal markers.
These markers may include access to good healthcare, loving relationships, meaningful work or volunteerism, leisure time for hobbies you enjoy, good rest, healthy food, and the ability to perform an enjoyable form of exercise.
Studies have found that practicing gratitude and meditation can improve your quality of life. Experts recommend adequate sleep (at least seven hours per night) to improve the quality of life and better control mood and energy levels.
How Governments Can Improve Quality of Life
Governments can look to data collected from happiness economic studies and indices to find places to improve the population's quality of life. One such index is the Gross National Happiness (GNH) index.
The latest version of the index, based on a survey of 5,000 Americans, concludes that Delaware residents have the highest life satisfaction, while Oregon residents are in last place.
There are many ways that a government can improve the quality of its citizens' lives. Actions include funding good public schools, offering affordable access to healthcare, and supporting family-friendly policies like paid leave to take care of sick family members or newborn or adopted children. These policy movements help families thrive.
Many of the governments in countries listed as having a high quality of life provide services and programs to their citizens to help them improve their lives. These include access to living-wage jobs, affordable or free higher education, better gun control laws, and access to high-quality and affordable healthcare.
The quality of life in the U.S. is lower than in many developed nations due to declines in personal safety, high healthcare costs, and uneven access to high-quality public education.
What Are the Primary Indicators of Quality of Life?
Some primary indicators of quality of life include sufficient income, job satisfaction, decent housing, access to high-quality education, a reasonable life-work balance, rewarding personal relationships, and access to cultural and leisure activities.
How Can We Improve Quality of Life?
Work on improving your work-life balance, relationships, home, and health.Governments can improve the quality of life in their countries by offering affordable and accessible healthcare, investing in education, providing affordable housing, offering family-friendly policies, and putting laws into place for workers to earn living wages.
How Is Quality of Life Calculated?
Quality of life can be calculated in many ways. One is from the World Health Organization: "WHO defines Quality of Life as an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards, and concerns."
The Bottom Line
Quality of life is, above all, an individual calculation. Most of us, however, include good health, good friends, loving relationships, and some degree of creature comforts in the factors they assess. It may sound distasteful, but the money we have and the ways we get it have a big role in many of the factors that make up quality of life.
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https://www.investopedia.com/disney-telecommute-mandate-7093535 | Work From Home Under Fire As Disney CEO Sets Office Mandate | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Full-time remote work may be the wave—or hope—of the future, but it will soon be a thing of the past at yet another big company that cracked down on pandemic-fueled telecommuting.<span class="ql-inline-citation" data-cite="14"></span><span class="ql-inline-citation" data-cite="15"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Walt Disney (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=dis">DIS</a>) CEO Bob Iger informed Disney's corporate employees this week that they'll need to be at the office at least four days a week starting March 1.<span class="ql-inline-citation" data-cite="1"></span> Companies including 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>) and Goldman Sachs (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl">GS</a>) have sought to curtail work from home in recent months, saying it isn't an adequate replacement for in-person collaboration.
</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>Walt Disney CEO Bob Iger has told workers to be in the office four days a week starting March 1.</li><li>Disney is the latest company to require work from the office after telecommuting spread alongside COVID-19.</li><li>The number of workers working primarily from home tripled between 2019 and 2021, and millions more shifted to hybrid work arrangements.</li><li>The federal government continues to promote remote work as part of hybrid arrangements for its civilian employees.</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"> "In a creative business like ours, nothing can replace the ability to connect, observe, and create with peers that comes from being physically together, nor the opportunity to grow professionally by learning from leaders and mentors," Iger wrote.<span class="ql-inline-citation" data-cite="1"></span> The CEO returned in November to the post he held until 2020, after Disney's board <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/disney-ousts-ceo-6831330">fired his estranged </a><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://protege.stanford.edu/">protégé</a><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/disney-ousts-ceo-6831330">, Bob Chapek</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"> Apple has insisted since September that employees spend three days a week in the office.<span class="ql-inline-citation" data-cite="2"></span> CEO Tim Cook has defended the policy amid complaints from some workers.<span class="ql-inline-citation" data-cite="3"></span> "We make product, and you have to hold product. You collaborate with one another because we believe that one plus one equals three," Cook has 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_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Goldman Sachs CEO David Solomon says the rise of remote work threatens the company's culture and cohesion. Goldman's diminished tolerance for telecommuting had boosted the firm's office attendance rate to 65% on average as of October, though that remained short of 75% before the pandemic.<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_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Even companies seeking to bring employees back to the office have accepted an expanded role for remote work in hybrid arrangements. Apple's policy "doesn't mean we're going to be here five days a week, we're not," Cook told CBS. "If you were here on a Friday, it would be a ghost town."<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> According to the U.S. Census Bureau, more than 27 million Americans accounting for 18% of the labor force worked primarily from home in 2021, triple the number in 2019.<span class="ql-inline-citation" data-cite="10"></span> Millions more have shifted to hybrid arrangements allowing them to work from home at least some days, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech-layoffs-2022-6829344">driving down office occupancy rates</a> in major U.S. cities.
</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"> Kastle, a facilities security provider that estimates office occupancy rates based on access data from 2,600 buildings in 47 U.S. states, says occupancy in the top 10 U.S. office markets is down more than 50% since the start of the pandemic.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The effect has been particularly dramatic in San Francisco, where Salesforce (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl">CRM</a>) offered workers the option of fully remote work in 2021. By late 2022, the software giant began requiring sales staff to work from office three days a week. “Even at Salesforce we have what I would call factory jobs—folks that are required to be here,” Salesforce CEO Marc Benioff told Bloomberg. “But we’re never going back to how it was.”<span class="ql-inline-citation" data-cite="7"></span> Benioff has also reportedly told employees he suspects remote workers may be less productive.<span class="ql-inline-citation" data-cite="8"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In many cases, companies have found remote workers are at least as productive as the office staff, while requiring lower overhead for office rent and other costs.<span class="ql-inline-citation" data-cite="11"></span> Tesla (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>) and Twitter CEO Elon Musk, a longtime critic of work from home who initially banned the practice at Twitter, appears to be among the latest converts, at least on the short-term basis.<span class="ql-inline-citation" data-cite="13"></span> After Twitter recently closed its Seattle offices, the company reportedly told workers there to telecommute.<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_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Among the most enthusiastic supporters of work from home is the U.S. government, the country's largest civilian employer after Walmart (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt">WMT</a>) with 2.1 million workers. Telework has increased engagement among federal government workers and is increasingly driving job changes in government employees, Office of Personnel Management (OPM) Director Kiran Ahuja told a congressional committee last year. "What we are seeing is agency-hopping, based on where employees see the level of flexibility," Ahuja said.<span class="ql-inline-citation" data-cite="16"></span><br/>
</p></div> | Full-time remote work may be the wave—or hope—of the future, but it will soon be a thing of the past at yet another big company that cracked down on pandemic-fueled telecommuting.
Walt Disney ([DIS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=dis)) CEO Bob Iger informed Disney's corporate employees this week that they'll need to be at the office at least four days a week starting March 1. Companies including Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) and Goldman Sachs ([GS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) have sought to curtail work from home in recent months, saying it isn't an adequate replacement for in-person collaboration.
### Key Takeaways
* Walt Disney CEO Bob Iger has told workers to be in the office four days a week starting March 1.
* Disney is the latest company to require work from the office after telecommuting spread alongside COVID-19.
* The number of workers working primarily from home tripled between 2019 and 2021, and millions more shifted to hybrid work arrangements.
* The federal government continues to promote remote work as part of hybrid arrangements for its civilian employees.
"In a creative business like ours, nothing can replace the ability to connect, observe, and create with peers that comes from being physically together, nor the opportunity to grow professionally by learning from leaders and mentors," Iger wrote. The CEO returned in November to the post he held until 2020, after Disney's board [fired his estranged](https://www.investopedia.com/disney-ousts-ceo-6831330) [protégé](https://protege.stanford.edu/)[, Bob Chapek](https://www.investopedia.com/disney-ousts-ceo-6831330).
Apple has insisted since September that employees spend three days a week in the office. CEO Tim Cook has defended the policy amid complaints from some workers. "We make product, and you have to hold product. You collaborate with one another because we believe that one plus one equals three," Cook has said.
Goldman Sachs CEO David Solomon says the rise of remote work threatens the company's culture and cohesion. Goldman's diminished tolerance for telecommuting had boosted the firm's office attendance rate to 65% on average as of October, though that remained short of 75% before the pandemic.
Even companies seeking to bring employees back to the office have accepted an expanded role for remote work in hybrid arrangements. Apple's policy "doesn't mean we're going to be here five days a week, we're not," Cook told CBS. "If you were here on a Friday, it would be a ghost town."
According to the U.S. Census Bureau, more than 27 million Americans accounting for 18% of the labor force worked primarily from home in 2021, triple the number in 2019. Millions more have shifted to hybrid arrangements allowing them to work from home at least some days, [driving down office occupancy rates](https://www.investopedia.com/tech-layoffs-2022-6829344) in major U.S. cities.
Kastle, a facilities security provider that estimates office occupancy rates based on access data from 2,600 buildings in 47 U.S. states, says occupancy in the top 10 U.S. office markets is down more than 50% since the start of the pandemic.
The effect has been particularly dramatic in San Francisco, where Salesforce ([CRM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) offered workers the option of fully remote work in 2021. By late 2022, the software giant began requiring sales staff to work from office three days a week. “Even at Salesforce we have what I would call factory jobs—folks that are required to be here,” Salesforce CEO Marc Benioff told Bloomberg. “But we’re never going back to how it was.” Benioff has also reportedly told employees he suspects remote workers may be less productive.
In many cases, companies have found remote workers are at least as productive as the office staff, while requiring lower overhead for office rent and other costs. Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) and Twitter CEO Elon Musk, a longtime critic of work from home who initially banned the practice at Twitter, appears to be among the latest converts, at least on the short-term basis. After Twitter recently closed its Seattle offices, the company reportedly told workers there to telecommute.
Among the most enthusiastic supporters of work from home is the U.S. government, the country's largest civilian employer after Walmart ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt)) with 2.1 million workers. Telework has increased engagement among federal government workers and is increasingly driving job changes in government employees, Office of Personnel Management (OPM) Director Kiran Ahuja told a congressional committee last year. "What we are seeing is agency-hopping, based on where employees see the level of flexibility," Ahuja said.
| Full-time remote work may be the wave—or hope—of the future, but it will soon be a thing of the past at yet another big company that cracked down on pandemic-fueled telecommuting.
Walt Disney (DIS) CEO Bob Iger informed Disney's corporate employees this week that they'll need to be at the office at least four days a week starting March 1. Companies including Apple (AAPL) and Goldman Sachs (GS) have sought to curtail work from home in recent months, saying it isn't an adequate replacement for in-person collaboration.
Key Takeaways
Walt Disney CEO Bob Iger has told workers to be in the office four days a week starting March 1.Disney is the latest company to require work from the office after telecommuting spread alongside COVID-19.The number of workers working primarily from home tripled between 2019 and 2021, and millions more shifted to hybrid work arrangements.The federal government continues to promote remote work as part of hybrid arrangements for its civilian employees.
"In a creative business like ours, nothing can replace the ability to connect, observe, and create with peers that comes from being physically together, nor the opportunity to grow professionally by learning from leaders and mentors," Iger wrote. The CEO returned in November to the post he held until 2020, after Disney's board fired his estranged protégé, Bob Chapek.
Apple has insisted since September that employees spend three days a week in the office. CEO Tim Cook has defended the policy amid complaints from some workers. "We make product, and you have to hold product. You collaborate with one another because we believe that one plus one equals three," Cook has said.
Goldman Sachs CEO David Solomon says the rise of remote work threatens the company's culture and cohesion. Goldman's diminished tolerance for telecommuting had boosted the firm's office attendance rate to 65% on average as of October, though that remained short of 75% before the pandemic.
Even companies seeking to bring employees back to the office have accepted an expanded role for remote work in hybrid arrangements. Apple's policy "doesn't mean we're going to be here five days a week, we're not," Cook told CBS. "If you were here on a Friday, it would be a ghost town."
According to the U.S. Census Bureau, more than 27 million Americans accounting for 18% of the labor force worked primarily from home in 2021, triple the number in 2019. Millions more have shifted to hybrid arrangements allowing them to work from home at least some days, driving down office occupancy rates in major U.S. cities.
Kastle, a facilities security provider that estimates office occupancy rates based on access data from 2,600 buildings in 47 U.S. states, says occupancy in the top 10 U.S. office markets is down more than 50% since the start of the pandemic.
The effect has been particularly dramatic in San Francisco, where Salesforce (CRM) offered workers the option of fully remote work in 2021. By late 2022, the software giant began requiring sales staff to work from office three days a week. “Even at Salesforce we have what I would call factory jobs—folks that are required to be here,” Salesforce CEO Marc Benioff told Bloomberg. “But we’re never going back to how it was.” Benioff has also reportedly told employees he suspects remote workers may be less productive.
In many cases, companies have found remote workers are at least as productive as the office staff, while requiring lower overhead for office rent and other costs. Tesla (TSLA) and Twitter CEO Elon Musk, a longtime critic of work from home who initially banned the practice at Twitter, appears to be among the latest converts, at least on the short-term basis. After Twitter recently closed its Seattle offices, the company reportedly told workers there to telecommute.
Among the most enthusiastic supporters of work from home is the U.S. government, the country's largest civilian employer after Walmart (WMT) with 2.1 million workers. Telework has increased engagement among federal government workers and is increasingly driving job changes in government employees, Office of Personnel Management (OPM) Director Kiran Ahuja told a congressional committee last year. "What we are seeing is agency-hopping, based on where employees see the level of flexibility," Ahuja said.
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https://www.investopedia.com/terms/d/dollarcostaveraging.asp | Dollar-Cost Averaging (DCA) Explained With Examples and Considerations | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-dollar-cost-averaging"></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 Dollar-Cost Averaging? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Investing can be challenging. Even experienced investors who try to time the market to buy at the most opportune moments can come up short.
</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"> Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor's effort to invest regularly.
</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"> Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> on the their portfolios.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In effect, this strategy eliminates the effort required to attempt to time the market to buy at the best prices.
</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"> Dollar-cost averaging is also known as the constant dollar plan.
</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-whatyouneedtoknow" 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">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security.</li><li>Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share.</li><li>By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices.</li><li>Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price.</li><li>Beginning and long-time investors can both benefit from dollar-cost averaging.</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 / Jiaqi Zhou</p></span>
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<span class="heading-toc" id="toc-how-dollar-cost-averaging-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> How Dollar-Cost Averaging Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Dollar-cost averaging is a simple tool that an investor can use to build savings and wealth over the long term. It is also a way for an investor to ignore short-term volatility in the broader markets.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> A prime example of long-term dollar-cost averaging is its use in <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>, in which employees invest regularly regardless of the price of the investment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> With a 401(k) plan, employees can choose the amount they wish to contribute as well as those investments offered by the plan in which to invest. Then, investments are made automatically every pay period. Depending on the markets, employees might see a larger or smaller number securities added to their accounts.<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_22-0"> Dollar-cost averaging can also be used outside of 401(k) plans. For instance, investors can use it to make regular purchases of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index</a> funds, whether in another tax-advantaged account such as a traditional IRA or a taxable brokerage account.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Dollar-cost averaging is one of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp">best strategies for beginning investors</a> looking to trade ETFs. Additionally, many <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp">dividend reinvestment plans</a> allow investors to dollar-cost average by making purchases regularly.
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<span class="heading-toc" id="toc-benefits-of-dollar-cost-averaging"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> Benefits of Dollar-Cost Averaging </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li>Dollar cost averaging can lower the average amount you spend on investments.</li><li>It reinforces the practice of investing regularly to build wealth over time.</li><li>It's automatic and can take concerns about when to invest out of your hands.</li><li>It removes the pitfalls of market timing, such as buying only when prices have already risen.</li><li>It can ensure that you're already in the market and ready to buy when events send prices higher.</li><li>It takes emotion out of your investing and prevents you from potentially damaging your portfolio's returns.</li>
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<span class="heading-toc" id="toc-who-should-use-dollar-cost-averaging"></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"> Who Should Use Dollar-Cost Averaging? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The investment strategy of dollar-cost averaging can be used by any investor who wants to take advantage of its benefits, which include a potentially lower average cost, automatic investing over regular intervals of time, and a method that relieves them of the stress of having to make purchase decisions under pressure when the market is volatile.<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_32-0"> Dollar-cost averaging may be especially useful to beginning investors who don't yet have the experience or expertise to judge the most opportune moments to buy.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> It can also be a reliable strategy for long-term investors who are committed to investing regularly but don't have the time or inclination to watch the market and time their orders.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> However, dollar-cost averaging isn't for everyone. It isn't necessarily appropriate for those investing time periods when prices are trending steadily in one direction or the other. Be sure to consider your outlook for an investment plus the broader market when making the decision to use dollar-cost averaging.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Bear in mind that the repeated investing called for by dollar-cost averaging may result in higher transaction costs compared to investing a lump sum of money once.<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_40-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> It's important to note that dollar-cost averaging works well as a method of buying an investment over a specific period of time when the price fluctuates up and down. If the price rises continuously, those using dollar-cost averaging end up buying fewer shares. If it declines continuously, they may continue buying when they should be on the sidelines.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> So, the strategy cannot protect investors against the risk of declining market prices. Like the outlook of many long-term investors, the strategy assumes that prices, though they may drop at times, will ultimately rise.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Using this strategy to buy an individual stock without researching a company's details could prove detrimental, as well. That's because an investor might continue to buy more stock when they otherwise would stop buying or exit the position.
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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 less-informed investors, the strategy is far less <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risky</a> when used to buy index funds rather than individual stocks.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Investors who use a dollar-cost averaging strategy will generally lower their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/060313/what-determines-your-cost-basis.asp">cost basis</a> in an investment over time. The lower cost basis will lead to less of a loss on investments that decline in price and generate greater gains on investments that increase in price.
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<span class="heading-toc" id="toc-example-of-dollar-cost-averaging"></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"> Example of Dollar-Cost Averaging </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Joe works at ABC Corp. and has a 401(k) plan. He receives a paycheck of $1,000 every two weeks. Joe decides to allocate 10% or $100 of his pay to his employer’s plan every pay period.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> He chooses to contribute 50% of his allocation to a large cap mutual fund and 50% to an <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> index fund. Every two weeks 10%, or $100, of Joe’s pre-tax pay will buy $50 worth of each of these two funds regardless of the fund's price.
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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 table below shows the half of Joe's $100 contributions that went to the S&P 500 index fund over 10 pay periods. Throughout 10 paychecks, Joe invested a total of $500, or $50 per week. The price of the fund increased and decreased over that time.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <strong>The results of dollar-cost averaging:</strong>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Joe spent $500 in total over the 10 pay periods and bought 47.71 shares.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> He paid an average price of $10.48 ($500/47.71).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Joe bought different share amounts as the index fund increased and decreased in value due to market fluctuations.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> <strong>The results if Joe spent one lump sum:</strong>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Say that, instead of using dollar-cost averaging, Joe spent his $500 at one time in pay period 4. He paid $11 per share.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> That would have resulted in a purchase of 45.45 shares ($500/$11).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> There was no way for Joe to know the best time to buy. By using dollar-cost averaging, though, he was able to take advantage of several price drops despite the fact that the share price increased to over $11. He ended up with more shares (47.71) at a lower average price ($10.48).
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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>Image by Sabrina Jiang © Investopedia 2020</p></span>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_75-0"><span class="heading-toc" id="toc-is-dollar-cost-averaging-a-good-idea"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Dollar-Cost Averaging a Good Idea?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It can be. When dollar-cost averaging, you invest the same amount at regular intervals and by doing so, hopefully lower your average purchase price. You will already be in the market when prices drop and when they rise. For instance, you'll have exposure to dips when they happen and don't have to try to time them. By investing a fixed amount regularly, you will end up buying more shares when the price is lower than when it is higher.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_77-0"><span class="heading-toc" id="toc-why-do-some-investors-use-dollar-cost-averaging"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Do Some Investors Use Dollar-Cost Averaging?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The key advantage of dollar-cost averaging is that it reduces the negative effects of investor psychology and market timing on a portfolio. By committing to a dollar-cost averaging approach, investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline. Instead, dollar-cost averaging forces investors to focus on contributing a set amount of money each period while ignoring the price of the target security.<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_79-0"><span class="heading-toc" id="toc-how-often-should-you-invest-with-dollar-cost-averaging"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Often Should You Invest With Dollar-Cost Averaging?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>With regard to actually using the strategy, how often you use it may depend on your investment horizon, outlook on the market, and experience with investing. If your outlook is for a market in flux that will eventually rise, then you might try it. If a persistent bear market's at work, then it wouldn't be a smart strategy to use. If you're planning to use it for long-term investing and wonder what interval for buying makes sense, consider applying some of every paycheck to the regular purchases.</p></div>
</div></div> | ## What Is Dollar-Cost Averaging?
Investing can be challenging. Even experienced investors who try to time the market to buy at the most opportune moments can come up short.
Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor's effort to invest regularly.
Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of [volatility](https://www.investopedia.com/terms/v/volatility.asp) on the their portfolios.
In effect, this strategy eliminates the effort required to attempt to time the market to buy at the best prices.
Dollar-cost averaging is also known as the constant dollar plan.
### Key Takeaways
* Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security.
* Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share.
* By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices.
* Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price.
* Beginning and long-time investors can both benefit from dollar-cost averaging.
![Dollar-Cost Averaging (DCA) Definition]()
:max_bytes(150000):strip_icc()/Dollar-Cost-Averaging-DCA-f79fcd89eaa34bb7adad3dacc3129798.png)
Investopedia / Jiaqi Zhou
## How Dollar-Cost Averaging Works
Dollar-cost averaging is a simple tool that an investor can use to build savings and wealth over the long term. It is also a way for an investor to ignore short-term volatility in the broader markets.
A prime example of long-term dollar-cost averaging is its use in [401(k) plans](https://www.investopedia.com/terms/1/401kplan.asp), in which employees invest regularly regardless of the price of the investment.
With a 401(k) plan, employees can choose the amount they wish to contribute as well as those investments offered by the plan in which to invest. Then, investments are made automatically every pay period. Depending on the markets, employees might see a larger or smaller number securities added to their accounts.
Dollar-cost averaging can also be used outside of 401(k) plans. For instance, investors can use it to make regular purchases of [mutual](https://www.investopedia.com/terms/m/mutualfund.asp) or [index](https://www.investopedia.com/terms/i/indexfund.asp) funds, whether in another tax-advantaged account such as a traditional IRA or a taxable brokerage account.
Dollar-cost averaging is one of the [best strategies for beginning investors](https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp) looking to trade ETFs. Additionally, many [dividend reinvestment plans](https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp) allow investors to dollar-cost average by making purchases regularly.
## Benefits of Dollar-Cost Averaging
* Dollar cost averaging can lower the average amount you spend on investments.
* It reinforces the practice of investing regularly to build wealth over time.
* It's automatic and can take concerns about when to invest out of your hands.
* It removes the pitfalls of market timing, such as buying only when prices have already risen.
* It can ensure that you're already in the market and ready to buy when events send prices higher.
* It takes emotion out of your investing and prevents you from potentially damaging your portfolio's returns.
## Who Should Use Dollar-Cost Averaging?
The investment strategy of dollar-cost averaging can be used by any investor who wants to take advantage of its benefits, which include a potentially lower average cost, automatic investing over regular intervals of time, and a method that relieves them of the stress of having to make purchase decisions under pressure when the market is volatile.
Dollar-cost averaging may be especially useful to beginning investors who don't yet have the experience or expertise to judge the most opportune moments to buy.
It can also be a reliable strategy for long-term investors who are committed to investing regularly but don't have the time or inclination to watch the market and time their orders.
However, dollar-cost averaging isn't for everyone. It isn't necessarily appropriate for those investing time periods when prices are trending steadily in one direction or the other. Be sure to consider your outlook for an investment plus the broader market when making the decision to use dollar-cost averaging.
###
Bear in mind that the repeated investing called for by dollar-cost averaging may result in higher transaction costs compared to investing a lump sum of money once.
## Special Considerations
It's important to note that dollar-cost averaging works well as a method of buying an investment over a specific period of time when the price fluctuates up and down. If the price rises continuously, those using dollar-cost averaging end up buying fewer shares. If it declines continuously, they may continue buying when they should be on the sidelines.
So, the strategy cannot protect investors against the risk of declining market prices. Like the outlook of many long-term investors, the strategy assumes that prices, though they may drop at times, will ultimately rise.
Using this strategy to buy an individual stock without researching a company's details could prove detrimental, as well. That's because an investor might continue to buy more stock when they otherwise would stop buying or exit the position.
For less-informed investors, the strategy is far less [risky](https://www.investopedia.com/terms/r/risktolerance.asp) when used to buy index funds rather than individual stocks.
Investors who use a dollar-cost averaging strategy will generally lower their [cost basis](https://www.investopedia.com/articles/investing/060313/what-determines-your-cost-basis.asp) in an investment over time. The lower cost basis will lead to less of a loss on investments that decline in price and generate greater gains on investments that increase in price.
## Example of Dollar-Cost Averaging
Joe works at ABC Corp. and has a 401(k) plan. He receives a paycheck of $1,000 every two weeks. Joe decides to allocate 10% or $100 of his pay to his employer’s plan every pay period.
He chooses to contribute 50% of his allocation to a large cap mutual fund and 50% to an [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) index fund. Every two weeks 10%, or $100, of Joe’s pre-tax pay will buy $50 worth of each of these two funds regardless of the fund's price.
The table below shows the half of Joe's $100 contributions that went to the S&P 500 index fund over 10 pay periods. Throughout 10 paychecks, Joe invested a total of $500, or $50 per week. The price of the fund increased and decreased over that time.
**The results of dollar-cost averaging:**
Joe spent $500 in total over the 10 pay periods and bought 47.71 shares.
He paid an average price of $10.48 ($500/47.71).
Joe bought different share amounts as the index fund increased and decreased in value due to market fluctuations.
**The results if Joe spent one lump sum:**
Say that, instead of using dollar-cost averaging, Joe spent his $500 at one time in pay period 4. He paid $11 per share.
That would have resulted in a purchase of 45.45 shares ($500/$11).
There was no way for Joe to know the best time to buy. By using dollar-cost averaging, though, he was able to take advantage of several price drops despite the fact that the share price increased to over $11. He ended up with more shares (47.71) at a lower average price ($10.48).
![Image]()
:max_bytes(150000):strip_icc()/dotdash_Final_Dollar_Cost_Averaging_DCA_Aug_2020-01-65c3107f5de8437ba6397cafbd1093fc.jpg)
Image by Sabrina Jiang © Investopedia 2020
## Is Dollar-Cost Averaging a Good Idea?
It can be. When dollar-cost averaging, you invest the same amount at regular intervals and by doing so, hopefully lower your average purchase price. You will already be in the market when prices drop and when they rise. For instance, you'll have exposure to dips when they happen and don't have to try to time them. By investing a fixed amount regularly, you will end up buying more shares when the price is lower than when it is higher.
## Why Do Some Investors Use Dollar-Cost Averaging?
The key advantage of dollar-cost averaging is that it reduces the negative effects of investor psychology and market timing on a portfolio. By committing to a dollar-cost averaging approach, investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline. Instead, dollar-cost averaging forces investors to focus on contributing a set amount of money each period while ignoring the price of the target security.
## How Often Should You Invest With Dollar-Cost Averaging?
With regard to actually using the strategy, how often you use it may depend on your investment horizon, outlook on the market, and experience with investing. If your outlook is for a market in flux that will eventually rise, then you might try it. If a persistent bear market's at work, then it wouldn't be a smart strategy to use. If you're planning to use it for long-term investing and wonder what interval for buying makes sense, consider applying some of every paycheck to the regular purchases.
| What Is Dollar-Cost Averaging?
Investing can be challenging. Even experienced investors who try to time the market to buy at the most opportune moments can come up short.
Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor's effort to invest regularly.
Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of volatility on the their portfolios.
In effect, this strategy eliminates the effort required to attempt to time the market to buy at the best prices.
Dollar-cost averaging is also known as the constant dollar plan.
Key Takeaways
Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security.Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share.By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices.Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price.Beginning and long-time investors can both benefit from dollar-cost averaging.
Investopedia / Jiaqi Zhou
How Dollar-Cost Averaging Works
Dollar-cost averaging is a simple tool that an investor can use to build savings and wealth over the long term. It is also a way for an investor to ignore short-term volatility in the broader markets.
A prime example of long-term dollar-cost averaging is its use in 401(k) plans, in which employees invest regularly regardless of the price of the investment.
With a 401(k) plan, employees can choose the amount they wish to contribute as well as those investments offered by the plan in which to invest. Then, investments are made automatically every pay period. Depending on the markets, employees might see a larger or smaller number securities added to their accounts.
Dollar-cost averaging can also be used outside of 401(k) plans. For instance, investors can use it to make regular purchases of mutual or index funds, whether in another tax-advantaged account such as a traditional IRA or a taxable brokerage account.
Dollar-cost averaging is one of the best strategies for beginning investors looking to trade ETFs. Additionally, many dividend reinvestment plans allow investors to dollar-cost average by making purchases regularly.
Benefits of Dollar-Cost Averaging
Dollar cost averaging can lower the average amount you spend on investments.It reinforces the practice of investing regularly to build wealth over time.It's automatic and can take concerns about when to invest out of your hands.It removes the pitfalls of market timing, such as buying only when prices have already risen.It can ensure that you're already in the market and ready to buy when events send prices higher.It takes emotion out of your investing and prevents you from potentially damaging your portfolio's returns.
Who Should Use Dollar-Cost Averaging?
The investment strategy of dollar-cost averaging can be used by any investor who wants to take advantage of its benefits, which include a potentially lower average cost, automatic investing over regular intervals of time, and a method that relieves them of the stress of having to make purchase decisions under pressure when the market is volatile.
Dollar-cost averaging may be especially useful to beginning investors who don't yet have the experience or expertise to judge the most opportune moments to buy.
It can also be a reliable strategy for long-term investors who are committed to investing regularly but don't have the time or inclination to watch the market and time their orders.
However, dollar-cost averaging isn't for everyone. It isn't necessarily appropriate for those investing time periods when prices are trending steadily in one direction or the other. Be sure to consider your outlook for an investment plus the broader market when making the decision to use dollar-cost averaging.
Bear in mind that the repeated investing called for by dollar-cost averaging may result in higher transaction costs compared to investing a lump sum of money once.
Special Considerations
It's important to note that dollar-cost averaging works well as a method of buying an investment over a specific period of time when the price fluctuates up and down. If the price rises continuously, those using dollar-cost averaging end up buying fewer shares. If it declines continuously, they may continue buying when they should be on the sidelines.
So, the strategy cannot protect investors against the risk of declining market prices. Like the outlook of many long-term investors, the strategy assumes that prices, though they may drop at times, will ultimately rise.
Using this strategy to buy an individual stock without researching a company's details could prove detrimental, as well. That's because an investor might continue to buy more stock when they otherwise would stop buying or exit the position.
For less-informed investors, the strategy is far less risky when used to buy index funds rather than individual stocks.
Investors who use a dollar-cost averaging strategy will generally lower their cost basis in an investment over time. The lower cost basis will lead to less of a loss on investments that decline in price and generate greater gains on investments that increase in price.
Example of Dollar-Cost Averaging
Joe works at ABC Corp. and has a 401(k) plan. He receives a paycheck of $1,000 every two weeks. Joe decides to allocate 10% or $100 of his pay to his employer’s plan every pay period.
He chooses to contribute 50% of his allocation to a large cap mutual fund and 50% to an S&P 500 index fund. Every two weeks 10%, or $100, of Joe’s pre-tax pay will buy $50 worth of each of these two funds regardless of the fund's price.
The table below shows the half of Joe's $100 contributions that went to the S&P 500 index fund over 10 pay periods. Throughout 10 paychecks, Joe invested a total of $500, or $50 per week. The price of the fund increased and decreased over that time.
The results of dollar-cost averaging:
Joe spent $500 in total over the 10 pay periods and bought 47.71 shares.
He paid an average price of $10.48 ($500/47.71).
Joe bought different share amounts as the index fund increased and decreased in value due to market fluctuations.
The results if Joe spent one lump sum:
Say that, instead of using dollar-cost averaging, Joe spent his $500 at one time in pay period 4. He paid $11 per share.
That would have resulted in a purchase of 45.45 shares ($500/$11).
There was no way for Joe to know the best time to buy. By using dollar-cost averaging, though, he was able to take advantage of several price drops despite the fact that the share price increased to over $11. He ended up with more shares (47.71) at a lower average price ($10.48).
Image by Sabrina Jiang © Investopedia 2020
Is Dollar-Cost Averaging a Good Idea?
It can be. When dollar-cost averaging, you invest the same amount at regular intervals and by doing so, hopefully lower your average purchase price. You will already be in the market when prices drop and when they rise. For instance, you'll have exposure to dips when they happen and don't have to try to time them. By investing a fixed amount regularly, you will end up buying more shares when the price is lower than when it is higher.
Why Do Some Investors Use Dollar-Cost Averaging?
The key advantage of dollar-cost averaging is that it reduces the negative effects of investor psychology and market timing on a portfolio. By committing to a dollar-cost averaging approach, investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline. Instead, dollar-cost averaging forces investors to focus on contributing a set amount of money each period while ignoring the price of the target security.
How Often Should You Invest With Dollar-Cost Averaging?
With regard to actually using the strategy, how often you use it may depend on your investment horizon, outlook on the market, and experience with investing. If your outlook is for a market in flux that will eventually rise, then you might try it. If a persistent bear market's at work, then it wouldn't be a smart strategy to use. If you're planning to use it for long-term investing and wonder what interval for buying makes sense, consider applying some of every paycheck to the regular purchases.
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https://www.investopedia.com/articles/active-trading/021915/how-important-tape-reading-modern-markets.asp | How Important Is Tape Reading in Modern Markets? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tape-reading.asp">Tape readers</a> have an advantage over <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chartist.asp">chartists</a> because they can interpret <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intraday.asp">intraday</a> data in real time, filtering pages of numbers into surprisingly accurate predictions of short-term price movement. This near-legendary market skill has additional perks, allowing proponents to measure the emotional intensity of participants while they uncover the day's <a class="atom_link atom_valid" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market-leader.asp">leaders</a> and <a class="atom_link atom_valid" data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/laggard.asp">laggards</a>. Tape reading can add firepower to longer-term market strategies.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The basics of tape reading can be learned in a few minutes, but the practice takes a lifetime to master, for three reasons. First, the market is enormously complex, requiring many years of observation to understand how individual parts affect the whole. Second, <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/macroeconomics.asp">macro</a> forces that move world markets change over time, with <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quantitative-easing.asp">quantitative easing</a> controlling one cycle, while a <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/housing_bubble.asp">housing bubble</a> keeps markets afloat in another cycle. Third, and most importantly, the market structure has changed dramatically over the years, forcing tape readers to continuously learn new skill sets.
</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-revolution-in-market-structure"></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"> Revolution in Market Structure </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In the 1990s, 50-cent <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">bid-ask spreads</a> forced tape readers to abandon simple tickers and focus their attention on <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketdepth.asp">market depth</a> screens, commonly known as <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/06/level2quotes.asp">Level II</a>. This practice made money in the first few years because it read <a class="atom_link atom_valid" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/law-of-supply-demand.asp">supply and demand</a> accurately, showing the standing orders of big players as well as which <a class="atom_link atom_valid" data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp">market makers</a> were in control of the security's direction in that session.
</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 <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">SEC</a>'s <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/patterndaytrader.asp">pattern day trading</a> rule then came along in 2001, triggering an exodus of capital from equities into CME Globex <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfutures.asp">index futures</a>. In turn, those instruments have taken on enormous power, moving thousands of securities at a time.
</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"> Many tape readers abandoned Level II in the next few years, choosing instead to watch index futures for clues on broad equity impulses. Level II lost more adherents in 2007 with the adoption of the SEC's <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulation-nms.asp">Regulation NMS</a>, which opened the door to <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/high-frequency-trading.asp">high-frequency trading</a> (HFT) computers, <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dark_pool_liquidity.asp">dark pools</a><em> </em>and other <a class="atom_link atom_valid" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/algorithm.asp">algorithmic</a> code that now captures more than 70% of equity volume. Tape readers have adapted well to this electronic environment and now watch a broader array of market inputs than at any time in history.
</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"> Heard enough and want to become a skilled tape reader? Here are some tips and techniques to help you get started.
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<span class="heading-toc" id="toc-pre-market-preparation"></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"> Pre-Market Preparation </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/articles/active-trading/012915/premarket-routine-sets-stage-trading-day.asp">Start in the pre-market session</a>, looking at the overnight index futures. Keep a 60-minute, 24-hour <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a> index futures chart on your screen at all times, referencing overnight levels during the regular U.S. session. Check out whether that index is leading or lagging the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq100.asp">Nasdaq 100</a> and/or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">U.S. Treasury bond</a> futures. Nasdaq leadership and lagging bonds point to risk assumption, in which traders want to own more speculative instruments, while S&P 500 leadership and strong bonds suggest risk aversion, often driven by adverse events in other world markets.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Consider the impact of the projected open and how gaps will impact <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trading-psychology.asp">trader psychology</a>. Big gaps have become more common in recent years due to the rise in 24-hour trading, and playing them well requires careful strategies. Get ready by estimating how opening <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/print.asp">prints</a> will interact with overnight levels. A gap into an overnight high or low suggests <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rangeboundtrading.asp">range-bound</a> action that may yield a quick <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reversal.asp">reversal</a>, while a gap into levels not traded for days or weeks carries a higher likelihood of trend day<em> </em>action<em> </em>wherein major instruments thrust in a single direction for the most of the session.
</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-first-hour-tells"></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"> First-Hour Tells </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Note the opening prints on the S&P 500, Nasdaq 100 and <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell2000.asp">Russell 2000</a> futures or underlying <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds</a> (ETFs). The relationship between price swings and those levels presents the first tell of the day, with bulls in control above opening prints and bears in control beneath. Mark out the first 5- or 15-minute trading ranges, looking for small sideways patterns that could yield <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breakout.asp">breakouts</a> or <a class="atom_link atom_valid" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breakdown.asp">breakdowns</a> later in the session. Now, take your first look at the <a class="atom_link atom_valid" data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/relativestrength.asp">relative strength</a> and weakness, pulling up a list of the most liquid ETF for each major sector. Sort the list by percentage change, exposing the strongest and weakest funds in the first hour. This may also identify rotational strategies that persist for the entire session.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></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_22-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:85.9%;">
<img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/aUI2zZaJ__HS6I0jMQlpUBo-MGg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV_final_How_Important_Is_Tape_Reading_in_Modern_Markets_Jan_2021-01-52ec2362d71f4f70859fc55f60f8a9d4.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/aUI2zZaJ__HS6I0jMQlpUBo-MGg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV_final_How_Important_Is_Tape_Reading_in_Modern_Markets_Jan_2021-01-52ec2362d71f4f70859fc55f60f8a9d4.jpg" data-srcset="https://www.investopedia.com/thmb/2piciZ5wY6ZCYYSgVrTLfLoh-Bs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV_final_How_Important_Is_Tape_Reading_in_Modern_Markets_Jan_2021-01-52ec2362d71f4f70859fc55f60f8a9d4.jpg 750w" data-tracking-container="true" height="1897" id="mntl-sc-block-image_1-0" width="2207"/>
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<img alt="Image" class="img--noscript universal-image__image" height="1897" sizes="750px" src="https://www.investopedia.com/thmb/aUI2zZaJ__HS6I0jMQlpUBo-MGg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV_final_How_Important_Is_Tape_Reading_in_Modern_Markets_Jan_2021-01-52ec2362d71f4f70859fc55f60f8a9d4.jpg" srcset="https://www.investopedia.com/thmb/2piciZ5wY6ZCYYSgVrTLfLoh-Bs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV_final_How_Important_Is_Tape_Reading_in_Modern_Markets_Jan_2021-01-52ec2362d71f4f70859fc55f60f8a9d4.jpg 750w" width="2207"/>
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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>Image by Sabrina Jiang © Investopedia 2021</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Next, pull up the <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">NYSE</a> and Nasdaq <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/advancedeclineline.asp">advance/decline</a> and <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/upvolume.asp">up/down volume</a> indicators. These four data sets yield immensely useful tells on short-term capital flows. The advance-minus-decline variation also carves predictive intraday patterns, often ahead of price, as you can see above when the indicator reversed sharply after a strong January open. This reversal led to a nasty decline that dropped major indices deeply into the red.
</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"> Notice now a <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fibonacciretracement.asp">Fibonacci grid</a> over the initial plunge predicted the extent of a midday recovery, while swing lows near 1,000 defined support that broke in the last hour.
</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"> Now look at <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vix.asp">VIX</a>, recording observations about the morning tape. First, is it flashing red or green after the first hour, and is that number trending higher or lower? Rising VIX signals conflict or fear that favors lower prices, while dropping VIX reveals a speculative appetite that supports higher prices. Second, track <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divergence.asp">divergences</a> between VIX and index action because they often resolve with <a class="atom_link atom_valid" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitulation.asp">capitulative</a> behavior that forces the indicator or index to reverse and follow.
</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-midday-messages"></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"> Midday Messages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Track first-hour themes into the lunch hour, watching opening prints and market internals. Be especially vigilant when indices push well beyond prior closing prints and then reverse gears, pushing back in the other direction. Market tells become primary leading indicators at these <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflectionpoint.asp">inflection points</a>, often breaking out or reversing ahead of price. These can be used to build or add to intraday positions, or as exit signals, allowing you to take profits or losses ahead of the crowd that gets trapped by sudden changes in the market tone.
</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"> Pay special attention between 11:30 a.m. and noon Eastern time when European markets end their trading days, often forcing U.S. indices through key price levels. With other world markets closed, U.S. afternoons may elicit a second theme of the day, with internals shifting off morning messages, moving into new tells that last into the <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/closingbell.asp">closing bell</a>. This second wave may require a rework of morning strategies that includes exiting early <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/position.asp">positions</a> to avoid getting targeted by contrary price action.
</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-reading-the-final-hour"></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"> Reading the Final Hour </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Expect persistent intraday themes to reach their climax in the last hour, especially in the last 15 minutes. Index prices can surge much higher and lower during this period, with institutional capital coming off the sidelines, while algorithms work hard to shake out traders wanting to hold <a class="atom_link atom_valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overnight-position.asp">overnight positions</a>. <a class="atom_link atom_valid" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market_indicators.asp">Market internals</a> become your best friends at these critical junctures because they tell you what to expect into the closing bell. Numbers that expand or contract throughout the session predict that contrary strategies will fail, while mediocre numbers suggest a mixed close, with neither bulls nor bears happy about the outcome.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<span class="heading-toc" id="toc-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"> Tape readers interpret complex background data during the market day to gain a definable trading edge over the competition. Through experience and skill, they react to environmental changes well before price movement awakens the sleeping crowd.
</p></div> | [Tape readers](https://www.investopedia.com/terms/t/tape-reading.asp) have an advantage over [chartists](https://www.investopedia.com/terms/c/chartist.asp) because they can interpret [intraday](https://www.investopedia.com/terms/i/intraday.asp) data in real time, filtering pages of numbers into surprisingly accurate predictions of short-term price movement. This near-legendary market skill has additional perks, allowing proponents to measure the emotional intensity of participants while they uncover the day's [leaders](https://www.investopedia.com/terms/m/market-leader.asp) and [laggards](https://www.investopedia.com/terms/l/laggard.asp). Tape reading can add firepower to longer-term market strategies.
The basics of tape reading can be learned in a few minutes, but the practice takes a lifetime to master, for three reasons. First, the market is enormously complex, requiring many years of observation to understand how individual parts affect the whole. Second, [macro](https://www.investopedia.com/terms/m/macroeconomics.asp) forces that move world markets change over time, with [quantitative easing](https://www.investopedia.com/terms/q/quantitative-easing.asp) controlling one cycle, while a [housing bubble](https://www.investopedia.com/terms/h/housing_bubble.asp) keeps markets afloat in another cycle. Third, and most importantly, the market structure has changed dramatically over the years, forcing tape readers to continuously learn new skill sets.
## Revolution in Market Structure
In the 1990s, 50-cent [bid-ask spreads](https://www.investopedia.com/terms/b/bid-askspread.asp) forced tape readers to abandon simple tickers and focus their attention on [market depth](https://www.investopedia.com/terms/m/marketdepth.asp) screens, commonly known as [Level II](https://www.investopedia.com/articles/trading/06/level2quotes.asp). This practice made money in the first few years because it read [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp) accurately, showing the standing orders of big players as well as which [market makers](https://www.investopedia.com/terms/m/marketmaker.asp) were in control of the security's direction in that session.
The [SEC](https://www.investopedia.com/terms/s/sec.asp)'s [pattern day trading](https://www.investopedia.com/terms/p/patterndaytrader.asp) rule then came along in 2001, triggering an exodus of capital from equities into CME Globex [index futures](https://www.investopedia.com/terms/i/indexfutures.asp). In turn, those instruments have taken on enormous power, moving thousands of securities at a time.
Many tape readers abandoned Level II in the next few years, choosing instead to watch index futures for clues on broad equity impulses. Level II lost more adherents in 2007 with the adoption of the SEC's [Regulation NMS](https://www.investopedia.com/terms/r/regulation-nms.asp), which opened the door to [high-frequency trading](https://www.investopedia.com/terms/h/high-frequency-trading.asp) (HFT) computers, [dark pools](https://www.investopedia.com/terms/d/dark_pool_liquidity.asp)and other [algorithmic](https://www.investopedia.com/terms/a/algorithm.asp) code that now captures more than 70% of equity volume. Tape readers have adapted well to this electronic environment and now watch a broader array of market inputs than at any time in history.
Heard enough and want to become a skilled tape reader? Here are some tips and techniques to help you get started.
## Pre-Market Preparation
[Start in the pre-market session](https://www.investopedia.com/articles/active-trading/012915/premarket-routine-sets-stage-trading-day.asp), looking at the overnight index futures. Keep a 60-minute, 24-hour [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) index futures chart on your screen at all times, referencing overnight levels during the regular U.S. session. Check out whether that index is leading or lagging the [Nasdaq 100](https://www.investopedia.com/terms/n/nasdaq100.asp) and/or [U.S. Treasury bond](https://www.investopedia.com/terms/t/treasurybond.asp) futures. Nasdaq leadership and lagging bonds point to risk assumption, in which traders want to own more speculative instruments, while S&P 500 leadership and strong bonds suggest risk aversion, often driven by adverse events in other world markets.
Consider the impact of the projected open and how gaps will impact [trader psychology](https://www.investopedia.com/terms/t/trading-psychology.asp). Big gaps have become more common in recent years due to the rise in 24-hour trading, and playing them well requires careful strategies. Get ready by estimating how opening [prints](https://www.investopedia.com/terms/p/print.asp) will interact with overnight levels. A gap into an overnight high or low suggests [range-bound](https://www.investopedia.com/terms/r/rangeboundtrading.asp) action that may yield a quick [reversal](https://www.investopedia.com/terms/r/reversal.asp), while a gap into levels not traded for days or weeks carries a higher likelihood of trend dayactionwherein major instruments thrust in a single direction for the most of the session.
## First-Hour Tells
Note the opening prints on the S&P 500, Nasdaq 100 and [Russell 2000](https://www.investopedia.com/terms/r/russell2000.asp) futures or underlying [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs). The relationship between price swings and those levels presents the first tell of the day, with bulls in control above opening prints and bears in control beneath. Mark out the first 5- or 15-minute trading ranges, looking for small sideways patterns that could yield [breakouts](https://www.investopedia.com/terms/b/breakout.asp) or [breakdowns](https://www.investopedia.com/terms/b/breakdown.asp) later in the session. Now, take your first look at the [relative strength](https://www.investopedia.com/terms/r/relativestrength.asp) and weakness, pulling up a list of the most liquid ETF for each major sector. Sort the list by percentage change, exposing the strongest and weakest funds in the first hour. This may also identify rotational strategies that persist for the entire session.
![Image]()
:max_bytes(150000):strip_icc()/dotdash_INV_final_How_Important_Is_Tape_Reading_in_Modern_Markets_Jan_2021-01-52ec2362d71f4f70859fc55f60f8a9d4.jpg)
Image by Sabrina Jiang © Investopedia 2021
Next, pull up the [NYSE](https://www.investopedia.com/terms/n/nyse.asp) and Nasdaq [advance/decline](https://www.investopedia.com/terms/a/advancedeclineline.asp) and [up/down volume](https://www.investopedia.com/terms/u/upvolume.asp) indicators. These four data sets yield immensely useful tells on short-term capital flows. The advance-minus-decline variation also carves predictive intraday patterns, often ahead of price, as you can see above when the indicator reversed sharply after a strong January open. This reversal led to a nasty decline that dropped major indices deeply into the red.
Notice now a [Fibonacci grid](https://www.investopedia.com/terms/f/fibonacciretracement.asp) over the initial plunge predicted the extent of a midday recovery, while swing lows near 1,000 defined support that broke in the last hour.
Now look at [VIX](https://www.investopedia.com/terms/v/vix.asp), recording observations about the morning tape. First, is it flashing red or green after the first hour, and is that number trending higher or lower? Rising VIX signals conflict or fear that favors lower prices, while dropping VIX reveals a speculative appetite that supports higher prices. Second, track [divergences](https://www.investopedia.com/terms/d/divergence.asp) between VIX and index action because they often resolve with [capitulative](https://www.investopedia.com/terms/c/capitulation.asp) behavior that forces the indicator or index to reverse and follow.
## Midday Messages
Track first-hour themes into the lunch hour, watching opening prints and market internals. Be especially vigilant when indices push well beyond prior closing prints and then reverse gears, pushing back in the other direction. Market tells become primary leading indicators at these [inflection points](https://www.investopedia.com/terms/i/inflectionpoint.asp), often breaking out or reversing ahead of price. These can be used to build or add to intraday positions, or as exit signals, allowing you to take profits or losses ahead of the crowd that gets trapped by sudden changes in the market tone.
Pay special attention between 11:30 a.m. and noon Eastern time when European markets end their trading days, often forcing U.S. indices through key price levels. With other world markets closed, U.S. afternoons may elicit a second theme of the day, with internals shifting off morning messages, moving into new tells that last into the [closing bell](https://www.investopedia.com/terms/c/closingbell.asp). This second wave may require a rework of morning strategies that includes exiting early [positions](https://www.investopedia.com/terms/p/position.asp) to avoid getting targeted by contrary price action.
## Reading the Final Hour
Expect persistent intraday themes to reach their climax in the last hour, especially in the last 15 minutes. Index prices can surge much higher and lower during this period, with institutional capital coming off the sidelines, while algorithms work hard to shake out traders wanting to hold [overnight positions](https://www.investopedia.com/terms/o/overnight-position.asp). [Market internals](https://www.investopedia.com/terms/m/market_indicators.asp) become your best friends at these critical junctures because they tell you what to expect into the closing bell. Numbers that expand or contract throughout the session predict that contrary strategies will fail, while mediocre numbers suggest a mixed close, with neither bulls nor bears happy about the outcome.
## The Bottom Line
Tape readers interpret complex background data during the market day to gain a definable trading edge over the competition. Through experience and skill, they react to environmental changes well before price movement awakens the sleeping crowd.
| Tape readers have an advantage over chartists because they can interpret intraday data in real time, filtering pages of numbers into surprisingly accurate predictions of short-term price movement. This near-legendary market skill has additional perks, allowing proponents to measure the emotional intensity of participants while they uncover the day's leaders and laggards. Tape reading can add firepower to longer-term market strategies.
The basics of tape reading can be learned in a few minutes, but the practice takes a lifetime to master, for three reasons. First, the market is enormously complex, requiring many years of observation to understand how individual parts affect the whole. Second, macro forces that move world markets change over time, with quantitative easing controlling one cycle, while a housing bubble keeps markets afloat in another cycle. Third, and most importantly, the market structure has changed dramatically over the years, forcing tape readers to continuously learn new skill sets.
Revolution in Market Structure
In the 1990s, 50-cent bid-ask spreads forced tape readers to abandon simple tickers and focus their attention on market depth screens, commonly known as Level II. This practice made money in the first few years because it read supply and demand accurately, showing the standing orders of big players as well as which market makers were in control of the security's direction in that session.
The SEC's pattern day trading rule then came along in 2001, triggering an exodus of capital from equities into CME Globex index futures. In turn, those instruments have taken on enormous power, moving thousands of securities at a time.
Many tape readers abandoned Level II in the next few years, choosing instead to watch index futures for clues on broad equity impulses. Level II lost more adherents in 2007 with the adoption of the SEC's Regulation NMS, which opened the door to high-frequency trading (HFT) computers, dark pools and other algorithmic code that now captures more than 70% of equity volume. Tape readers have adapted well to this electronic environment and now watch a broader array of market inputs than at any time in history.
Heard enough and want to become a skilled tape reader? Here are some tips and techniques to help you get started.
Pre-Market Preparation
Start in the pre-market session, looking at the overnight index futures. Keep a 60-minute, 24-hour S&P 500 index futures chart on your screen at all times, referencing overnight levels during the regular U.S. session. Check out whether that index is leading or lagging the Nasdaq 100 and/or U.S. Treasury bond futures. Nasdaq leadership and lagging bonds point to risk assumption, in which traders want to own more speculative instruments, while S&P 500 leadership and strong bonds suggest risk aversion, often driven by adverse events in other world markets.
Consider the impact of the projected open and how gaps will impact trader psychology. Big gaps have become more common in recent years due to the rise in 24-hour trading, and playing them well requires careful strategies. Get ready by estimating how opening prints will interact with overnight levels. A gap into an overnight high or low suggests range-bound action that may yield a quick reversal, while a gap into levels not traded for days or weeks carries a higher likelihood of trend day action wherein major instruments thrust in a single direction for the most of the session.
First-Hour Tells
Note the opening prints on the S&P 500, Nasdaq 100 and Russell 2000 futures or underlying exchange-traded funds (ETFs). The relationship between price swings and those levels presents the first tell of the day, with bulls in control above opening prints and bears in control beneath. Mark out the first 5- or 15-minute trading ranges, looking for small sideways patterns that could yield breakouts or breakdowns later in the session. Now, take your first look at the relative strength and weakness, pulling up a list of the most liquid ETF for each major sector. Sort the list by percentage change, exposing the strongest and weakest funds in the first hour. This may also identify rotational strategies that persist for the entire session.
Image by Sabrina Jiang © Investopedia 2021
Next, pull up the NYSE and Nasdaq advance/decline and up/down volume indicators. These four data sets yield immensely useful tells on short-term capital flows. The advance-minus-decline variation also carves predictive intraday patterns, often ahead of price, as you can see above when the indicator reversed sharply after a strong January open. This reversal led to a nasty decline that dropped major indices deeply into the red.
Notice now a Fibonacci grid over the initial plunge predicted the extent of a midday recovery, while swing lows near 1,000 defined support that broke in the last hour.
Now look at VIX, recording observations about the morning tape. First, is it flashing red or green after the first hour, and is that number trending higher or lower? Rising VIX signals conflict or fear that favors lower prices, while dropping VIX reveals a speculative appetite that supports higher prices. Second, track divergences between VIX and index action because they often resolve with capitulative behavior that forces the indicator or index to reverse and follow.
Midday Messages
Track first-hour themes into the lunch hour, watching opening prints and market internals. Be especially vigilant when indices push well beyond prior closing prints and then reverse gears, pushing back in the other direction. Market tells become primary leading indicators at these inflection points, often breaking out or reversing ahead of price. These can be used to build or add to intraday positions, or as exit signals, allowing you to take profits or losses ahead of the crowd that gets trapped by sudden changes in the market tone.
Pay special attention between 11:30 a.m. and noon Eastern time when European markets end their trading days, often forcing U.S. indices through key price levels. With other world markets closed, U.S. afternoons may elicit a second theme of the day, with internals shifting off morning messages, moving into new tells that last into the closing bell. This second wave may require a rework of morning strategies that includes exiting early positions to avoid getting targeted by contrary price action.
Reading the Final Hour
Expect persistent intraday themes to reach their climax in the last hour, especially in the last 15 minutes. Index prices can surge much higher and lower during this period, with institutional capital coming off the sidelines, while algorithms work hard to shake out traders wanting to hold overnight positions. Market internals become your best friends at these critical junctures because they tell you what to expect into the closing bell. Numbers that expand or contract throughout the session predict that contrary strategies will fail, while mediocre numbers suggest a mixed close, with neither bulls nor bears happy about the outcome.
The Bottom Line
Tape readers interpret complex background data during the market day to gain a definable trading edge over the competition. Through experience and skill, they react to environmental changes well before price movement awakens the sleeping crowd.
| [
[
"Tape readers",
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],
[
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],
[
"intraday",
"https://www.investopedia.com/terms/i/intraday.asp"
],
[
"leaders",
"https://www.investopedia.com/terms/m/market-leader.asp"
],
[
"laggards",
"https://www.investopedia.com/terms/l/laggard.asp"
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https://www.investopedia.com/food-insecurity-and-its-impact-on-the-stock-market-7968108 | Food Insecurity and Its Impact on the Stock Market | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Food insecurity is generally considered an economic and social issue, though not one that affects the stock market. Nevertheless, its ramifications involve the food, retail, and consumer goods sectors, and it can be a symptom of broader economic problems, including poverty, unemployment, and inflation.
</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 struggle of households to put food on the table can also indirectly influence stock valuations and investment returns. In essence, the tendrils of food insecurity stretch into the core mechanisms of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockmarket.asp">stock market</a>, affecting consumer behavior, corporate earnings, and even investor sentiment. Recognizing these connections reveals a more nuanced understanding of market dynamics, as well as pathways for investors to contribute to solutions.
</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 article explores how food insecurity impacts <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/03/060303.asp">market trends</a>, what that means for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a>, and the efforts underway to fight this complex issue.
</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>Food insecurity, a lack of access to affordable food, is an ongoing problem in the developed and developing world, including more than 10% of American households.</li><li>Food insecurity can affect consumer spending, which in turn could dampen corporate earnings and stock valuations.</li><li>Companies in the food and retail sectors are particularly sensitive to increases in food insecurity.</li><li>Socially responsible investing can offer a pathway for investors to help combat food insecurity while achieving financial returns.</li><li>Food insecurity, however, is a complex and pervasive issue that disproportionately impacts lower-income and minority households. Therefore, investors alone cannot solve the problem of addressing persistent structural inequalities and poverty.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-food-insecurity-affects-the-stock-market"></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 Food Insecurity Affects the Stock Market </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">12.8%</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>In 2022, more than 12% of American households had food insecurity during the year, and 5.1% or 6.8 million households had very low food security, according to government statistics.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/food-insecurity-impacts-economy-8303222">Food insecurity</a> is a lack of reliable access and ability to affordable food. It’s not just about hunger; it’s a complex condition that involves economic, social, and geographic factors. In simple terms, if a household is uncertain about where its next meal will come from or has to choose between food and other basic needs like healthcare or housing, then it’s facing food insecurity.<span class="ql-inline-citation" data-cite="6"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Food insecurity can set off a chain reaction that eventually reaches the stock market. It starts at the household level, where the struggle to afford food frequently leads to reduced spending in other areas. When families cut back on food spending, they often cut expenditures in other sectors, such as retail, entertainment, and healthcare.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> This decline in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-spending.asp">consumer spending</a> has a cascading effect on businesses. Companies that rely on consumer demand could see revenues drop, resulting in lower profit margins. In turn, these diminished earnings can negatively influence their stock prices.
</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 stocks of companies in certain <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sectors</a> are more exposed to the consequences of food insecurity than others. For example, companies in the food and beverage industry may experience decreased sales as consumers turn to cheaper options—or none at all. Retailers, particularly those selling nonessential items, could have a slump in demand. Even the healthcare sector can be impacted as food-insecure individuals delay or forgo medical treatments because of financial constraints, affecting the revenue streams of healthcare companies.
</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"> Beyond these tangible financial effects, food insecurity can also influence <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/investorsentiment.asp">investor sentiment</a>. For instance, rising levels of food insecurity could indicate economic instability, making investors more cautious. This caution might be seen in reduced investments in stocks considered to be riskier, contributing to market <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a>.
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Consumer spending is not the only factor that affects corporate earnings and stock valuations. Other factors, such as supply shocks, technological innovations, competition, regulations, taxes, interest rates, exchange rates, or geopolitical events, can significantly affect the profitability and attractiveness of different businesses and industries. Therefore, the relationship among food insecurity, corporate earnings, and stock valuations is neither straightforward nor deterministic.</p></div></div></div>
<span class="heading-toc" id="toc-what-food-insecurity-means-for-investors"></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"> What Food Insecurity Means for Investors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Traditionally, investors look at indicators like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">price-to-earnings (P/E) ratios</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendyield.asp">dividend yields</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earningsreport.asp">earnings reports</a> to assess the health and potential profitability of stocks. While these remain undoubtedly important, incorporating food insecurity data can add another layer to risk evaluation.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Learning that certain sectors like food and retail are more sensitive to fluctuations in food insecurity levels allows investors to weigh their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolios</a> accordingly. For instance, if food insecurity rises, then stocks in these sectors might become riskier. Additionally, food insecurity can vary significantly by region. Investing in companies with heavy exposure to areas with high levels of food insecurity might also be seen as a higher risk.
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<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"> Food insecurity frequently correlates with broader economic conditions. For example, high levels of food insecurity could be an early warning sign of a looming recession. By keeping an eye on this metric, investors can be better equipped to navigate market downturns or capitalize on emerging opportunities.
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<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-tip" 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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Donating a part of your investment gains to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sri.asp">nonprofit organizations working to combat food insecurity</a> can provide help as well as offer tax advantages. In many jurisdictions, charitable donations are tax-deductible, which can offset some of the capital gains tax you might owe on your investments.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<span class="heading-toc" id="toc-fighting-food-insecurity"></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"> Fighting Food Insecurity </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Governments worldwide use strategies to combat food insecurity, each tailored to their respective nations’ distinctive challenges and resources. While the methods may vary, the goals are generally the same: to ensure that all citizens have reliable access to sufficient, healthy food. These include setting up and supporting direct food programs like food banks and food vouchers, such as the <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> in the United States. Providing free or subsidized meals in schools is another way to directly alleviate food insecurity among children and, by extension, their families.
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<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"> Investors can have a role in the fight against food insecurity. Not only do they frequently have the financial resources to make a difference, but they also can influence corporate behavior and public policy.
</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"> Investors can try to influence change by consciously choosing to invest in companies that are committed to reducing food insecurity. Look for companies with clearly defined <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corp-social-responsibility.asp">corporate social responsibility (CSR)</a> programs to reduce food insecurity or related issues like poverty. This could range from food companies sourcing their products sustainably to technology companies developing platforms that help redistribute excess food.
</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 that report their social impact metrics transparently can help you see what they are doing. Investing in companies with strong social initiatives is not just about doing good; it can also benefit your portfolio. Research has shown that companies with strong CSR initiatives frequently have a lower cost of capital, lower volatility, and higher profitability.<span class="ql-inline-citation" data-cite="7"></span>
</p>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Areas called “food deserts” have limited access to affordable and nutritious food, making it harder for residents to maintain a healthy diet. In the U.S., there are counties that do not have a single grocery store, mainly in the Great Plains and Midwest regions.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_44-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://gisportal.ers.usda.gov/portal/apps/experiencebuilder/experience/?id=a53ebd7396cd4ac3a3ed09137676fd40" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Food Deserts in the U.S."></iframe>
<cite class="comp mntl-sc-block-iframe__caption mntl-text-block" id="mntl-sc-block-iframe__caption_1-0">Food Deserts in the U.S.</cite></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-how-does-food-insecurity-impact-the-economy"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Food Insecurity Impact the Economy?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Food insecurity reduces consumer spending among those struggling, which can contribute to lower economic growth. The public costs of addressing health and educational disparities caused by food insecurity can also weigh on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economy.asp">economy</a> to a certain degree.</p></div>
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<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-where-does-food-insecurity-have-the-greatest-impact"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Does Food Insecurity Have the Greatest Impact?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Food insecurity has the most significant impact in low-income communities and countries with high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/poverty.asp">poverty</a> rates. These areas are frequently ensnared in a cycle of poverty and food insecurity that hampers economic development.</p><p>Countries facing critical levels of food insecurity in 2022 include Afghanistan, the Central African Republic, the Democratic Republic of the Congo, Ethiopia, Haiti, Honduras, Somalia, South Sudan, Sudan, Syria, and Yemen.<span class="ql-inline-citation" data-cite="2"></span></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_50-0"><span class="heading-toc" id="toc-how-can-food-insecurity-impact-the-workforce"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can Food Insecurity Impact the Workforce?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Food insecurity can lead to health problems and decreased productivity among workers, affecting individual lives and overall economic output. When workers face health issues because of inadequate nutrition, they are more likely to miss work or perform at suboptimal levels, leading to decreased productivity.</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-why-is-food-insecurity-a-problem-in-the-us"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is Food Insecurity a Problem in the U.S.?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Despite being a wealthy nation, the U.S. grapples with food insecurity because of income and wealth disparities, structural inequalities, and inadequate social safety nets. Official statistics report that more than 12% of American households faced some degree of food insecurity during 2022, affecting tens of millions of people.<span class="ql-inline-citation" data-cite="1"></span></p><p>The U.S. government has taken steps to better address food insecurity, especially during the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723">COVID-19 pandemic</a>, through stimulus packages, extensions of unemployment benefits, and expansions of food assistance programs. However, these were mostly short-term solutions not meant to address the systemic issues that lead to food insecurity.<span class="ql-inline-citation" data-cite="10"></span> While programs like SNAP exist, they frequently provide insufficient support to completely alleviate food insecurity.<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_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"> Food insecurity is a problem affecting millions of Americans and many millions more around the world. This lack of access or affordability to food is not an isolated problem; it has far-reaching implications that may include influencing the stock market. Understanding this connection can help investors make more informed decisions and potentially contribute to solutions that alleviate this pressing issue.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Food insecurity in the U.S. gained attention and worsened during the COVID-19 pandemic.<span class="ql-inline-citation" data-cite="3"></span> It is a complex issue requiring multifaceted solutions, involving not just food assistance but also broader economic and social reforms.
</p></div> | Food insecurity is generally considered an economic and social issue, though not one that affects the stock market. Nevertheless, its ramifications involve the food, retail, and consumer goods sectors, and it can be a symptom of broader economic problems, including poverty, unemployment, and inflation.
The struggle of households to put food on the table can also indirectly influence stock valuations and investment returns. In essence, the tendrils of food insecurity stretch into the core mechanisms of the [stock market](https://www.investopedia.com/terms/s/stockmarket.asp), affecting consumer behavior, corporate earnings, and even investor sentiment. Recognizing these connections reveals a more nuanced understanding of market dynamics, as well as pathways for investors to contribute to solutions.
This article explores how food insecurity impacts [market trends](https://www.investopedia.com/articles/technical/03/060303.asp), what that means for [investors](https://www.investopedia.com/terms/i/investor.asp), and the efforts underway to fight this complex issue.
### Key Takeaways
* Food insecurity, a lack of access to affordable food, is an ongoing problem in the developed and developing world, including more than 10% of American households.
* Food insecurity can affect consumer spending, which in turn could dampen corporate earnings and stock valuations.
* Companies in the food and retail sectors are particularly sensitive to increases in food insecurity.
* Socially responsible investing can offer a pathway for investors to help combat food insecurity while achieving financial returns.
* Food insecurity, however, is a complex and pervasive issue that disproportionately impacts lower-income and minority households. Therefore, investors alone cannot solve the problem of addressing persistent structural inequalities and poverty.
## How Food Insecurity Affects the Stock Market
### 12.8%
In 2022, more than 12% of American households had food insecurity during the year, and 5.1% or 6.8 million households had very low food security, according to government statistics.
[Food insecurity](https://www.investopedia.com/food-insecurity-impacts-economy-8303222) is a lack of reliable access and ability to affordable food. It’s not just about hunger; it’s a complex condition that involves economic, social, and geographic factors. In simple terms, if a household is uncertain about where its next meal will come from or has to choose between food and other basic needs like healthcare or housing, then it’s facing food insecurity.
Food insecurity can set off a chain reaction that eventually reaches the stock market. It starts at the household level, where the struggle to afford food frequently leads to reduced spending in other areas. When families cut back on food spending, they often cut expenditures in other sectors, such as retail, entertainment, and healthcare.
This decline in [consumer spending](https://www.investopedia.com/terms/c/consumer-spending.asp) has a cascading effect on businesses. Companies that rely on consumer demand could see revenues drop, resulting in lower profit margins. In turn, these diminished earnings can negatively influence their stock prices.
The stocks of companies in certain [sectors](https://www.investopedia.com/terms/s/sector.asp) are more exposed to the consequences of food insecurity than others. For example, companies in the food and beverage industry may experience decreased sales as consumers turn to cheaper options—or none at all. Retailers, particularly those selling nonessential items, could have a slump in demand. Even the healthcare sector can be impacted as food-insecure individuals delay or forgo medical treatments because of financial constraints, affecting the revenue streams of healthcare companies.
Beyond these tangible financial effects, food insecurity can also influence [investor sentiment](https://www.investopedia.com/ask/answers/06/investorsentiment.asp). For instance, rising levels of food insecurity could indicate economic instability, making investors more cautious. This caution might be seen in reduced investments in stocks considered to be riskier, contributing to market [volatility](https://www.investopedia.com/terms/v/volatility.asp).
###
Consumer spending is not the only factor that affects corporate earnings and stock valuations. Other factors, such as supply shocks, technological innovations, competition, regulations, taxes, interest rates, exchange rates, or geopolitical events, can significantly affect the profitability and attractiveness of different businesses and industries. Therefore, the relationship among food insecurity, corporate earnings, and stock valuations is neither straightforward nor deterministic.
## What Food Insecurity Means for Investors
Traditionally, investors look at indicators like [price-to-earnings (P/E) ratios](https://www.investopedia.com/terms/p/price-earningsratio.asp), [dividend yields](https://www.investopedia.com/terms/d/dividendyield.asp), and [earnings reports](https://www.investopedia.com/terms/e/earningsreport.asp) to assess the health and potential profitability of stocks. While these remain undoubtedly important, incorporating food insecurity data can add another layer to risk evaluation.
Learning that certain sectors like food and retail are more sensitive to fluctuations in food insecurity levels allows investors to weigh their [portfolios](https://www.investopedia.com/terms/p/portfolio.asp) accordingly. For instance, if food insecurity rises, then stocks in these sectors might become riskier. Additionally, food insecurity can vary significantly by region. Investing in companies with heavy exposure to areas with high levels of food insecurity might also be seen as a higher risk.
Food insecurity frequently correlates with broader economic conditions. For example, high levels of food insecurity could be an early warning sign of a looming recession. By keeping an eye on this metric, investors can be better equipped to navigate market downturns or capitalize on emerging opportunities.
###
Donating a part of your investment gains to [nonprofit organizations working to combat food insecurity](https://www.investopedia.com/terms/s/sri.asp) can provide help as well as offer tax advantages. In many jurisdictions, charitable donations are tax-deductible, which can offset some of the capital gains tax you might owe on your investments.
## Fighting Food Insecurity
Governments worldwide use strategies to combat food insecurity, each tailored to their respective nations’ distinctive challenges and resources. While the methods may vary, the goals are generally the same: to ensure that all citizens have reliable access to sufficient, healthy food. These include setting up and supporting direct food programs like food banks and food vouchers, such as the [Supplemental Nutrition Assistance Program (SNAP)](https://www.investopedia.com/supplemental-nutrition-assistance-program-snap-5187718) in the United States. Providing free or subsidized meals in schools is another way to directly alleviate food insecurity among children and, by extension, their families.
Investors can have a role in the fight against food insecurity. Not only do they frequently have the financial resources to make a difference, but they also can influence corporate behavior and public policy.
Investors can try to influence change by consciously choosing to invest in companies that are committed to reducing food insecurity. Look for companies with clearly defined [corporate social responsibility (CSR)](https://www.investopedia.com/terms/c/corp-social-responsibility.asp) programs to reduce food insecurity or related issues like poverty. This could range from food companies sourcing their products sustainably to technology companies developing platforms that help redistribute excess food.
Companies that report their social impact metrics transparently can help you see what they are doing. Investing in companies with strong social initiatives is not just about doing good; it can also benefit your portfolio. Research has shown that companies with strong CSR initiatives frequently have a lower cost of capital, lower volatility, and higher profitability.
###
Areas called “food deserts” have limited access to affordable and nutritious food, making it harder for residents to maintain a healthy diet. In the U.S., there are counties that do not have a single grocery store, mainly in the Great Plains and Midwest regions.
Food Deserts in the U.S.
## How Does Food Insecurity Impact the Economy?
Food insecurity reduces consumer spending among those struggling, which can contribute to lower economic growth. The public costs of addressing health and educational disparities caused by food insecurity can also weigh on the [economy](https://www.investopedia.com/terms/e/economy.asp) to a certain degree.
## Where Does Food Insecurity Have the Greatest Impact?
Food insecurity has the most significant impact in low-income communities and countries with high [poverty](https://www.investopedia.com/terms/p/poverty.asp) rates. These areas are frequently ensnared in a cycle of poverty and food insecurity that hampers economic development.
Countries facing critical levels of food insecurity in 2022 include Afghanistan, the Central African Republic, the Democratic Republic of the Congo, Ethiopia, Haiti, Honduras, Somalia, South Sudan, Sudan, Syria, and Yemen.
## How Can Food Insecurity Impact the Workforce?
Food insecurity can lead to health problems and decreased productivity among workers, affecting individual lives and overall economic output. When workers face health issues because of inadequate nutrition, they are more likely to miss work or perform at suboptimal levels, leading to decreased productivity.
## Why Is Food Insecurity a Problem in the U.S.?
Despite being a wealthy nation, the U.S. grapples with food insecurity because of income and wealth disparities, structural inequalities, and inadequate social safety nets. Official statistics report that more than 12% of American households faced some degree of food insecurity during 2022, affecting tens of millions of people.
The U.S. government has taken steps to better address food insecurity, especially during the [COVID-19 pandemic](https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723), through stimulus packages, extensions of unemployment benefits, and expansions of food assistance programs. However, these were mostly short-term solutions not meant to address the systemic issues that lead to food insecurity. While programs like SNAP exist, they frequently provide insufficient support to completely alleviate food insecurity.
## The Bottom Line
Food insecurity is a problem affecting millions of Americans and many millions more around the world. This lack of access or affordability to food is not an isolated problem; it has far-reaching implications that may include influencing the stock market. Understanding this connection can help investors make more informed decisions and potentially contribute to solutions that alleviate this pressing issue.
Food insecurity in the U.S. gained attention and worsened during the COVID-19 pandemic. It is a complex issue requiring multifaceted solutions, involving not just food assistance but also broader economic and social reforms.
| Food insecurity is generally considered an economic and social issue, though not one that affects the stock market. Nevertheless, its ramifications involve the food, retail, and consumer goods sectors, and it can be a symptom of broader economic problems, including poverty, unemployment, and inflation.
The struggle of households to put food on the table can also indirectly influence stock valuations and investment returns. In essence, the tendrils of food insecurity stretch into the core mechanisms of the stock market, affecting consumer behavior, corporate earnings, and even investor sentiment. Recognizing these connections reveals a more nuanced understanding of market dynamics, as well as pathways for investors to contribute to solutions.
This article explores how food insecurity impacts market trends, what that means for investors, and the efforts underway to fight this complex issue.
Key Takeaways
Food insecurity, a lack of access to affordable food, is an ongoing problem in the developed and developing world, including more than 10% of American households.Food insecurity can affect consumer spending, which in turn could dampen corporate earnings and stock valuations.Companies in the food and retail sectors are particularly sensitive to increases in food insecurity.Socially responsible investing can offer a pathway for investors to help combat food insecurity while achieving financial returns.Food insecurity, however, is a complex and pervasive issue that disproportionately impacts lower-income and minority households. Therefore, investors alone cannot solve the problem of addressing persistent structural inequalities and poverty.
How Food Insecurity Affects the Stock Market
12.8%
In 2022, more than 12% of American households had food insecurity during the year, and 5.1% or 6.8 million households had very low food security, according to government statistics.
Food insecurity is a lack of reliable access and ability to affordable food. It’s not just about hunger; it’s a complex condition that involves economic, social, and geographic factors. In simple terms, if a household is uncertain about where its next meal will come from or has to choose between food and other basic needs like healthcare or housing, then it’s facing food insecurity.
Food insecurity can set off a chain reaction that eventually reaches the stock market. It starts at the household level, where the struggle to afford food frequently leads to reduced spending in other areas. When families cut back on food spending, they often cut expenditures in other sectors, such as retail, entertainment, and healthcare.
This decline in consumer spending has a cascading effect on businesses. Companies that rely on consumer demand could see revenues drop, resulting in lower profit margins. In turn, these diminished earnings can negatively influence their stock prices.
The stocks of companies in certain sectors are more exposed to the consequences of food insecurity than others. For example, companies in the food and beverage industry may experience decreased sales as consumers turn to cheaper options—or none at all. Retailers, particularly those selling nonessential items, could have a slump in demand. Even the healthcare sector can be impacted as food-insecure individuals delay or forgo medical treatments because of financial constraints, affecting the revenue streams of healthcare companies.
Beyond these tangible financial effects, food insecurity can also influence investor sentiment. For instance, rising levels of food insecurity could indicate economic instability, making investors more cautious. This caution might be seen in reduced investments in stocks considered to be riskier, contributing to market volatility.
Consumer spending is not the only factor that affects corporate earnings and stock valuations. Other factors, such as supply shocks, technological innovations, competition, regulations, taxes, interest rates, exchange rates, or geopolitical events, can significantly affect the profitability and attractiveness of different businesses and industries. Therefore, the relationship among food insecurity, corporate earnings, and stock valuations is neither straightforward nor deterministic.
What Food Insecurity Means for Investors
Traditionally, investors look at indicators like price-to-earnings (P/E) ratios, dividend yields, and earnings reports to assess the health and potential profitability of stocks. While these remain undoubtedly important, incorporating food insecurity data can add another layer to risk evaluation.
Learning that certain sectors like food and retail are more sensitive to fluctuations in food insecurity levels allows investors to weigh their portfolios accordingly. For instance, if food insecurity rises, then stocks in these sectors might become riskier. Additionally, food insecurity can vary significantly by region. Investing in companies with heavy exposure to areas with high levels of food insecurity might also be seen as a higher risk.
Food insecurity frequently correlates with broader economic conditions. For example, high levels of food insecurity could be an early warning sign of a looming recession. By keeping an eye on this metric, investors can be better equipped to navigate market downturns or capitalize on emerging opportunities.
Donating a part of your investment gains to nonprofit organizations working to combat food insecurity can provide help as well as offer tax advantages. In many jurisdictions, charitable donations are tax-deductible, which can offset some of the capital gains tax you might owe on your investments.
Fighting Food Insecurity
Governments worldwide use strategies to combat food insecurity, each tailored to their respective nations’ distinctive challenges and resources. While the methods may vary, the goals are generally the same: to ensure that all citizens have reliable access to sufficient, healthy food. These include setting up and supporting direct food programs like food banks and food vouchers, such as the Supplemental Nutrition Assistance Program (SNAP) in the United States. Providing free or subsidized meals in schools is another way to directly alleviate food insecurity among children and, by extension, their families.
Investors can have a role in the fight against food insecurity. Not only do they frequently have the financial resources to make a difference, but they also can influence corporate behavior and public policy.
Investors can try to influence change by consciously choosing to invest in companies that are committed to reducing food insecurity. Look for companies with clearly defined corporate social responsibility (CSR) programs to reduce food insecurity or related issues like poverty. This could range from food companies sourcing their products sustainably to technology companies developing platforms that help redistribute excess food.
Companies that report their social impact metrics transparently can help you see what they are doing. Investing in companies with strong social initiatives is not just about doing good; it can also benefit your portfolio. Research has shown that companies with strong CSR initiatives frequently have a lower cost of capital, lower volatility, and higher profitability.
Areas called “food deserts” have limited access to affordable and nutritious food, making it harder for residents to maintain a healthy diet. In the U.S., there are counties that do not have a single grocery store, mainly in the Great Plains and Midwest regions.
Food Deserts in the U.S.
How Does Food Insecurity Impact the Economy?
Food insecurity reduces consumer spending among those struggling, which can contribute to lower economic growth. The public costs of addressing health and educational disparities caused by food insecurity can also weigh on the economy to a certain degree.
Where Does Food Insecurity Have the Greatest Impact?
Food insecurity has the most significant impact in low-income communities and countries with high poverty rates. These areas are frequently ensnared in a cycle of poverty and food insecurity that hampers economic development.Countries facing critical levels of food insecurity in 2022 include Afghanistan, the Central African Republic, the Democratic Republic of the Congo, Ethiopia, Haiti, Honduras, Somalia, South Sudan, Sudan, Syria, and Yemen.
How Can Food Insecurity Impact the Workforce?
Food insecurity can lead to health problems and decreased productivity among workers, affecting individual lives and overall economic output. When workers face health issues because of inadequate nutrition, they are more likely to miss work or perform at suboptimal levels, leading to decreased productivity.
Why Is Food Insecurity a Problem in the U.S.?
Despite being a wealthy nation, the U.S. grapples with food insecurity because of income and wealth disparities, structural inequalities, and inadequate social safety nets. Official statistics report that more than 12% of American households faced some degree of food insecurity during 2022, affecting tens of millions of people.The U.S. government has taken steps to better address food insecurity, especially during the COVID-19 pandemic, through stimulus packages, extensions of unemployment benefits, and expansions of food assistance programs. However, these were mostly short-term solutions not meant to address the systemic issues that lead to food insecurity. While programs like SNAP exist, they frequently provide insufficient support to completely alleviate food insecurity.
The Bottom Line
Food insecurity is a problem affecting millions of Americans and many millions more around the world. This lack of access or affordability to food is not an isolated problem; it has far-reaching implications that may include influencing the stock market. Understanding this connection can help investors make more informed decisions and potentially contribute to solutions that alleviate this pressing issue.
Food insecurity in the U.S. gained attention and worsened during the COVID-19 pandemic. It is a complex issue requiring multifaceted solutions, involving not just food assistance but also broader economic and social reforms.
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https://www.investopedia.com/wide-ranging-federal-policy-allays-employers-dilemma-over-vaccine-mandates-5200954 | Wide-ranging federal policy allays employers’ dilemma over vaccine mandates | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Plenty of employers have tried the carrot approach in their growing mix of strategies to encourage employees to get the COVID-19 vaccine. Now, with President Joe Biden’s sweeping new orders<span class="ql-inline-citation" data-cite="1"></span> that will require employers with more than 100 workers to mandate shots or weekly testing, the stick tactic has just won out.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>President Biden announced a vaccine mandate on Sept. 9 for private employers with 100 employees or more.</li><li>Many large U.S. employers had been planning to turn nudges into shoves when it came to vaccination policies. An alternative that was gaining ground involved health insurance premium surcharges levied on unvaccinated workers.</li><li>Early results from a trendsetter showed promise, though it remains to be seen how the new federal vaccine mandate announcement will play out and if further measures like health insurance premium surcharges are still needed.</li></ul><p><br/></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The Sept. 9 announcement affirms a recent cascade of companies<span class="ql-inline-citation" data-cite="2"></span>vaccination mandates—following the Food and Drug Administration’s full approval of the Pfizer Inc. and BioNTech SE vaccine last month.<span class="ql-inline-citation" data-cite="3"></span> And it covers those that were still in the midst of decision making. Others that stopped short of requiring outright mandates, meantime, began considering levying penalties in the form of health insurance surcharges for unvaccinated workers -- a path that, while somewhat uncertain, may also gain speed, some observers believe.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> “This is the first vaccine mandate ever applicable to private employers,” Kathryn Bakich, health compliance practice leader and senior vice president at employee benefits consulting firm Segal, told the Society for Human Resource Management (SHRM).<span class="ql-inline-citation" data-cite="4"></span> “Employers are moving toward mandatory vaccination policies at great speed. Those that aren’t mandating vaccines are considering whether they can implement premium differentials in their health plans to penalize employees who won't get the vaccine.”
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Bakich says wellness regulations currently permit incentives and penalties for taking legitimate health-related steps, noting. “I would expect that the Biden administration would move to help employers by explicitly issuing guidance to permit these incentives."
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<span class="heading-toc" id="toc-taking-the-tougher-stance"></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"> Taking the Tougher Stance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Even before the mandate, many companies rolled out incentives and more were considering disincentives. A survey that polled 961 U.S. employers between Aug. 18-25 by advisory company Willis Towers Watson found that while 2% of employers were offering either a discount to vaccinated employees or imposing a premium surcharge on unvaccinated employees, another 18% were considering one or both approaches.<span class="ql-inline-citation" data-cite="11"></span><br/>
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<span class="heading-toc" id="toc-delta-air-lines-talks-results"></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"> Delta Air Lines Talks Results </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/markets/quote?tvwidgetsymbol=dal">Delta Air Lines Inc. </a>was considered the first major company to launch the surcharge trend when it announced in an Aug. 25 memo to employees that it would impose a $200-a-month health plan fee on employees who are not vaccinated by Nov. 1. Its experiment has returned some early results.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Since then, the company says it’s seen a five-fold increase per day of workers receiving vaccines, Delta Executive Vice President and Chief Legal Officer Peter Carter recently told <em>Bloomberg Law</em>.<span class="ql-inline-citation" data-cite="7"></span>
</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"> Moreover, the company’s Chief Health Officer Dr. Henry Ting reported during a Sept. 9 Infectious Diseases Society of America media briefing that nearly 20% of the remaining 20,000 Delta workers without shots have now started the vaccination process. So far, he says there has been no employee turnover as a result of the policy.<span class="ql-inline-citation" data-cite="15"></span>
</p>
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<span class="heading-toc" id="toc-addressing-financial-risk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-heading__text"> Addressing Financial Risk </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> In addition to taking steps to ensure a safe workplace and protect employees from a major health risk, employers have a financial impetus for the tougher rules. Unvaccinated people have 29 times more COVID-19 hospitalizations than those who are fully vaccinated, according to recent reporting by the Centers for Disease Control and Prevention.<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.cdc.gov/mmwr/volumes/70/wr/mm7034e5.htm?s_cid=mm7034e5_w"> </a><span class="ql-inline-citation" data-cite="12"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> In its announcement, Delta acknowledged that its newly imposed fee was intended to address that financial risk. The average hospital stay for COVID-19 patients has cost the company $50,000 each, the airline’s CEO Ed Bastian said, noting that since the rise of the Delta variant, “all Delta employees who have been hospitalized with COVID were not fully vaccinated.”<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> As employers grapple with the new mandate amid the current Delta variant surge, labor concerns and the vaccine-hesitant, change may be the only constant in the near term.
</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"> Half of U.S. workers are in favor of vaccine requirements at their workplaces, according to a poll from The Associated Press-NORC Center for Public Affairs Research.<span class="ql-inline-citation" data-cite="13"></span> Yet varying levels of vaccine hesitancy among workers continue. SHRM research, for example, found that 28% of U.S. workers say they won't get the COVID-19 vaccine even if it costs them their job.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> “We have reached a point in the pandemic where employers that have worked hard to make it easy for employees to get vaccinated are also considering approaches to make it more difficult for employees to remain unvaccinated,” says Jeff Levin-Scherz, M.D., Willis Towers Watson’s population health leader. “The one certainty right now is that employers will continue to adjust their plans through the remainder of 2021.”
</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> | Plenty of employers have tried the carrot approach in their growing mix of strategies to encourage employees to get the COVID-19 vaccine. Now, with President Joe Biden’s sweeping new orders that will require employers with more than 100 workers to mandate shots or weekly testing, the stick tactic has just won out.
### Key Takeaways
* President Biden announced a vaccine mandate on Sept. 9 for private employers with 100 employees or more.
* Many large U.S. employers had been planning to turn nudges into shoves when it came to vaccination policies. An alternative that was gaining ground involved health insurance premium surcharges levied on unvaccinated workers.
* Early results from a trendsetter showed promise, though it remains to be seen how the new federal vaccine mandate announcement will play out and if further measures like health insurance premium surcharges are still needed.
The Sept. 9 announcement affirms a recent cascade of companiesvaccination mandates—following the Food and Drug Administration’s full approval of the Pfizer Inc. and BioNTech SE vaccine last month. And it covers those that were still in the midst of decision making. Others that stopped short of requiring outright mandates, meantime, began considering levying penalties in the form of health insurance surcharges for unvaccinated workers -- a path that, while somewhat uncertain, may also gain speed, some observers believe.
“This is the first vaccine mandate ever applicable to private employers,” Kathryn Bakich, health compliance practice leader and senior vice president at employee benefits consulting firm Segal, told the Society for Human Resource Management (SHRM). “Employers are moving toward mandatory vaccination policies at great speed. Those that aren’t mandating vaccines are considering whether they can implement premium differentials in their health plans to penalize employees who won't get the vaccine.”
Bakich says wellness regulations currently permit incentives and penalties for taking legitimate health-related steps, noting. “I would expect that the Biden administration would move to help employers by explicitly issuing guidance to permit these incentives."
## Taking the Tougher Stance
Even before the mandate, many companies rolled out incentives and more were considering disincentives. A survey that polled 961 U.S. employers between Aug. 18-25 by advisory company Willis Towers Watson found that while 2% of employers were offering either a discount to vaccinated employees or imposing a premium surcharge on unvaccinated employees, another 18% were considering one or both approaches.
## Delta Air Lines Talks Results
[Delta Air Lines Inc.](https://www.investopedia.com/markets/quote?tvwidgetsymbol=dal) was considered the first major company to launch the surcharge trend when it announced in an Aug. 25 memo to employees that it would impose a $200-a-month health plan fee on employees who are not vaccinated by Nov. 1. Its experiment has returned some early results.
Since then, the company says it’s seen a five-fold increase per day of workers receiving vaccines, Delta Executive Vice President and Chief Legal Officer Peter Carter recently told *Bloomberg Law*.
Moreover, the company’s Chief Health Officer Dr. Henry Ting reported during a Sept. 9 Infectious Diseases Society of America media briefing that nearly 20% of the remaining 20,000 Delta workers without shots have now started the vaccination process. So far, he says there has been no employee turnover as a result of the policy.
## Addressing Financial Risk
In addition to taking steps to ensure a safe workplace and protect employees from a major health risk, employers have a financial impetus for the tougher rules. Unvaccinated people have 29 times more COVID-19 hospitalizations than those who are fully vaccinated, according to recent reporting by the Centers for Disease Control and Prevention.
In its announcement, Delta acknowledged that its newly imposed fee was intended to address that financial risk. The average hospital stay for COVID-19 patients has cost the company $50,000 each, the airline’s CEO Ed Bastian said, noting that since the rise of the Delta variant, “all Delta employees who have been hospitalized with COVID were not fully vaccinated.”
## The Bottom Line
As employers grapple with the new mandate amid the current Delta variant surge, labor concerns and the vaccine-hesitant, change may be the only constant in the near term.
Half of U.S. workers are in favor of vaccine requirements at their workplaces, according to a poll from The Associated Press-NORC Center for Public Affairs Research. Yet varying levels of vaccine hesitancy among workers continue. SHRM research, for example, found that 28% of U.S. workers say they won't get the COVID-19 vaccine even if it costs them their job.
“We have reached a point in the pandemic where employers that have worked hard to make it easy for employees to get vaccinated are also considering approaches to make it more difficult for employees to remain unvaccinated,” says Jeff Levin-Scherz, M.D., Willis Towers Watson’s population health leader. “The one certainty right now is that employers will continue to adjust their plans through the remainder of 2021.”
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Plenty of employers have tried the carrot approach in their growing mix of strategies to encourage employees to get the COVID-19 vaccine. Now, with President Joe Biden’s sweeping new orders that will require employers with more than 100 workers to mandate shots or weekly testing, the stick tactic has just won out.
Key Takeaways
President Biden announced a vaccine mandate on Sept. 9 for private employers with 100 employees or more.Many large U.S. employers had been planning to turn nudges into shoves when it came to vaccination policies. An alternative that was gaining ground involved health insurance premium surcharges levied on unvaccinated workers.Early results from a trendsetter showed promise, though it remains to be seen how the new federal vaccine mandate announcement will play out and if further measures like health insurance premium surcharges are still needed.
The Sept. 9 announcement affirms a recent cascade of companiesvaccination mandates—following the Food and Drug Administration’s full approval of the Pfizer Inc. and BioNTech SE vaccine last month. And it covers those that were still in the midst of decision making. Others that stopped short of requiring outright mandates, meantime, began considering levying penalties in the form of health insurance surcharges for unvaccinated workers -- a path that, while somewhat uncertain, may also gain speed, some observers believe.
“This is the first vaccine mandate ever applicable to private employers,” Kathryn Bakich, health compliance practice leader and senior vice president at employee benefits consulting firm Segal, told the Society for Human Resource Management (SHRM). “Employers are moving toward mandatory vaccination policies at great speed. Those that aren’t mandating vaccines are considering whether they can implement premium differentials in their health plans to penalize employees who won't get the vaccine.”
Bakich says wellness regulations currently permit incentives and penalties for taking legitimate health-related steps, noting. “I would expect that the Biden administration would move to help employers by explicitly issuing guidance to permit these incentives."
Taking the Tougher Stance
Even before the mandate, many companies rolled out incentives and more were considering disincentives. A survey that polled 961 U.S. employers between Aug. 18-25 by advisory company Willis Towers Watson found that while 2% of employers were offering either a discount to vaccinated employees or imposing a premium surcharge on unvaccinated employees, another 18% were considering one or both approaches.
Delta Air Lines Talks Results
Delta Air Lines Inc. was considered the first major company to launch the surcharge trend when it announced in an Aug. 25 memo to employees that it would impose a $200-a-month health plan fee on employees who are not vaccinated by Nov. 1. Its experiment has returned some early results.
Since then, the company says it’s seen a five-fold increase per day of workers receiving vaccines, Delta Executive Vice President and Chief Legal Officer Peter Carter recently told Bloomberg Law.
Moreover, the company’s Chief Health Officer Dr. Henry Ting reported during a Sept. 9 Infectious Diseases Society of America media briefing that nearly 20% of the remaining 20,000 Delta workers without shots have now started the vaccination process. So far, he says there has been no employee turnover as a result of the policy.
Addressing Financial Risk
In addition to taking steps to ensure a safe workplace and protect employees from a major health risk, employers have a financial impetus for the tougher rules. Unvaccinated people have 29 times more COVID-19 hospitalizations than those who are fully vaccinated, according to recent reporting by the Centers for Disease Control and Prevention.
In its announcement, Delta acknowledged that its newly imposed fee was intended to address that financial risk. The average hospital stay for COVID-19 patients has cost the company $50,000 each, the airline’s CEO Ed Bastian said, noting that since the rise of the Delta variant, “all Delta employees who have been hospitalized with COVID were not fully vaccinated.”
The Bottom Line
As employers grapple with the new mandate amid the current Delta variant surge, labor concerns and the vaccine-hesitant, change may be the only constant in the near term.
Half of U.S. workers are in favor of vaccine requirements at their workplaces, according to a poll from The Associated Press-NORC Center for Public Affairs Research. Yet varying levels of vaccine hesitancy among workers continue. SHRM research, for example, found that 28% of U.S. workers say they won't get the COVID-19 vaccine even if it costs them their job.
“We have reached a point in the pandemic where employers that have worked hard to make it easy for employees to get vaccinated are also considering approaches to make it more difficult for employees to remain unvaccinated,” says Jeff Levin-Scherz, M.D., Willis Towers Watson’s population health leader. “The one certainty right now is that employers will continue to adjust their plans through the remainder of 2021.”
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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"Delta Air Lines Inc.",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=dal"
],
[
"[email protected]",
"mailto:[email protected]"
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https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp | How Big Is the Derivatives 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"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> market is, in a word, gigantic—often estimated at over $1 quadrillion<em> </em>on the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investment<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialasset.asp"> </a>asset, including equities, commodities, bonds, and currency. Some market analysts even place the size of the market at more than 10 times that of the total world <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product (GDP)</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"> However, other researchers challenge these estimates, arguing the size of the derivatives market is vastly overstated.
</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 derivatives market is said to be over $1 quadrillion dollars in notional value on the high end, but some analysts say the market is grossly overestimated.</li><li>The higher end of the estimates includes the notional value of derivative contracts. </li><li>There is a large difference in the notional value and actual netted value of derivatives—$600 trillion versus $12.4 trillion—as of 2021.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-range-of-estimates"></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 Range of Estimates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Determining the actual size of the derivatives market depends on what a person considers part of the market and thus what figures go into the calculation. The larger estimates come from adding up the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/notionalvalue.asp">notional value</a> of all available derivatives contracts. But some analysts argue that such a calculation doesn't reflect reality—that the notional value of a derivative contract's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying-asset.asp">underlying assets</a>, the financial instruments the derivative is pegged to, does not accurately represent the actual <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketvalue.asp">market value</a> of derivative contracts based on those assets.<span class="ql-inline-citation" data-cite="2"></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_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Derivatives are effectively binding contracts between parties that are bought or sold as bets on (or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedges</a> against) the future price moves of whatever <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a> they're based on—hence, the name "derivative." So derivatives' prices are dependent on the prices of their underlying assets.<span class="ql-inline-citation" data-cite="4"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> An example that illustrates the vast difference between notional value and actual market value can be found in popularly traded derivatives, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrateswap.asp">interest rate swaps</a>. The large <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a> amounts of the underlying <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rate</a> instruments, although usually included in the calculation of total swaps value, never actually trade hands. The only money traded in an interest rate swap is the vastly smaller interest payment amounts—sums that are only a fraction of the principal amount.
</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>Because the notional value of derivatives positions is so large, some regulators argue that they can pose a systemic threat to the global economy and financial system.</p></div></div></div>
<span class="heading-toc" id="toc-current-derivatives-market"></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"> Current Derivatives Market </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> According to the most recent data from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bis.asp">Bank for International Settlements (BIS)</a>, for the second half of 2021, the total notional amounts outstanding for contracts in the derivatives market was an estimated $600 trillion, but the gross market value of all contracts is said to be significantly less: approximately $12.4 trillion in 2021.<span class="ql-inline-citation" data-cite="1"></span><br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The OTC derivatives market, on a notional value, hit its highest notional value level in 2014. Interest rate derivatives make up the majority of the OTC notional derivative value. The notional value of interest rate contracts recently hit $488 trillion. Meanwhile, the gross value of derivatives had been falling significantly between 2014 and 2016, then began rebounding through 2019, and has since begun to level off through 2022.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-what-are-exchange-traded-derivatives"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Exchange-Traded Derivatives?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchange-traded-derivative.asp">Exchange-traded derivatives</a> are standardized contracts that trade on regulated exchanges. These include listed <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/option.asp">options</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futuresmarket.asp">futures</a> products. In general, the listed market is smaller in size than the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/otc.asp">over-the-counter (OTC)</a> derivatives market.<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_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-why-is-the-gross-value-of-derivatives-far-less-than-the-notional-value"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is the Gross Value of Derivatives Far Less than the Notional Value?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Many derivatives trades are executed as hedges against existing positions in order to minimize risk exposures. Because of this, the total (notional) amount of outstanding derivatives positions can be misleading. Say you have a $1 million stock portfolio and purchase <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put options</a> on that same amount to hedge your downside risk. While the notional value of the put options is $1 million, the gross value is actually zero since it is exactly offset by the value of the stock portfolio.</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-are-examples-of-derivatives"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Examples of Derivatives?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The derivatives market is large and complex, comprising different types of contracts available on equity, fixed-income, forex, credit, interest rates, commodities, and other markets. These types of contracts include options (both vanilla calls and puts as well as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exoticoption.asp">exotic options</a>), warrants, futures, forwards, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/07/swaps.asp">swaps</a>.</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"> When the actual market value of derivatives (rather than notional value) is the focus, the estimate of the size of the derivatives market changes dramatically. However, by any calculation, the derivatives market is quite sizable and significant in the overall picture of worldwide investments.
</p></div> | The [derivatives](https://www.investopedia.com/terms/d/derivative.asp) market is, in a word, gigantic—often estimated at over $1 quadrillionon the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investmentasset, including equities, commodities, bonds, and currency. Some market analysts even place the size of the market at more than 10 times that of the total world [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp).
However, other researchers challenge these estimates, arguing the size of the derivatives market is vastly overstated.
### Key Takeaways
* The derivatives market is said to be over $1 quadrillion dollars in notional value on the high end, but some analysts say the market is grossly overestimated.
* The higher end of the estimates includes the notional value of derivative contracts.
* There is a large difference in the notional value and actual netted value of derivatives—$600 trillion versus $12.4 trillion—as of 2021.
## The Range of Estimates
Determining the actual size of the derivatives market depends on what a person considers part of the market and thus what figures go into the calculation. The larger estimates come from adding up the [notional value](https://www.investopedia.com/terms/n/notionalvalue.asp) of all available derivatives contracts. But some analysts argue that such a calculation doesn't reflect reality—that the notional value of a derivative contract's [underlying assets](https://www.investopedia.com/terms/u/underlying-asset.asp), the financial instruments the derivative is pegged to, does not accurately represent the actual [market value](https://www.investopedia.com/terms/m/marketvalue.asp) of derivative contracts based on those assets.
Derivatives are effectively binding contracts between parties that are bought or sold as bets on (or [hedges](https://www.investopedia.com/terms/h/hedge.asp) against) the future price moves of whatever [securities](https://www.investopedia.com/terms/s/security.asp) they're based on—hence, the name "derivative." So derivatives' prices are dependent on the prices of their underlying assets.
An example that illustrates the vast difference between notional value and actual market value can be found in popularly traded derivatives, such as [interest rate swaps](https://www.investopedia.com/terms/i/interestrateswap.asp). The large [principal](https://www.investopedia.com/terms/p/principal.asp) amounts of the underlying [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) instruments, although usually included in the calculation of total swaps value, never actually trade hands. The only money traded in an interest rate swap is the vastly smaller interest payment amounts—sums that are only a fraction of the principal amount.
###
Because the notional value of derivatives positions is so large, some regulators argue that they can pose a systemic threat to the global economy and financial system.
## Current Derivatives Market
According to the most recent data from the [Bank for International Settlements (BIS)](https://www.investopedia.com/terms/b/bis.asp), for the second half of 2021, the total notional amounts outstanding for contracts in the derivatives market was an estimated $600 trillion, but the gross market value of all contracts is said to be significantly less: approximately $12.4 trillion in 2021.
The OTC derivatives market, on a notional value, hit its highest notional value level in 2014. Interest rate derivatives make up the majority of the OTC notional derivative value. The notional value of interest rate contracts recently hit $488 trillion. Meanwhile, the gross value of derivatives had been falling significantly between 2014 and 2016, then began rebounding through 2019, and has since begun to level off through 2022.
## What Are Exchange-Traded Derivatives?
[Exchange-traded derivatives](https://www.investopedia.com/terms/e/exchange-traded-derivative.asp) are standardized contracts that trade on regulated exchanges. These include listed [options](https://www.investopedia.com/terms/o/option.asp) and [futures](https://www.investopedia.com/terms/f/futuresmarket.asp) products. In general, the listed market is smaller in size than the [over-the-counter (OTC)](https://www.investopedia.com/terms/o/otc.asp) derivatives market.
## Why Is the Gross Value of Derivatives Far Less than the Notional Value?
Many derivatives trades are executed as hedges against existing positions in order to minimize risk exposures. Because of this, the total (notional) amount of outstanding derivatives positions can be misleading. Say you have a $1 million stock portfolio and purchase [put options](https://www.investopedia.com/terms/p/putoption.asp) on that same amount to hedge your downside risk. While the notional value of the put options is $1 million, the gross value is actually zero since it is exactly offset by the value of the stock portfolio.
## What Are Examples of Derivatives?
The derivatives market is large and complex, comprising different types of contracts available on equity, fixed-income, forex, credit, interest rates, commodities, and other markets. These types of contracts include options (both vanilla calls and puts as well as [exotic options](https://www.investopedia.com/terms/e/exoticoption.asp)), warrants, futures, forwards, and [swaps](https://www.investopedia.com/articles/optioninvestor/07/swaps.asp).
## The Bottom Line
When the actual market value of derivatives (rather than notional value) is the focus, the estimate of the size of the derivatives market changes dramatically. However, by any calculation, the derivatives market is quite sizable and significant in the overall picture of worldwide investments.
| The derivatives market is, in a word, gigantic—often estimated at over $1 quadrillion on the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investment asset, including equities, commodities, bonds, and currency. Some market analysts even place the size of the market at more than 10 times that of the total world gross domestic product (GDP).
However, other researchers challenge these estimates, arguing the size of the derivatives market is vastly overstated.
Key Takeaways
The derivatives market is said to be over $1 quadrillion dollars in notional value on the high end, but some analysts say the market is grossly overestimated.The higher end of the estimates includes the notional value of derivative contracts. There is a large difference in the notional value and actual netted value of derivatives—$600 trillion versus $12.4 trillion—as of 2021.
The Range of Estimates
Determining the actual size of the derivatives market depends on what a person considers part of the market and thus what figures go into the calculation. The larger estimates come from adding up the notional value of all available derivatives contracts. But some analysts argue that such a calculation doesn't reflect reality—that the notional value of a derivative contract's underlying assets, the financial instruments the derivative is pegged to, does not accurately represent the actual market value of derivative contracts based on those assets.
Derivatives are effectively binding contracts between parties that are bought or sold as bets on (or hedges against) the future price moves of whatever securities they're based on—hence, the name "derivative." So derivatives' prices are dependent on the prices of their underlying assets.
An example that illustrates the vast difference between notional value and actual market value can be found in popularly traded derivatives, such as interest rate swaps. The large principal amounts of the underlying interest rate instruments, although usually included in the calculation of total swaps value, never actually trade hands. The only money traded in an interest rate swap is the vastly smaller interest payment amounts—sums that are only a fraction of the principal amount.
Because the notional value of derivatives positions is so large, some regulators argue that they can pose a systemic threat to the global economy and financial system.
Current Derivatives Market
According to the most recent data from the Bank for International Settlements (BIS), for the second half of 2021, the total notional amounts outstanding for contracts in the derivatives market was an estimated $600 trillion, but the gross market value of all contracts is said to be significantly less: approximately $12.4 trillion in 2021.
The OTC derivatives market, on a notional value, hit its highest notional value level in 2014. Interest rate derivatives make up the majority of the OTC notional derivative value. The notional value of interest rate contracts recently hit $488 trillion. Meanwhile, the gross value of derivatives had been falling significantly between 2014 and 2016, then began rebounding through 2019, and has since begun to level off through 2022.
What Are Exchange-Traded Derivatives?
Exchange-traded derivatives are standardized contracts that trade on regulated exchanges. These include listed options and futures products. In general, the listed market is smaller in size than the over-the-counter (OTC) derivatives market.
Why Is the Gross Value of Derivatives Far Less than the Notional Value?
Many derivatives trades are executed as hedges against existing positions in order to minimize risk exposures. Because of this, the total (notional) amount of outstanding derivatives positions can be misleading. Say you have a $1 million stock portfolio and purchase put options on that same amount to hedge your downside risk. While the notional value of the put options is $1 million, the gross value is actually zero since it is exactly offset by the value of the stock portfolio.
What Are Examples of Derivatives?
The derivatives market is large and complex, comprising different types of contracts available on equity, fixed-income, forex, credit, interest rates, commodities, and other markets. These types of contracts include options (both vanilla calls and puts as well as exotic options), warrants, futures, forwards, and swaps.
The Bottom Line
When the actual market value of derivatives (rather than notional value) is the focus, the estimate of the size of the derivatives market changes dramatically. However, by any calculation, the derivatives market is quite sizable and significant in the overall picture of worldwide investments.
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https://www.investopedia.com/women-run-companies-to-invest-in-8417339 | 9 Women-Run Companies to Invest In | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Women-owned companies in the U.S. are growing at more than double the rate of all other firms. With direct responsibility for 23 million jobs, these companies contribute nearly $3 trillion to the economy.<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"> As women gain a bigger stake in the corporate world, there are more opportunities to add their businesses to your stock portfolio. Whether you invest in ETFs or individual stocks, here are nine women-owned businesses to consider for your 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>Women-owned businesses contribute nearly $3 trillion to the U.S. economy and are responsible for 23 million jobs.</li><li>Women hold just 15% of the Fortune 500 CEO positions but make up more than half of the population in the U.S.</li><li>Having more women on the boards of companies translates to less excessive risk taking and improves companies' reputations, earning quality, and sustainability performance.</li><li>Investing in women-owned and -run businesses like the nine profiled here can help increase diversity and inclusion in American corporations.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-reasons-to-invest-in-women-owned-or-led-businesses"></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"> Reasons to Invest In Women-Owned or Led Businesses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Many everyday investors want to put their money into businesses that align with their values, whether that's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">environmental, social, and governance (ESG)</a> investing or female- or minority-owned companies. Investing in women-owned businesses can make a difference in increasing diversity and representation in corporate America.
</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"> Women make up more than half of the U.S. population, but hold just 15% of CEO positions at Fortune 500 companies, as of 2022.<span class="ql-inline-citation" data-cite="2"></span> What’s more, only 5.2% of chief executives in the country are Black, despite making up approximately 13.6% of the population.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In 2023, women-founded companies received only a tiny slice (2.1%) of total venture capital funding in the U.S.<span class="ql-inline-citation" data-cite="5"></span><strong> </strong>Investing in women-led companies may help narrow the gap of financial inequality. It may lead to better ROI for your investment portfolio, as well.
</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 Boston Consulting Group study found that startups founded and cofounded by women actually performed better over time than those founded by men: they generated 10% more in cumulative revenue over a five-year period.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>According to S&P Global, having more women on the board of a company tends to mean less excessive risk taking as well as improved firm reputation, earnings quality, and sustainability performance.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div>
<span class="heading-toc" id="toc-top-women-owned-and-women-run-businesses-to-invest-in"></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"> Top Women-Owned and Women-Run Businesses to Invest In </span> </h2>
<span class="heading-toc" id="toc-1-arista-networks"></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"> 1. Arista Networks </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Arista Networks (ANET) leads the industry in cloud to client networking for large data center, campus, and routing environments.
</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 company serves more than 9,000 cloud customers, including global Fortune 500 companies.<span class="ql-inline-citation" data-cite="8"></span> CEO Jayshree Ullal has been at the helm of Arista Networks since early on. In 2014, she led the company to a historic, multibillion-dollar IPO.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Under her leadership, the company continues to expand at a blistering pace. Earnings growth, an important metric to consider when valuing a stock, looks extremely promising for Arista, with a 26.9% growth rate over the past five years and 63.2% in the last year. <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 (ROE)</a> for shareholders is also at an impressive 29%.<span class="ql-inline-citation" data-cite="10"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<span class="heading-toc" id="toc-2-chart-industries"></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"> 2. Chart Industries </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> CEO Jillian Evanko leads Chart Industries (GTLS), a top manufacturer of cryogenic gas processing and storage equipment. Evanko took charge in 2018 after serving as CFO and chief accounting officer, which is particularly significant for a company that heavily relies on acquisitions.<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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Thanks to solid financial expertise and leadership, Chart's stock has doubled since 2019. Evanko attributes the company’s success, in large part, to their market dominance and high demand for services. After a 2022 acquisition of Howden, a company larger than Chart in terms of revenues, the company is poised for even bigger growth.<span class="ql-inline-citation" data-cite="30"></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_30-0"></div>
<span class="heading-toc" id="toc-3-the-hershey-company"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> 3. The Hershey Company </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Hershey (HSY), the confectionery giant, has proven to be a delectable investment under the leadership of CEO Michele Buck. A stalwart at the company since 2005, Buck took over as CEO and board chair in March 2018. Before joining Hershey in 2005, Buck served 17 years at Kraft/Nabisco in numerous senior positions and at the Frito-Lay division of PepsiCo.<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"> Her extensive experience in consumer packaged goods has paid off for the company. Since Buck joined the executive team in 2016, Hershey's stock has nearly tripled, reaching a high of $274.04 in May 2023.<span class="ql-inline-citation" data-cite="15"></span> The stock has seen sustained growth over the past five years, as the company cemented its position in the market through over 20 acquisitions.<span class="ql-inline-citation" data-cite="14"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<span class="heading-toc" id="toc-4-progressive-corp"></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"> 4. Progressive Corp </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Already known as a giant in the insurance field, Progressive’s status has only grown since putting Tricia Griffith in charge. Griffith joined the company over 35 years ago, and worked her way up through several leadership positions before becoming CEO in 2016.<span class="ql-inline-citation" data-cite="16"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Traded under Progressive Corp (PGR), the company’s stock has a five-year price total return of 199%.<span class="ql-inline-citation" data-cite="35"></span> Perhaps thanks to their product being a basic need, Progressive stock and revenue performance has held strong through recent economic turmoil and market uncertainty. The company’s annual revenue for 2023 was $62.11B, a 25.2% increase from 2022.<span class="ql-inline-citation" data-cite="18"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<span class="heading-toc" id="toc-5-zoetis"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> 5. Zoetis </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Zoetis (ZTS), once part of Pfizer, is now a leading animal health company, which produces medicines, vaccines, and diagnostics. CEO Kristin Peck, who played a pivotal role in Zoetis' 2013 IPO, has led the company since 2020. She’s been recognized by Barron’s as one of the top CEOs in 2022, and by Fortune as a 2020 Businessperson of the Year.<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_43-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Global trends favor Zoetis, based on increased spending on livestock healthcare and growing pet ownership. Under Peck's leadership, Zoetis has delivered a solid 35% in total returns, exceeding the 26% S&P 500 returns for 2023.<span class="ql-inline-citation" data-cite="36"></span><span class="ql-inline-citation" data-cite="34"></span> Earnings per share, a key management metric, have grown consistently since 2011, with a 16.33% increase year-over-year for the quarter ending December 31, 2023.<span class="ql-inline-citation" data-cite="20"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<span class="heading-toc" id="toc-6-sunrun"></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"> 6. Sunrun </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> The nation’s leading home solar, battery storage, and energy services company, Sunrun (RUN), is both women-led and co-founded. CEO Mary Powell has run the company since August 2021. Before that, co-founder and co-executive chair Lynn Jurich held the top position.<span class="ql-inline-citation" data-cite="21"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Beyond feeling good about supporting sustainable energy, there are compelling financial reasons to invest in Sunrun. The stock has seen some volatility in the past few years, but analysts remain bullish on this buy. In December 2023, the stock crossed above its 200-day moving average of $16.24 with some trades going as high as $18.54 per share. The 200-day moving average is an important indicator for investors who are looking to spot mid- and long-term trends.<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_50-0"></div>
<span class="heading-toc" id="toc-7-accenture"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-heading__text"> 7. Accenture </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Accenture (ACN), led by CEO Julie Sweet since 2019, is a global IT-services giant excelling in consulting and outsourcing.<span class="ql-inline-citation" data-cite="31"></span> With a vast workforce and numerous diamond accounts, Accenture challenges smaller firms in innovation and expertise.
</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"> The company benefits from the pairing of a solid reputation and steady, sustainable growth. With $64.1 billion revenue in 2023 and a client list that includes more than 75% of the global top 500 companies, the company has built a considerable economic moat.<span class="ql-inline-citation" data-cite="32"></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_55-0"></div>
<span class="heading-toc" id="toc-8-eventbrite"></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"> 8. Eventbrite </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Co-Founder and CEO Julia Hartz leads vision, strategy, and growth at the world’s largest ticketing and event technology platform. Eventbrite attributes its success to her leadership, under which the company has received awards including Fortune's 100 Best Workplaces in the U.S., Glassdoor's Employees' Choice Best Places to Work, and San Francisco Business Times' Best Places to Work in the SF Bay Area.
</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"> Hartz herself has been honored as one of Inc.’s Female Founders 100, Fortune’s 40 Under 40 business leaders, Inc.’s 35 Under 35, and Fortune’s Most Powerful Women Entrepreneurs.<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_60-0"></div>
<span class="heading-toc" id="toc-9-veracyte"></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"> 9. Veracyte </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Before passing on the executive role to Marc Stapley, Veracyte (VCYT) founder Bonnie Anderson served as CEO from 2008 to 2016. She remains active in the company via an executive chairman role.<span class="ql-inline-citation" data-cite="27"></span> The global diagnostics company provides clinicians with insights and testing to help diagnose and treat cancer. With steady stock performance over the past five years, the company also boasts growing revenue, income, and profit margins, rising 35.1%, 51.6%, and 64.2%, respectively.<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_63-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-what-qualifies-as-a-woman-owned-business"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Qualifies as a Woman-Owned Business?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>To qualify for the Women-Owned Small Business (WOSB) Federal Contract program, a business must be at least 51% owned and controlled by women who are U.S. citizens. Women also must manage day-to-day operations and make long-term decisions.<span class="ql-inline-citation" data-cite="29"></span> Companies meeting this requirement can also apply for certification as a woman-owned business. Getting certified is not required, but it entitles you to federal contracts and economic resources.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-how-do-i-start-investing-in-women-owned-businesses"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Start Investing In Women-Owned Businesses?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The first step to adding women-owned or women-led businesses to your portfolio is identifying the companies you're interested in. Next, you should track their performance, including stock activity, financial health, and any relevant news or events. You may also look at financial statements, earnings reports, and other relevant data. </p><p>If you’re ready to buy, you can work with your brokerage platform or financial advisor to make a purchase. You'll need to specify the number of shares you want to purchase and the type of order (e.g., market order, limit order).</p><p>Instead of handpicking individual companies to invest in, you could invest in an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange traded fund (ETF)</a> that focuses on or includes female-owned companies. An ETF contains multiple companies and may include a mixture of investment types like stocks, commodities, and bonds.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Buying stock in successful, women-led public companies presents an opportunity for everyday investors and for the companies they invest in. Investing in companies like these contributes to more diversity and gender equality in corporate leadership. And research suggests that businesses with diverse leadership, including women, may exhibit better long-term financial results. Before making any investment, be sure to research the company, including stock and overall financial performance. <br/>
</p></div> | Women-owned companies in the U.S. are growing at more than double the rate of all other firms. With direct responsibility for 23 million jobs, these companies contribute nearly $3 trillion to the economy.
As women gain a bigger stake in the corporate world, there are more opportunities to add their businesses to your stock portfolio. Whether you invest in ETFs or individual stocks, here are nine women-owned businesses to consider for your portfolio.
### Key Takeaways
* Women-owned businesses contribute nearly $3 trillion to the U.S. economy and are responsible for 23 million jobs.
* Women hold just 15% of the Fortune 500 CEO positions but make up more than half of the population in the U.S.
* Having more women on the boards of companies translates to less excessive risk taking and improves companies' reputations, earning quality, and sustainability performance.
* Investing in women-owned and -run businesses like the nine profiled here can help increase diversity and inclusion in American corporations.
## Reasons to Invest In Women-Owned or Led Businesses
Many everyday investors want to put their money into businesses that align with their values, whether that's [environmental, social, and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) investing or female- or minority-owned companies. Investing in women-owned businesses can make a difference in increasing diversity and representation in corporate America.
Women make up more than half of the U.S. population, but hold just 15% of CEO positions at Fortune 500 companies, as of 2022. What’s more, only 5.2% of chief executives in the country are Black, despite making up approximately 13.6% of the population.
In 2023, women-founded companies received only a tiny slice (2.1%) of total venture capital funding in the U.S.Investing in women-led companies may help narrow the gap of financial inequality. It may lead to better ROI for your investment portfolio, as well.
A Boston Consulting Group study found that startups founded and cofounded by women actually performed better over time than those founded by men: they generated 10% more in cumulative revenue over a five-year period.
###
According to S&P Global, having more women on the board of a company tends to mean less excessive risk taking as well as improved firm reputation, earnings quality, and sustainability performance.
## Top Women-Owned and Women-Run Businesses to Invest In
## 1. Arista Networks
Arista Networks (ANET) leads the industry in cloud to client networking for large data center, campus, and routing environments.
The company serves more than 9,000 cloud customers, including global Fortune 500 companies. CEO Jayshree Ullal has been at the helm of Arista Networks since early on. In 2014, she led the company to a historic, multibillion-dollar IPO.
Under her leadership, the company continues to expand at a blistering pace. Earnings growth, an important metric to consider when valuing a stock, looks extremely promising for Arista, with a 26.9% growth rate over the past five years and 63.2% in the last year. [Return on equity (ROE)](https://www.investopedia.com/terms/r/returnonequity.asp) for shareholders is also at an impressive 29%.
## 2. Chart Industries
CEO Jillian Evanko leads Chart Industries (GTLS), a top manufacturer of cryogenic gas processing and storage equipment. Evanko took charge in 2018 after serving as CFO and chief accounting officer, which is particularly significant for a company that heavily relies on acquisitions.
Thanks to solid financial expertise and leadership, Chart's stock has doubled since 2019. Evanko attributes the company’s success, in large part, to their market dominance and high demand for services. After a 2022 acquisition of Howden, a company larger than Chart in terms of revenues, the company is poised for even bigger growth.
## 3. The Hershey Company
Hershey (HSY), the confectionery giant, has proven to be a delectable investment under the leadership of CEO Michele Buck. A stalwart at the company since 2005, Buck took over as CEO and board chair in March 2018. Before joining Hershey in 2005, Buck served 17 years at Kraft/Nabisco in numerous senior positions and at the Frito-Lay division of PepsiCo.
Her extensive experience in consumer packaged goods has paid off for the company. Since Buck joined the executive team in 2016, Hershey's stock has nearly tripled, reaching a high of $274.04 in May 2023. The stock has seen sustained growth over the past five years, as the company cemented its position in the market through over 20 acquisitions.
## 4. Progressive Corp
Already known as a giant in the insurance field, Progressive’s status has only grown since putting Tricia Griffith in charge. Griffith joined the company over 35 years ago, and worked her way up through several leadership positions before becoming CEO in 2016.
Traded under Progressive Corp (PGR), the company’s stock has a five-year price total return of 199%. Perhaps thanks to their product being a basic need, Progressive stock and revenue performance has held strong through recent economic turmoil and market uncertainty. The company’s annual revenue for 2023 was $62.11B, a 25.2% increase from 2022.
## 5. Zoetis
Zoetis (ZTS), once part of Pfizer, is now a leading animal health company, which produces medicines, vaccines, and diagnostics. CEO Kristin Peck, who played a pivotal role in Zoetis' 2013 IPO, has led the company since 2020. She’s been recognized by Barron’s as one of the top CEOs in 2022, and by Fortune as a 2020 Businessperson of the Year.
Global trends favor Zoetis, based on increased spending on livestock healthcare and growing pet ownership. Under Peck's leadership, Zoetis has delivered a solid 35% in total returns, exceeding the 26% S&P 500 returns for 2023. Earnings per share, a key management metric, have grown consistently since 2011, with a 16.33% increase year-over-year for the quarter ending December 31, 2023.
## 6. Sunrun
The nation’s leading home solar, battery storage, and energy services company, Sunrun (RUN), is both women-led and co-founded. CEO Mary Powell has run the company since August 2021. Before that, co-founder and co-executive chair Lynn Jurich held the top position.
Beyond feeling good about supporting sustainable energy, there are compelling financial reasons to invest in Sunrun. The stock has seen some volatility in the past few years, but analysts remain bullish on this buy. In December 2023, the stock crossed above its 200-day moving average of $16.24 with some trades going as high as $18.54 per share. The 200-day moving average is an important indicator for investors who are looking to spot mid- and long-term trends.
## 7. Accenture
Accenture (ACN), led by CEO Julie Sweet since 2019, is a global IT-services giant excelling in consulting and outsourcing. With a vast workforce and numerous diamond accounts, Accenture challenges smaller firms in innovation and expertise.
The company benefits from the pairing of a solid reputation and steady, sustainable growth. With $64.1 billion revenue in 2023 and a client list that includes more than 75% of the global top 500 companies, the company has built a considerable economic moat.
## 8. Eventbrite
Co-Founder and CEO Julia Hartz leads vision, strategy, and growth at the world’s largest ticketing and event technology platform. Eventbrite attributes its success to her leadership, under which the company has received awards including Fortune's 100 Best Workplaces in the U.S., Glassdoor's Employees' Choice Best Places to Work, and San Francisco Business Times' Best Places to Work in the SF Bay Area.
Hartz herself has been honored as one of Inc.’s Female Founders 100, Fortune’s 40 Under 40 business leaders, Inc.’s 35 Under 35, and Fortune’s Most Powerful Women Entrepreneurs.
## 9. Veracyte
Before passing on the executive role to Marc Stapley, Veracyte (VCYT) founder Bonnie Anderson served as CEO from 2008 to 2016. She remains active in the company via an executive chairman role. The global diagnostics company provides clinicians with insights and testing to help diagnose and treat cancer. With steady stock performance over the past five years, the company also boasts growing revenue, income, and profit margins, rising 35.1%, 51.6%, and 64.2%, respectively.
## What Qualifies as a Woman-Owned Business?
To qualify for the Women-Owned Small Business (WOSB) Federal Contract program, a business must be at least 51% owned and controlled by women who are U.S. citizens. Women also must manage day-to-day operations and make long-term decisions. Companies meeting this requirement can also apply for certification as a woman-owned business. Getting certified is not required, but it entitles you to federal contracts and economic resources.
## How Do I Start Investing In Women-Owned Businesses?
The first step to adding women-owned or women-led businesses to your portfolio is identifying the companies you're interested in. Next, you should track their performance, including stock activity, financial health, and any relevant news or events. You may also look at financial statements, earnings reports, and other relevant data.
If you’re ready to buy, you can work with your brokerage platform or financial advisor to make a purchase. You'll need to specify the number of shares you want to purchase and the type of order (e.g., market order, limit order).
Instead of handpicking individual companies to invest in, you could invest in an [exchange traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp) that focuses on or includes female-owned companies. An ETF contains multiple companies and may include a mixture of investment types like stocks, commodities, and bonds.
## The Bottom Line
Buying stock in successful, women-led public companies presents an opportunity for everyday investors and for the companies they invest in. Investing in companies like these contributes to more diversity and gender equality in corporate leadership. And research suggests that businesses with diverse leadership, including women, may exhibit better long-term financial results. Before making any investment, be sure to research the company, including stock and overall financial performance.
| Women-owned companies in the U.S. are growing at more than double the rate of all other firms. With direct responsibility for 23 million jobs, these companies contribute nearly $3 trillion to the economy.
As women gain a bigger stake in the corporate world, there are more opportunities to add their businesses to your stock portfolio. Whether you invest in ETFs or individual stocks, here are nine women-owned businesses to consider for your portfolio.
Key Takeaways
Women-owned businesses contribute nearly $3 trillion to the U.S. economy and are responsible for 23 million jobs.Women hold just 15% of the Fortune 500 CEO positions but make up more than half of the population in the U.S.Having more women on the boards of companies translates to less excessive risk taking and improves companies' reputations, earning quality, and sustainability performance.Investing in women-owned and -run businesses like the nine profiled here can help increase diversity and inclusion in American corporations.
Reasons to Invest In Women-Owned or Led Businesses
Many everyday investors want to put their money into businesses that align with their values, whether that's environmental, social, and governance (ESG) investing or female- or minority-owned companies. Investing in women-owned businesses can make a difference in increasing diversity and representation in corporate America.
Women make up more than half of the U.S. population, but hold just 15% of CEO positions at Fortune 500 companies, as of 2022. What’s more, only 5.2% of chief executives in the country are Black, despite making up approximately 13.6% of the population.
In 2023, women-founded companies received only a tiny slice (2.1%) of total venture capital funding in the U.S. Investing in women-led companies may help narrow the gap of financial inequality. It may lead to better ROI for your investment portfolio, as well.
A Boston Consulting Group study found that startups founded and cofounded by women actually performed better over time than those founded by men: they generated 10% more in cumulative revenue over a five-year period.
According to S&P Global, having more women on the board of a company tends to mean less excessive risk taking as well as improved firm reputation, earnings quality, and sustainability performance.
Top Women-Owned and Women-Run Businesses to Invest In
1. Arista Networks
Arista Networks (ANET) leads the industry in cloud to client networking for large data center, campus, and routing environments.
The company serves more than 9,000 cloud customers, including global Fortune 500 companies. CEO Jayshree Ullal has been at the helm of Arista Networks since early on. In 2014, she led the company to a historic, multibillion-dollar IPO.
Under her leadership, the company continues to expand at a blistering pace. Earnings growth, an important metric to consider when valuing a stock, looks extremely promising for Arista, with a 26.9% growth rate over the past five years and 63.2% in the last year. Return on equity (ROE) for shareholders is also at an impressive 29%.
2. Chart Industries
CEO Jillian Evanko leads Chart Industries (GTLS), a top manufacturer of cryogenic gas processing and storage equipment. Evanko took charge in 2018 after serving as CFO and chief accounting officer, which is particularly significant for a company that heavily relies on acquisitions.
Thanks to solid financial expertise and leadership, Chart's stock has doubled since 2019. Evanko attributes the company’s success, in large part, to their market dominance and high demand for services. After a 2022 acquisition of Howden, a company larger than Chart in terms of revenues, the company is poised for even bigger growth.
3. The Hershey Company
Hershey (HSY), the confectionery giant, has proven to be a delectable investment under the leadership of CEO Michele Buck. A stalwart at the company since 2005, Buck took over as CEO and board chair in March 2018. Before joining Hershey in 2005, Buck served 17 years at Kraft/Nabisco in numerous senior positions and at the Frito-Lay division of PepsiCo.
Her extensive experience in consumer packaged goods has paid off for the company. Since Buck joined the executive team in 2016, Hershey's stock has nearly tripled, reaching a high of $274.04 in May 2023. The stock has seen sustained growth over the past five years, as the company cemented its position in the market through over 20 acquisitions.
4. Progressive Corp
Already known as a giant in the insurance field, Progressive’s status has only grown since putting Tricia Griffith in charge. Griffith joined the company over 35 years ago, and worked her way up through several leadership positions before becoming CEO in 2016.
Traded under Progressive Corp (PGR), the company’s stock has a five-year price total return of 199%. Perhaps thanks to their product being a basic need, Progressive stock and revenue performance has held strong through recent economic turmoil and market uncertainty. The company’s annual revenue for 2023 was $62.11B, a 25.2% increase from 2022.
5. Zoetis
Zoetis (ZTS), once part of Pfizer, is now a leading animal health company, which produces medicines, vaccines, and diagnostics. CEO Kristin Peck, who played a pivotal role in Zoetis' 2013 IPO, has led the company since 2020. She’s been recognized by Barron’s as one of the top CEOs in 2022, and by Fortune as a 2020 Businessperson of the Year.
Global trends favor Zoetis, based on increased spending on livestock healthcare and growing pet ownership. Under Peck's leadership, Zoetis has delivered a solid 35% in total returns, exceeding the 26% S&P 500 returns for 2023. Earnings per share, a key management metric, have grown consistently since 2011, with a 16.33% increase year-over-year for the quarter ending December 31, 2023.
6. Sunrun
The nation’s leading home solar, battery storage, and energy services company, Sunrun (RUN), is both women-led and co-founded. CEO Mary Powell has run the company since August 2021. Before that, co-founder and co-executive chair Lynn Jurich held the top position.
Beyond feeling good about supporting sustainable energy, there are compelling financial reasons to invest in Sunrun. The stock has seen some volatility in the past few years, but analysts remain bullish on this buy. In December 2023, the stock crossed above its 200-day moving average of $16.24 with some trades going as high as $18.54 per share. The 200-day moving average is an important indicator for investors who are looking to spot mid- and long-term trends.
7. Accenture
Accenture (ACN), led by CEO Julie Sweet since 2019, is a global IT-services giant excelling in consulting and outsourcing. With a vast workforce and numerous diamond accounts, Accenture challenges smaller firms in innovation and expertise.
The company benefits from the pairing of a solid reputation and steady, sustainable growth. With $64.1 billion revenue in 2023 and a client list that includes more than 75% of the global top 500 companies, the company has built a considerable economic moat.
8. Eventbrite
Co-Founder and CEO Julia Hartz leads vision, strategy, and growth at the world’s largest ticketing and event technology platform. Eventbrite attributes its success to her leadership, under which the company has received awards including Fortune's 100 Best Workplaces in the U.S., Glassdoor's Employees' Choice Best Places to Work, and San Francisco Business Times' Best Places to Work in the SF Bay Area.
Hartz herself has been honored as one of Inc.’s Female Founders 100, Fortune’s 40 Under 40 business leaders, Inc.’s 35 Under 35, and Fortune’s Most Powerful Women Entrepreneurs.
9. Veracyte
Before passing on the executive role to Marc Stapley, Veracyte (VCYT) founder Bonnie Anderson served as CEO from 2008 to 2016. She remains active in the company via an executive chairman role. The global diagnostics company provides clinicians with insights and testing to help diagnose and treat cancer. With steady stock performance over the past five years, the company also boasts growing revenue, income, and profit margins, rising 35.1%, 51.6%, and 64.2%, respectively.
What Qualifies as a Woman-Owned Business?
To qualify for the Women-Owned Small Business (WOSB) Federal Contract program, a business must be at least 51% owned and controlled by women who are U.S. citizens. Women also must manage day-to-day operations and make long-term decisions. Companies meeting this requirement can also apply for certification as a woman-owned business. Getting certified is not required, but it entitles you to federal contracts and economic resources.
How Do I Start Investing In Women-Owned Businesses?
The first step to adding women-owned or women-led businesses to your portfolio is identifying the companies you're interested in. Next, you should track their performance, including stock activity, financial health, and any relevant news or events. You may also look at financial statements, earnings reports, and other relevant data. If you’re ready to buy, you can work with your brokerage platform or financial advisor to make a purchase. You'll need to specify the number of shares you want to purchase and the type of order (e.g., market order, limit order).Instead of handpicking individual companies to invest in, you could invest in an exchange traded fund (ETF) that focuses on or includes female-owned companies. An ETF contains multiple companies and may include a mixture of investment types like stocks, commodities, and bonds.
The Bottom Line
Buying stock in successful, women-led public companies presents an opportunity for everyday investors and for the companies they invest in. Investing in companies like these contributes to more diversity and gender equality in corporate leadership. And research suggests that businesses with diverse leadership, including women, may exhibit better long-term financial results. Before making any investment, be sure to research the company, including stock and overall financial performance.
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],
[
"Return on equity (ROE)",
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],
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"exchange traded fund (ETF)",
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https://www.investopedia.com/peloton-interactive-takes-steps-to-rework-its-debt-8651662 | Peloton Interactive Stock Tumbles As Company Takes Steps to Rework 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"><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>Peloton Interactive announced what it called a "global refinancing" plan to deal with its debt.</li><li>The provider of exercise equipment and workout services will sell $275 million in notes, and enter into a $1 billion loan facility and $100 million revolving credit facility.</li><li>Peloton said the money would be used to pay off and refinance current debt, and cover fees.</li><li>Shares of the company were down more than 15% Tuesday afternoon.</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"> Peloton Interactive (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PTON">PTON</a>) shares plunged Tuesday after the struggling fitness equipment maker and exercise program provider announced what it called a “global refinancing” plan to rework its debt.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The company, an investor darling during the COVID-19 lockdown, said Tuesday it would offer $275 million in convertible senior notes due in 2029, and enter into a $1 billion five-year term loan facility. In addition, it will add a $100 million five-year revolving credit facility.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Peloton noted that the money raised from the debt sale and new credit facilities, together with cash on hand, would be used to pay off about $800 million of its convertible debt due in 2026, refinance its existing term loan and revolving credit facilities, as well as pay fees.<span class="ql-inline-citation" data-cite="1"></span>
</p>
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<span class="heading-toc" id="toc-moves-follow-restructuring-announcement"></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"> Moves Follow Restructuring Announcement </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The moves came about three weeks after the company announced “comprehensive restructuring efforts,” which included slashing its workforce by 15%, or some 400 employees, continuing to reduce its retail showroom footprint, and reimagining its “international go-to-market approach to be more targeted and efficient.”<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"> At the same time, Peloton <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/peloton-sweats-out-another-restructuring-ceo-barry-mccarthy-to-step-down-8642334">explained</a> that CEO Barry McCarthy was stepping down, a little more than two years after taking over from co-founder John Foley and launching a massive shakeup of the firm as post-pandemic sales slumped.
</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"> Peloton became one of the hottest companies during the COVID-19 outbreak, when those stuck at home because of lockdowns bought up its equipment and services. However, once the restrictions ended, demand sank. <br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></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_16-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:87.3%;">
<img alt="Peloton share price chart over past 12 months." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/ZLzJs2HqkD91QmOAvZtl5JcMj00=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PTON_2024-05-21_14-16-46-c2f3f9906d0c43d0ae8bad72e09d70f4.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ZLzJs2HqkD91QmOAvZtl5JcMj00=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PTON_2024-05-21_14-16-46-c2f3f9906d0c43d0ae8bad72e09d70f4.png" data-srcset="https://www.investopedia.com/thmb/MXWx4xlDJtHcCe0TH4V1fcmUGTE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/PTON_2024-05-21_14-16-46-c2f3f9906d0c43d0ae8bad72e09d70f4.png 750w" data-tracking-container="true" height="1472" id="mntl-sc-block-image_1-0" width="1686"/>
<noscript>
<img alt="Peloton share price chart over past 12 months." class="img--noscript universal-image__image" height="1472" sizes="750px" src="https://www.investopedia.com/thmb/ZLzJs2HqkD91QmOAvZtl5JcMj00=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PTON_2024-05-21_14-16-46-c2f3f9906d0c43d0ae8bad72e09d70f4.png" srcset="https://www.investopedia.com/thmb/MXWx4xlDJtHcCe0TH4V1fcmUGTE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/PTON_2024-05-21_14-16-46-c2f3f9906d0c43d0ae8bad72e09d70f4.png 750w" width="1686"/>
</noscript>
</div> </div>
<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Shares of the company were down 15.5% at $3.30 at around 2:15 p.m. Tuesday. The stock has lost more than half its value over the past 12 months and is down 98% since hitting their all-time high in January 2021.
</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
* Peloton Interactive announced what it called a "global refinancing" plan to deal with its debt.
* The provider of exercise equipment and workout services will sell $275 million in notes, and enter into a $1 billion loan facility and $100 million revolving credit facility.
* Peloton said the money would be used to pay off and refinance current debt, and cover fees.
* Shares of the company were down more than 15% Tuesday afternoon.
Peloton Interactive ([PTON](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PTON)) shares plunged Tuesday after the struggling fitness equipment maker and exercise program provider announced what it called a “global refinancing” plan to rework its debt.
The company, an investor darling during the COVID-19 lockdown, said Tuesday it would offer $275 million in convertible senior notes due in 2029, and enter into a $1 billion five-year term loan facility. In addition, it will add a $100 million five-year revolving credit facility.
Peloton noted that the money raised from the debt sale and new credit facilities, together with cash on hand, would be used to pay off about $800 million of its convertible debt due in 2026, refinance its existing term loan and revolving credit facilities, as well as pay fees.
## Moves Follow Restructuring Announcement
The moves came about three weeks after the company announced “comprehensive restructuring efforts,” which included slashing its workforce by 15%, or some 400 employees, continuing to reduce its retail showroom footprint, and reimagining its “international go-to-market approach to be more targeted and efficient.”
At the same time, Peloton [explained](https://www.investopedia.com/peloton-sweats-out-another-restructuring-ceo-barry-mccarthy-to-step-down-8642334) that CEO Barry McCarthy was stepping down, a little more than two years after taking over from co-founder John Foley and launching a massive shakeup of the firm as post-pandemic sales slumped.
Peloton became one of the hottest companies during the COVID-19 outbreak, when those stuck at home because of lockdowns bought up its equipment and services. However, once the restrictions ended, demand sank.
![Peloton share price chart over past 12 months.]()
:max_bytes(150000):strip_icc()/PTON_2024-05-21_14-16-46-c2f3f9906d0c43d0ae8bad72e09d70f4.png)
TradingView
Shares of the company were down 15.5% at $3.30 at around 2:15 p.m. Tuesday. The stock has lost more than half its value over the past 12 months and is down 98% since hitting their all-time high in January 2021.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Peloton Interactive announced what it called a "global refinancing" plan to deal with its debt.The provider of exercise equipment and workout services will sell $275 million in notes, and enter into a $1 billion loan facility and $100 million revolving credit facility.Peloton said the money would be used to pay off and refinance current debt, and cover fees.Shares of the company were down more than 15% Tuesday afternoon.
Peloton Interactive (PTON) shares plunged Tuesday after the struggling fitness equipment maker and exercise program provider announced what it called a “global refinancing” plan to rework its debt.
The company, an investor darling during the COVID-19 lockdown, said Tuesday it would offer $275 million in convertible senior notes due in 2029, and enter into a $1 billion five-year term loan facility. In addition, it will add a $100 million five-year revolving credit facility.
Peloton noted that the money raised from the debt sale and new credit facilities, together with cash on hand, would be used to pay off about $800 million of its convertible debt due in 2026, refinance its existing term loan and revolving credit facilities, as well as pay fees.
Moves Follow Restructuring Announcement
The moves came about three weeks after the company announced “comprehensive restructuring efforts,” which included slashing its workforce by 15%, or some 400 employees, continuing to reduce its retail showroom footprint, and reimagining its “international go-to-market approach to be more targeted and efficient.”
At the same time, Peloton explained that CEO Barry McCarthy was stepping down, a little more than two years after taking over from co-founder John Foley and launching a massive shakeup of the firm as post-pandemic sales slumped.
Peloton became one of the hottest companies during the COVID-19 outbreak, when those stuck at home because of lockdowns bought up its equipment and services. However, once the restrictions ended, demand sank.
TradingView
Shares of the company were down 15.5% at $3.30 at around 2:15 p.m. Tuesday. The stock has lost more than half its value over the past 12 months and is down 98% since hitting their all-time high in January 2021.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/terms/s/softloan.asp | Soft Loan: Meaning, Overview, Pros and Cons | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-soft-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 Soft Loan? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A soft loan is a loan with no interest or a below-market rate of interest. Also known as "soft financing" or "concessional funding," soft loans have lenient terms, such as extended grace periods in which only interest or service charges are due, and interest holidays. They typically offer longer amortization schedules (in some cases up to 50 years) than conventional bank loans.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Soft loans are often made by multinational development banks (such as the Asian Development Fund), affiliates of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/worldbank.asp">the World Bank</a>, or federal governments (or government agencies) to developing countries that would be unable to borrow at the market rate.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A "soft financing" or "soft loan" is a loan given with next-to-no or no interest with extended grace periods, offering more leniency than traditional loans.</li><li>Many developing nations that need funds but cannot afford to borrow at market rates can benefit from soft loans.</li><li>In the case of government lenders, soft loans may be used to forge ties between the lending and borrowing countries.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-a-soft-loan-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> How a Soft Loan Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Soft loans are often offered not only as a way to support developing nations but also to form economic and political ties with them. This often happens if the borrowing nation has a resource or material that is of interest to the lender, which may want not only repayment of the loan but favorable access to that resource.
</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"> China, in particular, has been active in extending financing to African nations in the last decade. For example, Ethiopia has received over $19 billion in loans (also called Foreign Direct Investment) from the Chinese government from 2010 to 2021, according to the China-Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies.<span class="ql-inline-citation" data-cite="1"></span> The loans are all part of China's plan to support Ethiopia and to promote the development of trade between the African country and the Asian giant.
</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 another example, the Chinese government extended a $2 billion soft loan to Angola in March 2004. The loan was made in exchange for its commitment to provide a continuous supply of crude oil to China.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<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 soft loan is financing with generous terms—a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/below-market-interest-rate.asp">below-market interest rate</a>, for example—that is often offered to developing countries.</p></div></div></div>
<span class="heading-toc" id="toc-pros-and-cons-of-soft-loans"></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"> Pros and Cons of Soft Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> While at first glance soft loans can seem like a win-win situation, they do have disadvantages—as well as advantages—for lenders.
</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"> Pro: Breaks for Business </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Along with serving as a platform for the lender to establish broader diplomacy and policies with the borrower, soft loans offer favorable business opportunities. The aforementioned railway and industrial parks in Ethiopia are not only being built with Chinese funds but also by Chinese companies. Many of the firms that move into the complexes are also Chinese, and they receive considerable tax breaks on income and imports from the Ethiopian government.
</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"> Con: Shaky Returns </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The length of time it may take to repay a soft loan could mean the lender is tied to the borrower for an extended number of years. While this may mean the lender might not see a direct return on the financing it offered for some time, it does create an opportunity to dialogue with the borrower for other purposes.
</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 instance, in 2015, Japan offered a soft loan to India to cover 80% of the cost for a $15 billion bullet train project at a less than 1% interest rate, with the caveat that India would purchase 30% of the equipment for the project from Japanese companies.<span class="ql-inline-citation" data-cite="4"></span> By the time the countries signed a formal agreement, Japan’s commitment increased to 85% of the cost, in the form of soft loans, for a then-estimated $19 billion project cost.<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_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> There is also the issue of the borrower having repayment problems, despite the soft loan's generous terms. Nations may be tempted to take on more debt than they can afford. Such a situation occurred with Ethiopia.
</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 a result of those Chinese loans, Ethiopia's debt to China as a percent of gross national income was approximately 10%, and it was in danger of defaulting on them.<span class="ql-inline-citation" data-cite="6"></span> In Sept. 2018, China had to agree to restructure some of the debt, lowering the repayments and extending the loan term periods by 20 years. In the aftermath of the COVID-19 pandemic, soft lending from China to Africa has slowed, down to only $1 billion in 2022.<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_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-who-typically-offers-soft-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Typically Offers Soft Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Soft loans are typically offered from developed countries, such as China and the U.S., to developing countries. The latter countries often don't have the resources to qualify for higher cost loans.</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-makes-a-loan-soft"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Makes a Loan "Soft?"</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Soft loans generally have much more favorable terms than "hard" loans. That may include low to no interest and extended repayment periods.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-country-is-known-for-extending-soft-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Country Is Known for Extending Soft Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>China has funded many projects through soft loans. In exchange for low or no interest, China often expects countries to use Chinese companies or goods to complete their funded projects.<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_37-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Soft loans are an essential tool for many countries that are struggling to fund necessary infrastructure upgrades. While soft loans do help, they often come with strings attached, such as using certain products or companies.<br/>
</p></div> | ## What Is a Soft Loan?
A soft loan is a loan with no interest or a below-market rate of interest. Also known as "soft financing" or "concessional funding," soft loans have lenient terms, such as extended grace periods in which only interest or service charges are due, and interest holidays. They typically offer longer amortization schedules (in some cases up to 50 years) than conventional bank loans.
Soft loans are often made by multinational development banks (such as the Asian Development Fund), affiliates of [the World Bank](https://www.investopedia.com/terms/w/worldbank.asp), or federal governments (or government agencies) to developing countries that would be unable to borrow at the market rate.
### Key Takeaways
* A "soft financing" or "soft loan" is a loan given with next-to-no or no interest with extended grace periods, offering more leniency than traditional loans.
* Many developing nations that need funds but cannot afford to borrow at market rates can benefit from soft loans.
* In the case of government lenders, soft loans may be used to forge ties between the lending and borrowing countries.
## How a Soft Loan Works
Soft loans are often offered not only as a way to support developing nations but also to form economic and political ties with them. This often happens if the borrowing nation has a resource or material that is of interest to the lender, which may want not only repayment of the loan but favorable access to that resource.
China, in particular, has been active in extending financing to African nations in the last decade. For example, Ethiopia has received over $19 billion in loans (also called Foreign Direct Investment) from the Chinese government from 2010 to 2021, according to the China-Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies. The loans are all part of China's plan to support Ethiopia and to promote the development of trade between the African country and the Asian giant.
In another example, the Chinese government extended a $2 billion soft loan to Angola in March 2004. The loan was made in exchange for its commitment to provide a continuous supply of crude oil to China.
###
A soft loan is financing with generous terms—a [below-market interest rate](https://www.investopedia.com/terms/b/below-market-interest-rate.asp), for example—that is often offered to developing countries.
## Pros and Cons of Soft Loans
While at first glance soft loans can seem like a win-win situation, they do have disadvantages—as well as advantages—for lenders.
### Pro: Breaks for Business
Along with serving as a platform for the lender to establish broader diplomacy and policies with the borrower, soft loans offer favorable business opportunities. The aforementioned railway and industrial parks in Ethiopia are not only being built with Chinese funds but also by Chinese companies. Many of the firms that move into the complexes are also Chinese, and they receive considerable tax breaks on income and imports from the Ethiopian government.
### Con: Shaky Returns
The length of time it may take to repay a soft loan could mean the lender is tied to the borrower for an extended number of years. While this may mean the lender might not see a direct return on the financing it offered for some time, it does create an opportunity to dialogue with the borrower for other purposes.
For instance, in 2015, Japan offered a soft loan to India to cover 80% of the cost for a $15 billion bullet train project at a less than 1% interest rate, with the caveat that India would purchase 30% of the equipment for the project from Japanese companies. By the time the countries signed a formal agreement, Japan’s commitment increased to 85% of the cost, in the form of soft loans, for a then-estimated $19 billion project cost.
There is also the issue of the borrower having repayment problems, despite the soft loan's generous terms. Nations may be tempted to take on more debt than they can afford. Such a situation occurred with Ethiopia.
As a result of those Chinese loans, Ethiopia's debt to China as a percent of gross national income was approximately 10%, and it was in danger of defaulting on them. In Sept. 2018, China had to agree to restructure some of the debt, lowering the repayments and extending the loan term periods by 20 years. In the aftermath of the COVID-19 pandemic, soft lending from China to Africa has slowed, down to only $1 billion in 2022.
## Who Typically Offers Soft Loans?
Soft loans are typically offered from developed countries, such as China and the U.S., to developing countries. The latter countries often don't have the resources to qualify for higher cost loans.
## What Makes a Loan "Soft?"
Soft loans generally have much more favorable terms than "hard" loans. That may include low to no interest and extended repayment periods.
## What Country Is Known for Extending Soft Loans?
China has funded many projects through soft loans. In exchange for low or no interest, China often expects countries to use Chinese companies or goods to complete their funded projects.
## The Bottom Line
Soft loans are an essential tool for many countries that are struggling to fund necessary infrastructure upgrades. While soft loans do help, they often come with strings attached, such as using certain products or companies.
| What Is a Soft Loan?
A soft loan is a loan with no interest or a below-market rate of interest. Also known as "soft financing" or "concessional funding," soft loans have lenient terms, such as extended grace periods in which only interest or service charges are due, and interest holidays. They typically offer longer amortization schedules (in some cases up to 50 years) than conventional bank loans.
Soft loans are often made by multinational development banks (such as the Asian Development Fund), affiliates of the World Bank, or federal governments (or government agencies) to developing countries that would be unable to borrow at the market rate.
Key Takeaways
A "soft financing" or "soft loan" is a loan given with next-to-no or no interest with extended grace periods, offering more leniency than traditional loans.Many developing nations that need funds but cannot afford to borrow at market rates can benefit from soft loans.In the case of government lenders, soft loans may be used to forge ties between the lending and borrowing countries.
How a Soft Loan Works
Soft loans are often offered not only as a way to support developing nations but also to form economic and political ties with them. This often happens if the borrowing nation has a resource or material that is of interest to the lender, which may want not only repayment of the loan but favorable access to that resource.
China, in particular, has been active in extending financing to African nations in the last decade. For example, Ethiopia has received over $19 billion in loans (also called Foreign Direct Investment) from the Chinese government from 2010 to 2021, according to the China-Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies. The loans are all part of China's plan to support Ethiopia and to promote the development of trade between the African country and the Asian giant.
In another example, the Chinese government extended a $2 billion soft loan to Angola in March 2004. The loan was made in exchange for its commitment to provide a continuous supply of crude oil to China.
A soft loan is financing with generous terms—a below-market interest rate, for example—that is often offered to developing countries.
Pros and Cons of Soft Loans
While at first glance soft loans can seem like a win-win situation, they do have disadvantages—as well as advantages—for lenders.
Pro: Breaks for Business
Along with serving as a platform for the lender to establish broader diplomacy and policies with the borrower, soft loans offer favorable business opportunities. The aforementioned railway and industrial parks in Ethiopia are not only being built with Chinese funds but also by Chinese companies. Many of the firms that move into the complexes are also Chinese, and they receive considerable tax breaks on income and imports from the Ethiopian government.
Con: Shaky Returns
The length of time it may take to repay a soft loan could mean the lender is tied to the borrower for an extended number of years. While this may mean the lender might not see a direct return on the financing it offered for some time, it does create an opportunity to dialogue with the borrower for other purposes.
For instance, in 2015, Japan offered a soft loan to India to cover 80% of the cost for a $15 billion bullet train project at a less than 1% interest rate, with the caveat that India would purchase 30% of the equipment for the project from Japanese companies. By the time the countries signed a formal agreement, Japan’s commitment increased to 85% of the cost, in the form of soft loans, for a then-estimated $19 billion project cost.
There is also the issue of the borrower having repayment problems, despite the soft loan's generous terms. Nations may be tempted to take on more debt than they can afford. Such a situation occurred with Ethiopia.
As a result of those Chinese loans, Ethiopia's debt to China as a percent of gross national income was approximately 10%, and it was in danger of defaulting on them. In Sept. 2018, China had to agree to restructure some of the debt, lowering the repayments and extending the loan term periods by 20 years. In the aftermath of the COVID-19 pandemic, soft lending from China to Africa has slowed, down to only $1 billion in 2022.
Who Typically Offers Soft Loans?
Soft loans are typically offered from developed countries, such as China and the U.S., to developing countries. The latter countries often don't have the resources to qualify for higher cost loans.
What Makes a Loan "Soft?"
Soft loans generally have much more favorable terms than "hard" loans. That may include low to no interest and extended repayment periods.
What Country Is Known for Extending Soft Loans?
China has funded many projects through soft loans. In exchange for low or no interest, China often expects countries to use Chinese companies or goods to complete their funded projects.
The Bottom Line
Soft loans are an essential tool for many countries that are struggling to fund necessary infrastructure upgrades. While soft loans do help, they often come with strings attached, such as using certain products or companies.
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https://www.investopedia.com/ask/answers/042915/how-do-financial-market-exhibit-asymmetric-information.asp | How Financial Markets Exhibit Asymmetric Information | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Financial markets exhibit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asymmetricinformation.asp" rel="noopener noreferrer">asymmetric information</a> in any transaction in which one of the two parties involved has more information than the other and thus has the ability to make a more informed decision.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Economists say that asymmetric information leads to market failure. That is, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/law-of-supply-demand.asp" rel="noopener noreferrer">law of supply and demand</a> that regulates the pricing of goods and services is skewed.
</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>In any transaction, a state of asymmetric information exists if one party has information that the other lacks.</li><li>This is said to cause market failure. That is, the correct price cannot be set according to the law of supply and demand.</li><li>The subprime mortgage crisis of 2007-2008 has been seen as a case of asymmetric information. </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"> The 2007–2008 subprime loan crisis was a classic example of the way asymmetric information can skew a market and cause market failure.
</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-understanding-asymmetric-information"></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 Asymmetric Information </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Asymmetric information in the financial markets can occur whenever either the buyer or seller has more information on the past, present, or future performance of an investment. One party can make an informed decision but the other party cannot.
</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 buyer may know that the asset is underpriced, or the seller may know that it is underpriced. In either case, one party has the opportunity to profit from the transaction at the expense of the other.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-subheading__text"> The Subprime Meltdown and Asymmetric Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The 2007-2008 subprime mortgage crisis could serve as a textbook illustration of the effects of asymmetric information. The products behind the crisis were mortgage-backed securities. Banks had extended the mortgages to consumers and then sold them to third parties.<span class="ql-inline-citation" data-cite="1"></span> Those third parties packaged them together in batches and sold them on to investors. The securities were rated high-quality and were sold as such.
</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"> But many or most of the individual mortgages included in those products had been extended to borrowers buying bubble-priced homes that were beyond their means. When prices stalled the borrowers were stuck, as were the secondary buyers of their mortgages.
</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"> Unless nobody did their homework at any stage of this complicated process, the sellers had information that the end buyers did not. That is, they knew that risky mortgages were being passed off as high-quality debt. They were profiting from asymmetric information.
</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"> Other Examples of Asymmetric Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asymmetricinformation.asp" rel="noopener noreferrer">Asymmetric information</a> can occur in any situation involving a borrower and a lender when the borrower fails to disclose negative information about his or her real financial state. Or the borrower may simply fail to anticipate a worst-case scenario such as a job loss or an unanticipated expense.
</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 is why unsecured loans can be so costly. The lender can review the borrower's credit history and salary level but cannot foresee bad luck. The lender will charge a risk premium to compensate for the disparity in information.
</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"> Ignoring Risks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Economists who study asymmetric information suggest that such situations can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050415/how-can-problem-asymmetric-information-be-overcome.asp">pose a moral hazard to one party</a> in a transaction. Such a moral hazard can occur when the seller or buyer knows or reasonably suspects that a real but undisclosed risk is involved in the transaction.
</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"> As an example, consider again the sale of those mortgage-backed securities. The sellers may have done their homework and therefore have known they were selling low-quality mortgages packaged as top-rated investments. Or they may have seen early warning signs of an imminent collapse in home prices.
</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"> Did the buyers have the same information? If they did, they presumably were engaged in the same game of pass-the-trash and were counting on reselling the securities at a profit before the end came.
</p></div> | Financial markets exhibit [asymmetric information](https://www.investopedia.com/terms/a/asymmetricinformation.asp) in any transaction in which one of the two parties involved has more information than the other and thus has the ability to make a more informed decision.
Economists say that asymmetric information leads to market failure. That is, the [law of supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp) that regulates the pricing of goods and services is skewed.
### Key Takeaways
* In any transaction, a state of asymmetric information exists if one party has information that the other lacks.
* This is said to cause market failure. That is, the correct price cannot be set according to the law of supply and demand.
* The subprime mortgage crisis of 2007-2008 has been seen as a case of asymmetric information.
The 2007–2008 subprime loan crisis was a classic example of the way asymmetric information can skew a market and cause market failure.
## Understanding Asymmetric Information
Asymmetric information in the financial markets can occur whenever either the buyer or seller has more information on the past, present, or future performance of an investment. One party can make an informed decision but the other party cannot.
The buyer may know that the asset is underpriced, or the seller may know that it is underpriced. In either case, one party has the opportunity to profit from the transaction at the expense of the other.
### The Subprime Meltdown and Asymmetric Information
The 2007-2008 subprime mortgage crisis could serve as a textbook illustration of the effects of asymmetric information. The products behind the crisis were mortgage-backed securities. Banks had extended the mortgages to consumers and then sold them to third parties. Those third parties packaged them together in batches and sold them on to investors. The securities were rated high-quality and were sold as such.
But many or most of the individual mortgages included in those products had been extended to borrowers buying bubble-priced homes that were beyond their means. When prices stalled the borrowers were stuck, as were the secondary buyers of their mortgages.
Unless nobody did their homework at any stage of this complicated process, the sellers had information that the end buyers did not. That is, they knew that risky mortgages were being passed off as high-quality debt. They were profiting from asymmetric information.
### Other Examples of Asymmetric Information
[Asymmetric information](https://www.investopedia.com/terms/a/asymmetricinformation.asp) can occur in any situation involving a borrower and a lender when the borrower fails to disclose negative information about his or her real financial state. Or the borrower may simply fail to anticipate a worst-case scenario such as a job loss or an unanticipated expense.
This is why unsecured loans can be so costly. The lender can review the borrower's credit history and salary level but cannot foresee bad luck. The lender will charge a risk premium to compensate for the disparity in information.
### Ignoring Risks
Economists who study asymmetric information suggest that such situations can [pose a moral hazard to one party](https://www.investopedia.com/ask/answers/050415/how-can-problem-asymmetric-information-be-overcome.asp) in a transaction. Such a moral hazard can occur when the seller or buyer knows or reasonably suspects that a real but undisclosed risk is involved in the transaction.
As an example, consider again the sale of those mortgage-backed securities. The sellers may have done their homework and therefore have known they were selling low-quality mortgages packaged as top-rated investments. Or they may have seen early warning signs of an imminent collapse in home prices.
Did the buyers have the same information? If they did, they presumably were engaged in the same game of pass-the-trash and were counting on reselling the securities at a profit before the end came.
| Financial markets exhibit asymmetric information in any transaction in which one of the two parties involved has more information than the other and thus has the ability to make a more informed decision.
Economists say that asymmetric information leads to market failure. That is, the law of supply and demand that regulates the pricing of goods and services is skewed.
Key Takeaways
In any transaction, a state of asymmetric information exists if one party has information that the other lacks.This is said to cause market failure. That is, the correct price cannot be set according to the law of supply and demand.The subprime mortgage crisis of 2007-2008 has been seen as a case of asymmetric information.
The 2007–2008 subprime loan crisis was a classic example of the way asymmetric information can skew a market and cause market failure.
Understanding Asymmetric Information
Asymmetric information in the financial markets can occur whenever either the buyer or seller has more information on the past, present, or future performance of an investment. One party can make an informed decision but the other party cannot.
The buyer may know that the asset is underpriced, or the seller may know that it is underpriced. In either case, one party has the opportunity to profit from the transaction at the expense of the other.
The Subprime Meltdown and Asymmetric Information
The 2007-2008 subprime mortgage crisis could serve as a textbook illustration of the effects of asymmetric information. The products behind the crisis were mortgage-backed securities. Banks had extended the mortgages to consumers and then sold them to third parties. Those third parties packaged them together in batches and sold them on to investors. The securities were rated high-quality and were sold as such.
But many or most of the individual mortgages included in those products had been extended to borrowers buying bubble-priced homes that were beyond their means. When prices stalled the borrowers were stuck, as were the secondary buyers of their mortgages.
Unless nobody did their homework at any stage of this complicated process, the sellers had information that the end buyers did not. That is, they knew that risky mortgages were being passed off as high-quality debt. They were profiting from asymmetric information.
Other Examples of Asymmetric Information
Asymmetric information can occur in any situation involving a borrower and a lender when the borrower fails to disclose negative information about his or her real financial state. Or the borrower may simply fail to anticipate a worst-case scenario such as a job loss or an unanticipated expense.
This is why unsecured loans can be so costly. The lender can review the borrower's credit history and salary level but cannot foresee bad luck. The lender will charge a risk premium to compensate for the disparity in information.
Ignoring Risks
Economists who study asymmetric information suggest that such situations can pose a moral hazard to one party in a transaction. Such a moral hazard can occur when the seller or buyer knows or reasonably suspects that a real but undisclosed risk is involved in the transaction.
As an example, consider again the sale of those mortgage-backed securities. The sellers may have done their homework and therefore have known they were selling low-quality mortgages packaged as top-rated investments. Or they may have seen early warning signs of an imminent collapse in home prices.
Did the buyers have the same information? If they did, they presumably were engaged in the same game of pass-the-trash and were counting on reselling the securities at a profit before the end came.
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https://www.investopedia.com/terms/u/uninsured-certificate-of-deposit.asp | Uninsured Certificate of Deposit: What It is, How it Works, FAQs | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-uninsured-certificate-of-deposit"></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 Uninsured Certificate of Deposit? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An uninsured <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificate of deposit</a> is a CD that is not insured against losses. Due to the lack of insurance, these CDs yield a higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rate</a>, as the purchaser assumes all of the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risks</a>. If the financial institution or entity that issued the CD goes bankrupt, then the purchaser loses the investment.
</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 uninsured <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/certificate-of-deposits-4689733">certificate of deposit</a> is a CD that is not insured against losses by either the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA).</li>
<li>Uninsured CDs typically have higher interest rates because the purchaser of the CD assumes all of the risk associated with them.</li>
<li>Examples of uninsured CDs are Yankee CDs, bull CDs, and bear CDs.</li>
<li>Most CDs are insured by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fdic-rules-for-cds-5271560">the FDIC</a> or the NCUA.</li>
<li>CDs, along with savings accounts and money market accounts, are savings vehicles that you can invest in at your local bank or credit union.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-understanding-uninsured-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 Uninsured CDs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Most CDs are insured by either 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> or, in the case of credit unions, 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>.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="5"></span> These institutions would pay CD holders up to a certain limit in the event that the lending financial institution was insolvent. However, there are uninsured CDs, such as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/offshore.asp">offshore</a> CDs and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokered-cd.asp">brokered CDs</a>.
</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-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_10-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Offshore CDs put your money in a foreign institution’s bank certificate. The lure is interest rates that are a multiple of what you can get on a similar investment in the United States. However, the danger is betting on the safety of a foreign bank, and if your money is kept in that country’s currency rather than in U.S. dollars, you are exposed to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currencyrisk.asp">currency risk</a>.</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_11-0"> <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_12-0"> An FDIC-insured account is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">bank</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/thriftbank.asp">thrift</a> (savings and loan association) account that meets the requirements to be covered by the FDIC. The type of accounts that can be FDIC-insured includes <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nowaccount.asp">negotiable order of withdrawal (NOW)</a>, checking, savings, money market deposit accounts, and CDs. The <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificate-of-deposit-account-registry-service.asp">maximum amount insured</a> in a qualified account is $250,000 per depositor, per member institution.<span class="ql-inline-citation" data-cite="1"></span> This means if you have up to that amount in a bank account and the bank fails, then the FDIC makes you whole from any losses that you suffered.
</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"> Other categories of CDs are exotics that are put together by investment companies. Investors in search of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yield.asp">yield</a> sometimes buy these without realizing that they are not government-guaranteed. They may have high teaser rates, long lock-up periods, variable rates, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rates of return</a> tied to indexes like the stock or bond markets, or even variable rates tied to an asset that has no publicly revealed price.
</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"> Some brokered CDs may be partly uninsured. Other forms of CDs are the bull CD, bear CD,<span class="ql-inline-citation" data-cite="6"></span> and <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>. The bull CD’s interest rate correlates directly with the value of its underlying <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketindex.asp">market index</a>. When someone invests in a bull CD, they are guaranteed a minimum rate of return and an additional specified percentage, based on the associated market index. The interest rate that a holder of a bull CD receives during the life of the CD increases as the value of the market index increases.<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>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_18-0"><span class="heading-toc" id="toc-is-it-safe-to-invest-in-an-uninsured-certificate-of-deposit-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is it safe to invest in an uninsured certificate of deposit (CD)?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are risks involved with an uninsured certificate of deposit (CD). Investors put their money at risk all the time in uninsured options like mutual funds, annuities, life insurance policies, stocks, and bonds.<span class="ql-inline-citation" data-cite="3"></span> Each individual has to decide if the higher interest rates are worth the risk.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_20-0"><span class="heading-toc" id="toc-what-are-the-benefits-of-an-uninsured-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the benefits of an uninsured CD?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While an uninsured CD carries risk, the biggest benefit is that you can earn more money. Higher interest rates over time will bring in a much higher rate of return. If you are confident in the market, an uninsured CD could make sense for you.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_22-0"><span class="heading-toc" id="toc-are-cds-insured-by-the-federal-deposit-insurance-corp-fdic"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are CDs insured by the Federal Deposit Insurance Corp. (FDIC)?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The majority of CDs are provided through banks or credit unions, and these bank options are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000.<span class="ql-inline-citation" data-cite="3"></span> The National Credit Union Administration (NCUA) provides similar protection for credit union options.<span class="ql-inline-citation" data-cite="5"></span> There are uninsured options, typically offered through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp">brokerage</a>. These options include offshore CDs, bull CDs, bear CDs, and Yankee CDs.</p></div>
</div></div> | ## What Is an Uninsured Certificate of Deposit?
An uninsured [certificate of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) is a CD that is not insured against losses. Due to the lack of insurance, these CDs yield a higher [interest rate](https://www.investopedia.com/terms/i/interestrate.asp), as the purchaser assumes all of the [risks](https://www.investopedia.com/terms/r/risk.asp). If the financial institution or entity that issued the CD goes bankrupt, then the purchaser loses the investment.
### Key Takeaways
* An uninsured [certificate of deposit](https://www.investopedia.com/certificate-of-deposits-4689733) is a CD that is not insured against losses by either the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA).
* Uninsured CDs typically have higher interest rates because the purchaser of the CD assumes all of the risk associated with them.
* Examples of uninsured CDs are Yankee CDs, bull CDs, and bear CDs.
* Most CDs are insured by [the FDIC](https://www.investopedia.com/fdic-rules-for-cds-5271560) or the NCUA.
* CDs, along with savings accounts and money market accounts, are savings vehicles that you can invest in at your local bank or credit union.
## Understanding Uninsured CDs
Most CDs are insured by either the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) or, in the case of credit unions, the [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp). These institutions would pay CD holders up to a certain limit in the event that the lending financial institution was insolvent. However, there are uninsured CDs, such as [offshore](https://www.investopedia.com/terms/o/offshore.asp) CDs and [brokered CDs](https://www.investopedia.com/terms/b/brokered-cd.asp).
###
Offshore CDs put your money in a foreign institution’s bank certificate. The lure is interest rates that are a multiple of what you can get on a similar investment in the United States. However, the danger is betting on the safety of a foreign bank, and if your money is kept in that country’s currency rather than in U.S. dollars, you are exposed to [currency risk](https://www.investopedia.com/terms/c/currencyrisk.asp).
## Special Considerations
An FDIC-insured account is a [bank](https://www.investopedia.com/terms/b/bank.asp) or [thrift](https://www.investopedia.com/terms/t/thriftbank.asp) (savings and loan association) account that meets the requirements to be covered by the FDIC. The type of accounts that can be FDIC-insured includes [negotiable order of withdrawal (NOW)](https://www.investopedia.com/terms/n/nowaccount.asp), checking, savings, money market deposit accounts, and CDs. The [maximum amount insured](https://www.investopedia.com/terms/c/certificate-of-deposit-account-registry-service.asp) in a qualified account is $250,000 per depositor, per member institution. This means if you have up to that amount in a bank account and the bank fails, then the FDIC makes you whole from any losses that you suffered.
Other categories of CDs are exotics that are put together by investment companies. Investors in search of [yield](https://www.investopedia.com/terms/y/yield.asp) sometimes buy these without realizing that they are not government-guaranteed. They may have high teaser rates, long lock-up periods, variable rates, [rates of return](https://www.investopedia.com/terms/r/rateofreturn.asp) tied to indexes like the stock or bond markets, or even variable rates tied to an asset that has no publicly revealed price.
Some brokered CDs may be partly uninsured. Other forms of CDs are the bull CD, bear CD, and [Yankee CD](https://www.investopedia.com/terms/y/yankeecd.asp). The bull CD’s interest rate correlates directly with the value of its underlying [market index](https://www.investopedia.com/terms/m/marketindex.asp). When someone invests in a bull CD, they are guaranteed a minimum rate of return and an additional specified percentage, based on the associated market index. The interest rate that a holder of a bull CD receives during the life of the CD increases as the value of the market index increases.
## Is it safe to invest in an uninsured certificate of deposit (CD)?
There are risks involved with an uninsured certificate of deposit (CD). Investors put their money at risk all the time in uninsured options like mutual funds, annuities, life insurance policies, stocks, and bonds. Each individual has to decide if the higher interest rates are worth the risk.
## What are the benefits of an uninsured CD?
While an uninsured CD carries risk, the biggest benefit is that you can earn more money. Higher interest rates over time will bring in a much higher rate of return. If you are confident in the market, an uninsured CD could make sense for you.
## Are CDs insured by the Federal Deposit Insurance Corp. (FDIC)?
The majority of CDs are provided through banks or credit unions, and these bank options are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000. The National Credit Union Administration (NCUA) provides similar protection for credit union options. There are uninsured options, typically offered through a [brokerage](https://www.investopedia.com/terms/b/brokerage-company.asp). These options include offshore CDs, bull CDs, bear CDs, and Yankee CDs.
| What Is an Uninsured Certificate of Deposit?
An uninsured certificate of deposit is a CD that is not insured against losses. Due to the lack of insurance, these CDs yield a higher interest rate, as the purchaser assumes all of the risks. If the financial institution or entity that issued the CD goes bankrupt, then the purchaser loses the investment.
Key Takeaways
An uninsured certificate of deposit is a CD that is not insured against losses by either the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA).
Uninsured CDs typically have higher interest rates because the purchaser of the CD assumes all of the risk associated with them.
Examples of uninsured CDs are Yankee CDs, bull CDs, and bear CDs.
Most CDs are insured by the FDIC or the NCUA.
CDs, along with savings accounts and money market accounts, are savings vehicles that you can invest in at your local bank or credit union.
Understanding Uninsured CDs
Most CDs are insured by either the Federal Deposit Insurance Corp. (FDIC) or, in the case of credit unions, the National Credit Union Administration (NCUA). These institutions would pay CD holders up to a certain limit in the event that the lending financial institution was insolvent. However, there are uninsured CDs, such as offshore CDs and brokered CDs.
Offshore CDs put your money in a foreign institution’s bank certificate. The lure is interest rates that are a multiple of what you can get on a similar investment in the United States. However, the danger is betting on the safety of a foreign bank, and if your money is kept in that country’s currency rather than in U.S. dollars, you are exposed to currency risk.
Special Considerations
An FDIC-insured account is a bank or thrift (savings and loan association) account that meets the requirements to be covered by the FDIC. The type of accounts that can be FDIC-insured includes negotiable order of withdrawal (NOW), checking, savings, money market deposit accounts, and CDs. The maximum amount insured in a qualified account is $250,000 per depositor, per member institution. This means if you have up to that amount in a bank account and the bank fails, then the FDIC makes you whole from any losses that you suffered.
Other categories of CDs are exotics that are put together by investment companies. Investors in search of yield sometimes buy these without realizing that they are not government-guaranteed. They may have high teaser rates, long lock-up periods, variable rates, rates of return tied to indexes like the stock or bond markets, or even variable rates tied to an asset that has no publicly revealed price.
Some brokered CDs may be partly uninsured. Other forms of CDs are the bull CD, bear CD, and Yankee CD. The bull CD’s interest rate correlates directly with the value of its underlying market index. When someone invests in a bull CD, they are guaranteed a minimum rate of return and an additional specified percentage, based on the associated market index. The interest rate that a holder of a bull CD receives during the life of the CD increases as the value of the market index increases.
Is it safe to invest in an uninsured certificate of deposit (CD)?
There are risks involved with an uninsured certificate of deposit (CD). Investors put their money at risk all the time in uninsured options like mutual funds, annuities, life insurance policies, stocks, and bonds. Each individual has to decide if the higher interest rates are worth the risk.
What are the benefits of an uninsured CD?
While an uninsured CD carries risk, the biggest benefit is that you can earn more money. Higher interest rates over time will bring in a much higher rate of return. If you are confident in the market, an uninsured CD could make sense for you.
Are CDs insured by the Federal Deposit Insurance Corp. (FDIC)?
The majority of CDs are provided through banks or credit unions, and these bank options are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000. The National Credit Union Administration (NCUA) provides similar protection for credit union options. There are uninsured options, typically offered through a brokerage. These options include offshore CDs, bull CDs, bear CDs, and Yankee CDs.
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https://www.investopedia.com/best-expense-tracker-apps-5114591 | Best Expense Tracker Apps 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">
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Most people know the importance of keeping business receipts in case they’re <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/032415/how-do-irs-audits-work.asp">audited</a>. The problem with paper receipts is that they're easy to lose. By immediately uploading these into an expense tracker app, you save space and time instead of having to dig through a shoebox full of receipts at tax time.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-1">
We reviewed 30 different options to determine the best expense tracker apps, based on price, features, reviews, and accessibility. The apps we picked have the ability to sync and categorize account transactions, are reasonably priced, and offer reporting tools to track your personal and business financial health.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
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<span class="heading-toc" id="summary-list"></span>
<h2 class="summary-list__title">
Best Expense Tracker Apps for May 2024
</h2>
<ul class="summary-list__content">
<li class="summary-list__item">
<span class="summary-list__item-top-pick-container">
<strong class="summary-list__item-category">Best for Small Businesses:</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://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> QuickBooks Accounting</a><!-- end: summary-list__item-top-pick -->
</span>
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<li class="summary-list__item">
<span class="summary-list__item-top-pick-container">
<strong class="summary-list__item-category">Best for Investors:</strong>
<a class="summary-list__item-top-pick" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://personalcapital.sjv.io/c/328256/1287561/13439" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> Empower (Formerly Personal Capital)</a><!-- end: summary-list__item-top-pick -->
</span>
</li>
<li class="summary-list__item">
<span class="summary-list__item-top-pick-container">
<strong class="summary-list__item-category">Best for Receipt Saving:</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.expensify.com/" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> Expensify</a><!-- end: summary-list__item-top-pick -->
</span>
</li>
<li class="summary-list__item">
<span class="summary-list__item-top-pick-container">
<strong class="summary-list__item-category">Best for Reimbursement and 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.everlance.com/" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> Everlance</a><!-- end: summary-list__item-top-pick -->
</span>
</li>
<li class="summary-list__item">
<span class="summary-list__item-top-pick-container">
<strong class="summary-list__item-category">Best Free Option:</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.nerdwallet.com/" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> NerdWallet</a><!-- end: summary-list__item-top-pick -->
</span>
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Best Expense Tracker Apps for May 2024</span><!-- end: comp mntl-toc__heading-text mntl-text-block -->
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Best Expense Tracker Apps for May 2024</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-Empower (Formerly Personal Capital)" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-investors-empower-formerly-personal-capital" rel="nocaes"> <span class="link__wrapper">Empower (Formerly Personal Capital)</span>
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</a><!-- end: mntl-toc__list-item-link js-mntl-toc-link --></li><!-- end: comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item -->
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<li class="comp toc-items__chop mntl-text-block" data-click-action="OnPageClick-See More" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="toc-items__chop_1-0">
See More (2)</li><!-- end: comp toc-items__chop mntl-text-block -->
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<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-1">
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<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-2">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Choose" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-guide-to-choosing-expense-tracker-apps" id="mntl-toc__list-item-link_1-0-2" rel="nocaes"><span class="link__wrapper">How to Choose</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 mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-3">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros and Cons" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-and-cons-of-expense-tracker-apps" id="mntl-toc__list-item-link_1-0-3" rel="nocaes"><span class="link__wrapper">Pros and Cons</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link -->
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<div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-4">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-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_1-0-4" 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 -->
</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_1-0-5">
<a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-FAQ" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-faq-0937536d-8016-4a66-a194-f48968c91658" id="mntl-toc__list-item-link_1-0-5" rel="nocaes"><span class="link__wrapper">FAQ</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>
<div class="loc article-body__inner article-body__inner">
<div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0">
<span class="heading-toc" id="toc-best-for-small-businesses-quickbooks-accounting"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for Small Businesses</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> QuickBooks Accounting</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0"/><!-- end: comp list-sc-item__header-break mntl-block -->
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<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="QuickBooks" 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/_qlZddfqQzlQyBEMRVAdKXJoecg=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Quickbooks-2c9a88f066dc4af194ea8d074caa2f18.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0" width="1500"/>
<noscript>
<img alt="QuickBooks" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/_qlZddfqQzlQyBEMRVAdKXJoecg=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Quickbooks-2c9a88f066dc4af194ea8d074caa2f18.jpg" width="1500"/>
</noscript>
</div>
</div>
<figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0">
<span class="figure-article-caption-owner"><p> QuickBooks</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_3-0-1">
<li><strong>Price:</strong> $30 and up - 50% off for the first three months on each plan</li><li><strong>Platform:</strong> Android, iOS</li><li><strong>Receipt scanner:</strong> Yes<span class="ql-inline-citation" data-cite="1"></span></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_3-0-2">
<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-click-action="OffPageClick - External" data-retailer-caption="with QuickBooks" data-retailer-type="other" data-tracking-container="true" href="https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Sign Up 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 -->
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</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">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-4">
We chose QuickBooks Accounting as the best expense tracking app for small businesses because users can send and track invoices and automatically track mileage. It also has a built-in photo tool to snap pictures of receipts—all on-the-go.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</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">Pros and Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-6">
<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>Automatically track mileage and snap pictures of receipts</p></li>
<li><p>Send and track invoices in multiple currencies</p></li>
<li><p>Link bank and credit card accounts</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>One of the more expensive expense tracker apps</p></li>
<li><p>E-signature is available only on the app</p></li>
<li><p>No chat support</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="3">
<span class="tabbed-sc-block__text">Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-8">
Owned by Intuit, QuickBooks is a leader in business accounting and bookkeeping. Its app helps small businesses track expenses, send <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/invoice.asp">invoices</a>, and manage most financial aspects of a business.
</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">
QuickBooks Accounting offers a free 30-day trial with no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-do-credit-cards-work-5025119">credit card</a> or commitment required.<span class="ql-inline-citation" data-cite="1"></span> And, if you have QuickBooks online, the Accounting app is free. Otherwise, choose from a variety of plans starting at $30 per month and get 50% off of each plan for the first three months.<span class="ql-inline-citation" data-cite="2"></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_3-0-10">
Some popular features for small business owners 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_3-0-11">
<li>Integrations with over 750 apps, like inventory management and advanced CRM<span class="ql-inline-citation" data-cite="10"></span></li>
<li>Give your accountant access </li>
<li>Customize invoices with your logo and business info</li>
<li>Create and track invoices in multiple currencies</li>
<li>Generate profit and loss reports</li>
<li>Photograph receipts and attach them to expenses</li>
<li>Track sales and customers on-the-go</li>
<li>Categorize expenses</li>
<li>Mileage tracking uses GPS without draining the battery</li>
<li>Forecast cash flow over 90 days and use Envelopes to set aside money for business <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payroll.asp">payroll</a> and taxes<span class="ql-inline-citation" data-cite="11"></span></li>
<li>Connect bank and credit card accounts to track revenue and expenses</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 -->
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<span class="heading-toc" id="toc-best-for-investors-empower-formerly-personal-capital"></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 Investors</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> Empower (Formerly Personal Capital)</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-3x2 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_3-0-12" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:66.6%;">
<img alt="Empower Recirc" 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/DRBNePHeV4ZyBjOih2z-khpjM0o=/fit-in/1500x1000/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Empower-recirc-e01325fe34f24e2ba55fc32eed809e48.jpg" data-tracking-container="false" height="1000" id="mntl-sc-block-image_1-0-1" width="1500"/>
<noscript>
<img alt="Empower Recirc" class="img--noscript universal-image__image" height="1000" src="https://www.investopedia.com/thmb/DRBNePHeV4ZyBjOih2z-khpjM0o=/fit-in/1500x1000/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Empower-recirc-e01325fe34f24e2ba55fc32eed809e48.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>Empower</p></span>
</figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption -->
</figure><!-- end: comp mntl-sc-block-image figure-3x2 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_3-0-13">
<li><strong>Price:</strong> Free</li><li><strong>Platform:</strong> Android, iOS</li><li><strong>Receipt scanner:</strong> No<span class="ql-inline-citation" data-cite="13"></span></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_3-0-14">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-1">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-click-action="OffPageClick - External" data-retailer-caption="with Empower" data-retailer-type="other" data-tracking-container="true" href="https://personalcapital.sjv.io/c/328256/1287561/13439" id="button_1-0-1" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Sign Up 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">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-16">
The best expense tracker app for investors is Empower because you can view all of your investment and bank accounts in one app. It gives investment tools, advice, expense categorization, and helps you stay on top of upcoming bills.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</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">Pros and Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-18">
<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>Reporting tools make it easy to see the asset allocation and performance of your investments</p></li>
<li><p>Offers strategies to lower your tax burden</p></li>
<li><p>Recession simulator shows how your investments would’ve performed in historical recessions</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>No account reconciliation</p></li>
<li><p>Some financial institutions won’t sync with the app</p></li>
<li><p>Must have over $100,000 in investable assets for advisory services</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="3">
<span class="tabbed-sc-block__text">Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-20">
<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/empower-review-4587916">Empower</a> is a personal finance and wealth management company founded in 2009. This app is free and gives you a clear snapshot of your financial health.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-21">
If you have over $100,000 in investable assets, you’re eligible for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/advisory-management.asp">advisory services</a> with Empower. After linking your accounts, receive a free initial consultation with one of their financial advisors.<span class="ql-inline-citation" data-cite="4"></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_3-0-22">
Compared to similar companies, its annual fee for investment management is high. You pay an annual fee is 0.89% for the first $1 million in assets, 0.79% for the next $3 million in assets, 0.69% for the next $2 million, 0.59% for the next $5 million, and 0.49% for assets over $10 million.<span class="ql-inline-citation" data-cite="4"></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_3-0-23">
You can take advantage of this app even if you don't have $100,000 in investable assets. Use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-management.asp">investment management</a> tools to link accounts, plan your retirement, set a budget, and see your cash flow. Each of these services is free with the app or its web interface.
</p><!-- 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-for-receipt-saving-expensify"></span>
<h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-2">
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary">Best for Receipt Saving</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> Expensify</span> </span>
</span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text -->
<hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-2"/><!-- end: comp list-sc-item__header-break mntl-block -->
<div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-2">
<div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-2">
<div class="tabbed-sc-block-intro">
<figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-24" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="Expensify" 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/0-ZXJwW6-GxH5X3ANAfJJG3ehg4=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Expenisfy-a20d82421f43405a98f1e377c2e7b44c.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-2" width="1500"/>
<noscript>
<img alt="Expensify" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/0-ZXJwW6-GxH5X3ANAfJJG3ehg4=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Expenisfy-a20d82421f43405a98f1e377c2e7b44c.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> Expensify</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_3-0-25">
<li><strong>Price:</strong> Free for up to 25 scans, then $5–$9 per month</li><li><strong>Platform:</strong> Android, iOS</li><li><strong>Receipt scanner:</strong> Yes<span class="ql-inline-citation" data-cite="6"></span></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_3-0-26">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-2">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-click-action="OffPageClick - External" data-retailer-caption="with Expensify" data-retailer-type="other" data-tracking-container="true" href="https://www.expensify.com/" id="button_1-0-2" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Sign Up 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">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-28">
When looking for an app for receipt saving, go with Expensify because its app automatically scans, reads, and imports receipt details for you. It also works great for travel—get trip reminders, flight delay notifications, and change notifications sent right to your phone.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</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">Pros and Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-30">
<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>Automatically reads and imports receipt details for you—even if it’s foreign currency</p></li>
<li><p>Categorize, tag, and group expenses into a report</p></li>
<li><p>Automatic mileage tracking using GPS</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>Uploading PDF receipts can be difficult to do</p></li>
<li><p>Automatic receipt reading sometimes takes longer than it would to manually type in the info</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="3">
<span class="tabbed-sc-block__text">Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-32">
Expensify was launched in 2008 to manage receipts and expenses.<span class="ql-inline-citation" data-cite="5"></span> It allows 25 scans per month for free—beyond that, you’ll need a paid account. Expensify offers two plans at $5 for smaller companies and $9 per month for larger companies with greater tracking needs.<span class="ql-inline-citation" data-cite="6"></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_3-0-33">
This app is targeted toward business users because it has tools to submit receipts directly to a manager or accountant. From there, they can approve or reject expenses right from the app. Expensify even offers a corporate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-visa-makes-money-4799098">Visa</a> card and a corporate travel assistant.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-34">
Integrate accounting apps like QuickBooks, Xero, NetSuite, and Sage Intacct. Next-day <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reimbursement.asp">reimbursement</a> is a favorite feature of Expensify because employees get their money back quickly.<span class="ql-inline-citation" data-cite="6"></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_3-0-35">
One of the best features for international travelers is how Expensify works with global currencies and taxes. An app that’s globally compatible makes month-end closing seamless.
</p><!-- 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-reimbursement-and-mileage-everlance"></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 Reimbursement and Mileage</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> Everlance</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 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_3-0-36" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="Everlance" 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/f82N_oEPA1HsmG7M2VIWD7ui7OA=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Everlance-2865639af1d94b07bf8ed2da93a6d7c5.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-3" width="1500"/>
<noscript>
<img alt="Everlance" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/f82N_oEPA1HsmG7M2VIWD7ui7OA=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Everlance-2865639af1d94b07bf8ed2da93a6d7c5.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>Everlance</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_3-0-37">
<li><strong>Price:</strong> Free for 30 trips, then $10 per month and up</li><li><strong>Platform:</strong> Android, iOS</li><li><strong>Receipt scanner:</strong> Yes<span class="ql-inline-citation" data-cite="8"></span></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_3-0-38">
<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-click-action="OffPageClick - External" data-retailer-caption="with Everlance" data-retailer-type="other" data-tracking-container="true" href="https://www.everlance.com/" id="button_1-0-3" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Sign Up 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">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-40">
With Everlance, create an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/taxes/090316/how-log-mileage-taxes-8-easy-steps.asp" rel="noopener noreferrer">IRS-compliant mileage log</a> and sync your bank accounts and credit cards for expense and receipt tracking. This app is particularly popular with those who are self-employed.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</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">Pros and Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-42">
<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>GPS used to create an IRS-compliant mileage log</p></li>
<li><p>Syncs to bank or credit card for expenses and receipts</p></li>
<li><p>Export mileage and expense reports in PDF, CSV, or Excel formats</p></li>
</ul>
</div>
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>The app creates a new trip if you’ve stopped for 10 minutes</p></li>
<li><p>Premium features cost far more than other expense tracker apps</p></li>
<li><p>Notifications are cumbersome if manually tracking trips</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="3">
<span class="tabbed-sc-block__text">Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-44">
Founded in 2015, Everlance is an app designed to track mileage, expenses, and receipts.<span class="ql-inline-citation" data-cite="7"></span> When you download the app, you automatically start a seven-day Premium trial. At the end of the trial, you’ll revert to a free account unless you choose to upgrade.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-45">
To track expenses, sync your credit cards and bank accounts. With one swipe, you can categorize business and personal expenses. For recurring expenses and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transactions</a>, users can set custom expense rules. With Everlance, tracking revenue is easy, too—even if you have income from multiple sources.<span class="ql-inline-citation" data-cite="14"></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_3-0-46">
Everlance uses GPS technology to automatically chart your trips. However, you can also turn that feature off and manually track trips. While the app does advertise you can set it and forget it, user reviews suggest it’s best to double-check that your trip is recorded, as GPS errors have caused the app to miss some trips.<span class="ql-inline-citation" data-cite="14"></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_3-0-47">
There are three packages available with Everlance:<span class="ql-inline-citation" data-cite="8"></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="PRM Roundup | Table Block" id="mntl-sc-block_3-0-48">
<div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Free</b> </th>
<th><b>CPM Program: $12 billed monthly or $10 per month billed annually</b></th>
<th>FAVR Program: $33 per month billed annually</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>30 automatic trips per month</td>
<td>Unlimited automatic detection</td>
<td>Unlimited automatic trip detection</td>
</tr>
<tr>
<td>Unlimited manual start and stop trip tracking</td>
<td>Automatic expense tracking with bank and credit card sync</td>
<td>Automatic expense tracking with bank and credit card sync</td>
</tr>
<tr>
<td>IRS-compliant reports</td>
<td>Deduction finder</td>
<td>Deduction finder</td>
</tr>
<tr>
<td>Expense tracking with unlimited receipt uploads</td>
<td>Trip auto-classification with work hours and commute</td>
<td>Trip auto-classification with work hours and commute</td>
</tr>
<tr>
<td></td>
<td>Advanced PDF and Excel reports</td>
<td>Custom Excel & PDF data exports</td>
</tr>
<tr>
<td></td>
<td></td>
<td>Customized 1x1 training and VIP customer support</td>
</tr>
</tbody>
</table>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
</div>
</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-free-option-nerdwallet"></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 Free Option</span> </span>
</span>:
<span class="split-text__item">
<span class="split-text__secondary-wrapper">
<span class="split-text__item-secondary"> NerdWallet</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_3-0-49" style="--imgWidth: 0px">
<div class="figure-media">
<div class="img-placeholder" style="padding-bottom:50.0%;">
<img alt="NerdWallet" 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/4rMboh4zh5RZ32il_SEPCDJxsyM=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Nerd_Wallet-b528742e5f47447da701bd4213b4c724.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-4" width="1500"/>
<noscript>
<img alt="NerdWallet" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/4rMboh4zh5RZ32il_SEPCDJxsyM=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Nerd_Wallet-b528742e5f47447da701bd4213b4c724.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> NerdWallet</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_3-0-50">
<li><strong>Price:</strong> Free</li><li><strong>Platform:</strong> Android, iOS</li><li><strong>Receipt scanner:</strong> No<span class="ql-inline-citation" data-cite="15"></span></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_3-0-51">
<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-caption="with NerdWallet" data-retailer-type="other" data-tracking-container="true" href="https://www.nerdwallet.com/" id="button_1-0-4" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Sign Up 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">Why We Chose It</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="1">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-53">
If you want to get a handle on your personal finances for free, download the NerdWallet app. With it, you can see all of your accounts and their transactions in one place, keep tabs on your credit and net worth, and get helpful reports on your cash flow.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</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">Pros and Cons</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content is-active is-initial-load" data-tab-index="2">
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-55">
<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>Track income and expenses</p></li>
<li><p>Monitor your credit and net worth</p></li>
<li><p>It’s completely free</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>Limited transaction management</p></li>
<li><p>Credit score is only provided by one bureau—TransUnion</p></li>
<li><p>Must link your account to reconcile transactions, rather than it pulling from your credit report</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="3">
<span class="tabbed-sc-block__text">Overview</span>
</div>
<div class="tabbed-sc-block__content js-tabbed-content" data-tab-index="3">
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-57">
NerdWallet is a personal finance company founded in 2009.<span class="ql-inline-citation" data-cite="9"></span> Its app gives a complete look at your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personalfinance.asp">personal finances</a> and tools to help manage your money. It’s completely free and doesn’t offer in-app purchases.<span class="ql-inline-citation" data-cite="15"></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_3-0-58">
Link your accounts and categorize your transactions to get a picture of how you spend your money every month. From there, set goals to help pay down debt, invest in your future, and save money.<span class="ql-inline-citation" data-cite="15"></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_3-0-59">
When you link a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp">debit or credit card</a>, you can receive offers from retailers to get points and other rewards. NerdWallet also offers calculators and editorial content to help you make smart financial decisions.<span class="ql-inline-citation" data-cite="15"></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_3-0-60">
The app offers tips based on your personal situation. For example, if you're using a high amount of credit on a credit card, the app tells you to make multiple payments per month on that specific card to keep your balance low.
</p><!-- 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>
<div class="article-outro article-container">
<div class="comp mntl-sc-page--commerce structured-content article-outro__content prm-sc-page mntl-sc-page mntl-block" id="article-outro__content_1-0">
<span class="heading-toc" id="toc-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">
The best expense tracker app will depend on your needs. If you're looking for small business expense tracking, go with QuickBooks. If you're an investor, Empower may work well for you with its ability to house your investment and bank account info in one place. If you need receipt scanning capability, Expensify will work well for you.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-compare-expense-tracker-apps"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-2"> <span class="mntl-sc-block-heading__text"> Compare Expense Tracker Apps </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_4-0-3">
<div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Expense Tracker Apps</b></th>
<th><b>Why We Picked It</b></th>
<th><b>Key Benefit</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/" rel="sponsored nofollow">QuickBooks Accounting</a></td>
<td>Best for Small Businesses</td>
<td>Send and track invoices</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://personalcapital.sjv.io/c/328256/1287561/13439" rel="noopener noreferrer sponsored nofollow">Empower</a></td>
<td>Best for Investors</td>
<td>Investment tools, advice, and management</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.expensify.com/" rel="sponsored nofollow">Expensify</a></td>
<td>Best for Receipt Saving</td>
<td>Automatically reads and imports receipt details for you</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.everlance.com/" rel="sponsored nofollow">Everlance</a></td>
<td>Best for Reimbursement and Mileage</td>
<td>Automatically create an IRS-compliant mileage log and sync accounts to track expenses</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.nerdwallet.com/" rel="sponsored nofollow">NerdWallet</a></td>
<td>Best Free Option</td>
<td>It’s completely free and helps you monitor your credit and expenses</td>
</tr>
</tbody>
</table>
</div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table -->
<div class="comp theme-whatyouneedtoknow mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0-4">
<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">
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 Federal Reserve has aggressively <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-will-raise-interest-rate-at-a-more-moderate-pace-chair-powell-says-7551199">increased the federal funds</a> rate since February 2022.<span class="ql-inline-citation" data-cite="12"></span> These rate increases have caused business and consumer loan rates to increase significantly, making it harder to find affordable financing. For those focused on managing their money in the wake of rising rates, expense tracker apps can help simplify the process of tracking spending and saving for specific goals.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-whatyouneedtoknow mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<span class="heading-toc" id="toc-guide-to-choosing-expense-tracker-apps"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-5"> <span class="mntl-sc-block-heading__text"> Guide to Choosing Expense Tracker Apps </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_4-0-6"> <span class="mntl-sc-block-subheading__text"> What Is an Expense Tracker App? </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_4-0-7">
Expense tracker apps are tools designed to help you manage your money and track your spending. They allow you to sync bank accounts and credit cards to record your expenses so you can see how much you spend each month and where. After you've inputted all the data, you can review your financial details and decide where to make any changes and adjustments so you can save money.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-8"> <span class="mntl-sc-block-subheading__text"> Do I Need an Expense Tracker? </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_4-0-9">
You may think tracking your expenses is a cumbersome experience. Or that you have a good handle on your finances. But, an expense tracker can be a very useful tool for anyone—even people who are well aware of where their money goes.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-10">
Tracking your expenses can help you determine where your money goes and where you can make cuts. It may even help you identify things you didn't even know you're spending your money on, such as forgotten subscriptions that you may not use (like streaming video and monthly deliveries), and areas where you may find excessive spending, such as that daily coffee run.
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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"> Do Expense Trackers Work?<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_4-0-12">
Yes, expense trackers work as long as you put in the work and are honest about your spending. If you're determined to make changes and improve your financial situation, an expense tracker can be a valuable tool.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-13">
For trackers to work, you have to be honest about your spending. This means logging every dollar you spend (some trackers will do this automatically if you sync up your bank account), whether the money goes through your account or you pay for something in cash. It may seem daunting at first, but it will get easier once you get into a routine.
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-14"> <span class="mntl-sc-block-subheading__text"> Alternatives to Expense Tracker Apps </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_4-0-15">
<li><strong>Digital spreadsheets</strong>: For those who’d rather not rely on expense tracking apps, digital spreadsheets are a useful alternative. Consider setting up spreadsheets using Google Sheets or Microsoft Excel. You can customize your spreadsheet to meet your needs and modify it over time as needed. </li><li><strong>Paper expense tracking</strong>: Some people prefer tracking their expenses on paper. If this sounds like you, your best option is likely keeping receipts and reconciling them against your checkbook, credit card, and bank statements each month. Consider creating an easy-to-track filing system in case you need to go back and review certain expenses. </li><li><strong>Reconciling online statements</strong>: You could also track your spending by reconciling your online statements once a week (or more often if you prefer). This way, purchases will be fresh in your mind and you should be able to confirm that both vendors and amounts on your statements are correct. </li><li><strong>Digital calendars:</strong> If your primary goal is to track monthly payments, relying on your phone’s digital calendar could be a helpful and no-cost option. Review your monthly bills, and set up reminders on your phone so you don’t miss any payments or pay late. <br/></li>
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<span class="heading-toc" id="toc-pros-and-cons-of-expense-tracker-apps"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-16"> <span class="mntl-sc-block-heading__text"> Pros and Cons of Expense Tracker Apps </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_4-0-17">
<div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span>
<ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list">
<li><p>Can simplify financial management</p></li>
<li><p>Free options are available</p></li>
<li><p>May help you budget and improve credit</p></li>
<li><p>May help you meet money goals</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>Certain apps cost money</p></li>
<li><p>Features vary</p></li>
<li><p>Not all financial institutions connect</p></li>
<li><p>Requires some upfront and ongoing work </p></li>
</ul>
</div>
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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"> Pros Explained </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-19">
<li><strong>Can simplify financial management:</strong> Expense tracker apps may make it easier to manage your money, separate business and personal expenses, and track your monthly spending. </li>
<li><strong>Free options are available: </strong>Certain apps are free, and you can find a good tracker without worrying about any added monthly costs. </li>
<li><strong>May help you budget and improve credit:</strong> If you commit to using an expense tracker app, it could help you establish and stick to your budget. It may also help you improve your credit score, as many apps have helpful features like monthly payment alerts; these can help you avoid missed or late payments. Your payment history has a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/creditscorecalculation.asp">big effect on your credit score</a>. </li>
<li><strong>May help you meet money goals:</strong> Certain apps let you set savings goals and track your progress toward those goals. If used consistently, a personal expense tracker app could help you save for a down payment or take that vacation you’ve been putting off. </li>
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<h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-20"> <span class="mntl-sc-block-subheading__text"> Cons Explained </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-21">
<li><strong>Certain apps cost money:</strong> While some expense tracker apps are free, this isn’t the case with all of them. But, it’s worth considering the money you may save by using a paid tracker app, which may have more/better features than free apps.</li><li><strong>Features vary:</strong> Financial features vary across apps, so there isn’t one right option for everyone. You’ll need to do some research to find an app that works well for your situation. </li><li><strong>Not all financial institutions connect:</strong> Some banks or credit unions may not sync with certain expense tracker apps, meaning you won’t be able to easily track your spending. If you have a question about whether your financial institution will connect to an app, contact the app’s customer service team to confirm. </li><li><strong>Requires some upfront and ongoing work:</strong> To get the most out of a personal expense tracker app, you’ll need to do some work upfront and commit to using the app moving forward. While most apps don’t require any heavy lifting, there’s a time commitment involved. <br/></li>
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<p>Expense tracking apps and other financial management tools require upfront work and ongoing upkeep. They won’t automatically help you achieve your financial goals; instead, you need to commit to using them over time to meet your money goals and improve your situation. </p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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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_4-0-23"> <span class="mntl-sc-block-heading__text"> Why You Should Trust Us </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_4-0-24">
We looked at 30 of the best expense tracker apps available and narrowed it down to the best options based on several features and considerations. We considered pricing, features, reviews, and accessibility. In each case, we evaluated how robust the features were for day-to-day and power users and whether the app was easy to use. Investopedia launched in 1999 and has been helping readers find the best expense tracker apps since 2021.<br/>
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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_4-0-25">
<span class="heading-toc" id="toc-faq-0937536d-8016-4a66-a194-f48968c91658"></span>
<h2 class="comp mntl-sc-block-faq__title mntl-text-block" id="mntl-sc-block-faq__title_1-0">
Frequently Asked Questions</h2><!-- end: comp mntl-sc-block-faq__title mntl-text-block -->
<ul class="comp mntl-sc-block-faq__content mntl-accordion" id="mntl-sc-block-faq__content_1-0">
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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">What Does an Expense Tracker App Do?</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-0">
<div class="faq-accordion__item-answer">
<p>An expense tracker app allows you to monitor and categorize your expenses across different bank and investment accounts and credit cards. Some of these apps also offer budgeting tools, credit monitoring, mileage tracking, receipt keeping, and advice to grow your net worth.</p>
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<h3 class="accordion__title">Do Expense Tracker Apps Work?</h3>
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<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-1">
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<p>That depends on you. Expense tracker apps only work if you put in the time and effort to make them work. It may seem daunting and difficult to sit down and review your finances, but these tools are only helpful if you are honest about your spending and track your expenses consistently.</p>
</div>
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<h3 class="accordion__title">How Do I Track Daily Personal Expenses?</h3>
</div><!--end accordion__header-->
<div class="accordion__body">
<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-2">
<div class="faq-accordion__item-answer">
<p>You can track daily personal expenses on your mobile device using an expense tracking app for iPhone or Android, or you could opt for paper tracking while reviewing and reconciling your online credit card or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-statement.asp">bank statements</a> regularly. Your personal preferences will dictate which option is best for you. </p><p>Some expense tracker apps are tailored for personal use, while others are designed for small business use. If you need to track business expenses, opt for an app like <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/" rel="sponsored nofollow">QuickBooks Accounting</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.expensify.com/" rel="sponsored nofollow">Expensify</a>.</p>
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<h3 class="accordion__title">How Do I Keep Track of My Monthly Payments?</h3>
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<p>An expense tracking app could help simplify the process of tracking your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-monthly-payment.asp">monthly payments</a>. If you’re interested in doing so for your small business, an app like <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/" rel="sponsored nofollow">Quickbooks Accounting</a> may be a good choice.</p>
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<h3 class="accordion__title">How Much Does an Expense Tracker App Cost?</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">
<div class="faq-accordion__item-answer">
<p>Expense tracker apps vary in cost, although many are free. Paid apps are typically less than $10 per month, although if you want business features like invoice creation and management, you’re more likely to pay well above that. Before paying for an expense tracker app, check to see if there’s a free trial. A lot of apps offer 30 days to test drive all of their features.</p>
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<h3 class="accordion__title">Is an Expense Tracker App Worth the Cost?</h3>
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<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$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>Many expense tracker apps are free or low cost, so explore your options and decide if you need a paid app. These apps can help you gain control of your finances, pay down debt, and grow your net worth. Some even allow you to upload receipts, track mileage, and send invoices, which are all helpful if you run a business.</p>
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<h3 class="accordion__title">What Is the Best App to Track Personal Expenses?</h3>
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<div class="accordion__body">
<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-6">
<div class="faq-accordion__item-answer">
<p>The best app for tracking personal expenses is one that lets you track and categorize your spending while also seeing your overall financial picture. It should be affordable, with the features you need to stay in control of your budget.</p>
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<h3 class="accordion__title">What’s the Best Expense Tracker App for iPhone?</h3>
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<div class="accordion__body">
<div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-7">
<div class="faq-accordion__item-answer">
<p>The best expense tracker app for iPhone depends on your individual needs. What’s right for someone else won’t necessarily work for you. For instance, if you’re more focused on tracking your investments, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://personalcapital.sjv.io/c/328256/1058725/13439?subid1=5114591&subid2=n53464118697c4bf9ae1c3541a912c9ea18" rel="sponsored nofollow">Empower</a> may be a better choice. </p>
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<figure class="comp figure-landscape primary-image--roundup primary-image mntl-universal-primary-image primary-image" id="primary-image--roundup_1-0">
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<img alt="The Best Expense Tracker Apps of 2024" class="primary-image__image mntl-primary-image--blurry" height="2700" onload="(function(e){e.classList.add('loaded')})(this)" sizes="750px" src="https://www.investopedia.com/thmb/AjdA4jHOodGxKR4VMAHPBZIMIkc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/best-expense-tracker-apps-5114591-final-b6aaf014e0f742a9ab587f078780b073.png" srcset="https://www.investopedia.com/thmb/BZxGWZ7PYE0RtR8_DD1_RIyFmtI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/best-expense-tracker-apps-5114591-final-b6aaf014e0f742a9ab587f078780b073.png 750w" style="--blurry: url('data:image/gif;charset=utf-8;base64,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')" width="4000"/>
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<span class="figure-article-caption-owner"><p>Investopedia / Tara Anand</p></span>
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<li class="mntl-sources__source" id="citation-10"><p>QuickBooks. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://quickbooks.intuit.com/online/integrations/" rel="nofollow sponsored">Integrations</a>."</p></li>
<li class="mntl-sources__source" id="citation-11"><p>QuickBooks. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://quickbooks.intuit.com/payments/manage-cash-flow/" rel="nofollow sponsored">Manage Cash Flow</a>."</p></li>
<li class="mntl-sources__source" id="citation-13"><p>Empower. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.empower.com/personal-investors/budget-planner">Take control of your finances with our free Budget Planner</a>."</p></li>
<li class="mntl-sources__source" id="citation-4"><p>Empower. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.personalcapital.com/wealth-management" rel="nofollow sponsored">Wealth Management</a>."</p></li>
<li class="mntl-sources__source" id="citation-6"><p>Expensify. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.expensify.com/pricing" rel="nofollow sponsored">Pricing</a>."</p></li>
<li class="mntl-sources__source" id="citation-5"><p>Expensify. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://we.are.expensify.com/how-we-got-here" rel="nofollow sponsored">How We Got Here</a>."</p></li>
<li class="mntl-sources__source" id="citation-8"><p>Everlance. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.everlance.com/pricing" rel="nofollow sponsored">Pricing</a>."</p></li>
<li class="mntl-sources__source" id="citation-7"><p>PR News Wire. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.prnewswire.com/news-releases/everlance-reaches-500-000-user-milestone-and-launches-new-partnerships-with-xero-and-freshbooks-300729123.html">Everlance Reaches 500,000 User Milestone and Launches New Partnerships With Xero and FreshBooks</a>."</p></li>
<li class="mntl-sources__source" id="citation-14"><p>Everlance. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.everlance.com" rel="nofollow sponsored">Automatically track mileage & expenses</a>."</p></li>
<li class="mntl-sources__source" id="citation-15"><p>Nerdwallet. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.nerdwallet.com/p/mobile-app" rel="nofollow sponsored">Financial clarity all in one place</a>."</p></li>
<li class="mntl-sources__source" id="citation-9"><p>Crunchbase. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.crunchbase.com/organization/nerdwallet">Nerdwallet</a>."</p></li>
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Most people know the importance of keeping business receipts in case they’re [audited](https://www.investopedia.com/articles/personal-finance/032415/how-do-irs-audits-work.asp). The problem with paper receipts is that they're easy to lose. By immediately uploading these into an expense tracker app, you save space and time instead of having to dig through a shoebox full of receipts at tax time.
We reviewed 30 different options to determine the best expense tracker apps, based on price, features, reviews, and accessibility. The apps we picked have the ability to sync and categorize account transactions, are reasonably priced, and offer reporting tools to track your personal and business financial health.
## Best Expense Tracker Apps for May 2024
* **Best for Small Businesses:**
[QuickBooks Accounting](https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/)
* **Best for Investors:**
[Empower (Formerly Personal Capital)](https://personalcapital.sjv.io/c/328256/1287561/13439)
* **Best for Receipt Saving:**
[Expensify](https://www.expensify.com/)
* **Best for Reimbursement and Mileage:**
[Everlance](https://www.everlance.com/)
* **Best Free Option:**
[NerdWallet](https://www.nerdwallet.com/)
Best Expense Tracker Apps for May 2024
Expand
Best Expense Tracker Apps for May 2024
* [Our Top Picks](#summary-list)
* [QuickBooks Accounting](#toc-best-for-small-businesses-quickbooks-accounting)
* [Empower (Formerly Personal Capital)](#toc-best-for-investors-empower-formerly-personal-capital)
* [Expensify](#toc-best-for-receipt-saving-expensify)
* [Everlance](#toc-best-for-reimbursement-and-mileage-everlance)
* [NerdWallet](#toc-best-free-option-nerdwallet)
* See More (2)
* [The Bottom Line](#toc-the-bottom-line)
* [Compare Expense Tracker Apps](#toc-compare-expense-tracker-apps)
* [How to Choose](#toc-guide-to-choosing-expense-tracker-apps)
* [Pros and Cons](#toc-pros-and-cons-of-expense-tracker-apps)
* [Why You Should Trust Us](#toc-why-you-should-trust-us)
* [FAQ](#toc-faq-0937536d-8016-4a66-a194-f48968c91658)
### Best for Small Businesses
:
QuickBooks Accounting
---
![QuickBooks]()
:fill(white):max_bytes(150000):strip_icc()/Quickbooks-2c9a88f066dc4af194ea8d074caa2f18.jpg)
QuickBooks
* **Price:** $30 and up - 50% off for the first three months on each plan
* **Platform:** Android, iOS
* **Receipt scanner:** Yes
[Sign Up Now](https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/)
Why We Chose It
We chose QuickBooks Accounting as the best expense tracking app for small businesses because users can send and track invoices and automatically track mileage. It also has a built-in photo tool to snap pictures of receipts—all on-the-go.
Pros and Cons
Pros
* Automatically track mileage and snap pictures of receipts
* Send and track invoices in multiple currencies
* Link bank and credit card accounts
Cons
* One of the more expensive expense tracker apps
* E-signature is available only on the app
* No chat support
Overview
Owned by Intuit, QuickBooks is a leader in business accounting and bookkeeping. Its app helps small businesses track expenses, send [invoices](https://www.investopedia.com/terms/i/invoice.asp), and manage most financial aspects of a business.
QuickBooks Accounting offers a free 30-day trial with no [credit card](https://www.investopedia.com/how-do-credit-cards-work-5025119) or commitment required. And, if you have QuickBooks online, the Accounting app is free. Otherwise, choose from a variety of plans starting at $30 per month and get 50% off of each plan for the first three months.
Some popular features for small business owners include:
* Integrations with over 750 apps, like inventory management and advanced CRM
* Give your accountant access
* Customize invoices with your logo and business info
* Create and track invoices in multiple currencies
* Generate profit and loss reports
* Photograph receipts and attach them to expenses
* Track sales and customers on-the-go
* Categorize expenses
* Mileage tracking uses GPS without draining the battery
* Forecast cash flow over 90 days and use Envelopes to set aside money for business [payroll](https://www.investopedia.com/terms/p/payroll.asp) and taxes
* Connect bank and credit card accounts to track revenue and expenses
### Best for Investors
:
Empower (Formerly Personal Capital)
---
![Empower Recirc]()
:fill(white):max_bytes(150000):strip_icc()/Empower-recirc-e01325fe34f24e2ba55fc32eed809e48.jpg)
Empower
* **Price:** Free
* **Platform:** Android, iOS
* **Receipt scanner:** No
[Sign Up Now](https://personalcapital.sjv.io/c/328256/1287561/13439)
Why We Chose It
The best expense tracker app for investors is Empower because you can view all of your investment and bank accounts in one app. It gives investment tools, advice, expense categorization, and helps you stay on top of upcoming bills.
Pros and Cons
Pros
* Reporting tools make it easy to see the asset allocation and performance of your investments
* Offers strategies to lower your tax burden
* Recession simulator shows how your investments would’ve performed in historical recessions
Cons
* No account reconciliation
* Some financial institutions won’t sync with the app
* Must have over $100,000 in investable assets for advisory services
Overview
[Empower](https://www.investopedia.com/empower-review-4587916) is a personal finance and wealth management company founded in 2009. This app is free and gives you a clear snapshot of your financial health.
If you have over $100,000 in investable assets, you’re eligible for [advisory services](https://www.investopedia.com/terms/a/advisory-management.asp) with Empower. After linking your accounts, receive a free initial consultation with one of their financial advisors.
Compared to similar companies, its annual fee for investment management is high. You pay an annual fee is 0.89% for the first $1 million in assets, 0.79% for the next $3 million in assets, 0.69% for the next $2 million, 0.59% for the next $5 million, and 0.49% for assets over $10 million.
You can take advantage of this app even if you don't have $100,000 in investable assets. Use the [investment management](https://www.investopedia.com/terms/i/investment-management.asp) tools to link accounts, plan your retirement, set a budget, and see your cash flow. Each of these services is free with the app or its web interface.
### Best for Receipt Saving
:
Expensify
---
![Expensify]()
:fill(white):max_bytes(150000):strip_icc()/Expenisfy-a20d82421f43405a98f1e377c2e7b44c.jpg)
Expensify
* **Price:** Free for up to 25 scans, then $5–$9 per month
* **Platform:** Android, iOS
* **Receipt scanner:** Yes
[Sign Up Now](https://www.expensify.com/)
Why We Chose It
When looking for an app for receipt saving, go with Expensify because its app automatically scans, reads, and imports receipt details for you. It also works great for travel—get trip reminders, flight delay notifications, and change notifications sent right to your phone.
Pros and Cons
Pros
* Automatically reads and imports receipt details for you—even if it’s foreign currency
* Categorize, tag, and group expenses into a report
* Automatic mileage tracking using GPS
Cons
* Uploading PDF receipts can be difficult to do
* Automatic receipt reading sometimes takes longer than it would to manually type in the info
Overview
Expensify was launched in 2008 to manage receipts and expenses. It allows 25 scans per month for free—beyond that, you’ll need a paid account. Expensify offers two plans at $5 for smaller companies and $9 per month for larger companies with greater tracking needs.
This app is targeted toward business users because it has tools to submit receipts directly to a manager or accountant. From there, they can approve or reject expenses right from the app. Expensify even offers a corporate [Visa](https://www.investopedia.com/how-visa-makes-money-4799098) card and a corporate travel assistant.
Integrate accounting apps like QuickBooks, Xero, NetSuite, and Sage Intacct. Next-day [reimbursement](https://www.investopedia.com/terms/r/reimbursement.asp) is a favorite feature of Expensify because employees get their money back quickly.
One of the best features for international travelers is how Expensify works with global currencies and taxes. An app that’s globally compatible makes month-end closing seamless.
### Best for Reimbursement and Mileage
:
Everlance
---
![Everlance]()
:fill(white):max_bytes(150000):strip_icc()/Everlance-2865639af1d94b07bf8ed2da93a6d7c5.jpg)
Everlance
* **Price:** Free for 30 trips, then $10 per month and up
* **Platform:** Android, iOS
* **Receipt scanner:** Yes
[Sign Up Now](https://www.everlance.com/)
Why We Chose It
With Everlance, create an [IRS-compliant mileage log](https://www.investopedia.com/articles/taxes/090316/how-log-mileage-taxes-8-easy-steps.asp) and sync your bank accounts and credit cards for expense and receipt tracking. This app is particularly popular with those who are self-employed.
Pros and Cons
Pros
* GPS used to create an IRS-compliant mileage log
* Syncs to bank or credit card for expenses and receipts
* Export mileage and expense reports in PDF, CSV, or Excel formats
Cons
* The app creates a new trip if you’ve stopped for 10 minutes
* Premium features cost far more than other expense tracker apps
* Notifications are cumbersome if manually tracking trips
Overview
Founded in 2015, Everlance is an app designed to track mileage, expenses, and receipts. When you download the app, you automatically start a seven-day Premium trial. At the end of the trial, you’ll revert to a free account unless you choose to upgrade.
To track expenses, sync your credit cards and bank accounts. With one swipe, you can categorize business and personal expenses. For recurring expenses and [transactions](https://www.investopedia.com/terms/t/transaction.asp), users can set custom expense rules. With Everlance, tracking revenue is easy, too—even if you have income from multiple sources.
Everlance uses GPS technology to automatically chart your trips. However, you can also turn that feature off and manually track trips. While the app does advertise you can set it and forget it, user reviews suggest it’s best to double-check that your trip is recorded, as GPS errors have caused the app to miss some trips.
There are three packages available with Everlance:
| **Free** | **CPM Program: $12 billed monthly or $10 per month billed annually** | FAVR Program: $33 per month billed annually |
| --- | --- | --- |
| 30 automatic trips per month | Unlimited automatic detection | Unlimited automatic trip detection |
| Unlimited manual start and stop trip tracking | Automatic expense tracking with bank and credit card sync | Automatic expense tracking with bank and credit card sync |
| IRS-compliant reports | Deduction finder | Deduction finder |
| Expense tracking with unlimited receipt uploads | Trip auto-classification with work hours and commute | Trip auto-classification with work hours and commute |
| | Advanced PDF and Excel reports | Custom Excel & PDF data exports |
| | | Customized 1x1 training and VIP customer support |
### Best Free Option
:
NerdWallet
---
![NerdWallet]()
:fill(white):max_bytes(150000):strip_icc()/Nerd_Wallet-b528742e5f47447da701bd4213b4c724.jpg)
NerdWallet
* **Price:** Free
* **Platform:** Android, iOS
* **Receipt scanner:** No
[Sign Up Now](https://www.nerdwallet.com/)
Why We Chose It
If you want to get a handle on your personal finances for free, download the NerdWallet app. With it, you can see all of your accounts and their transactions in one place, keep tabs on your credit and net worth, and get helpful reports on your cash flow.
Pros and Cons
Pros
* Track income and expenses
* Monitor your credit and net worth
* It’s completely free
Cons
* Limited transaction management
* Credit score is only provided by one bureau—TransUnion
* Must link your account to reconcile transactions, rather than it pulling from your credit report
Overview
NerdWallet is a personal finance company founded in 2009. Its app gives a complete look at your [personal finances](https://www.investopedia.com/terms/p/personalfinance.asp) and tools to help manage your money. It’s completely free and doesn’t offer in-app purchases.
Link your accounts and categorize your transactions to get a picture of how you spend your money every month. From there, set goals to help pay down debt, invest in your future, and save money.
When you link a [debit or credit card](https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp), you can receive offers from retailers to get points and other rewards. NerdWallet also offers calculators and editorial content to help you make smart financial decisions.
The app offers tips based on your personal situation. For example, if you're using a high amount of credit on a credit card, the app tells you to make multiple payments per month on that specific card to keep your balance low.
## The Bottom Line
The best expense tracker app will depend on your needs. If you're looking for small business expense tracking, go with QuickBooks. If you're an investor, Empower may work well for you with its ability to house your investment and bank account info in one place. If you need receipt scanning capability, Expensify will work well for you.
## Compare Expense Tracker Apps
| **Expense Tracker Apps** | **Why We Picked It** | **Key Benefit** |
| --- | --- | --- |
| [QuickBooks Accounting](https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/) | Best for Small Businesses | Send and track invoices |
| [Empower](https://personalcapital.sjv.io/c/328256/1287561/13439) | Best for Investors | Investment tools, advice, and management |
| [Expensify](https://www.expensify.com/) | Best for Receipt Saving | Automatically reads and imports receipt details for you |
| [Everlance](https://www.everlance.com/) | Best for Reimbursement and Mileage | Automatically create an IRS-compliant mileage log and sync accounts to track expenses |
| [NerdWallet](https://www.nerdwallet.com/) | Best Free Option | It’s completely free and helps you monitor your credit and expenses |
### In the News
The Federal Reserve has aggressively [increased the federal funds](https://www.investopedia.com/fed-will-raise-interest-rate-at-a-more-moderate-pace-chair-powell-says-7551199) rate since February 2022. These rate increases have caused business and consumer loan rates to increase significantly, making it harder to find affordable financing. For those focused on managing their money in the wake of rising rates, expense tracker apps can help simplify the process of tracking spending and saving for specific goals.
## Guide to Choosing Expense Tracker Apps
### What Is an Expense Tracker App?
Expense tracker apps are tools designed to help you manage your money and track your spending. They allow you to sync bank accounts and credit cards to record your expenses so you can see how much you spend each month and where. After you've inputted all the data, you can review your financial details and decide where to make any changes and adjustments so you can save money.
### Do I Need an Expense Tracker?
You may think tracking your expenses is a cumbersome experience. Or that you have a good handle on your finances. But, an expense tracker can be a very useful tool for anyone—even people who are well aware of where their money goes.
Tracking your expenses can help you determine where your money goes and where you can make cuts. It may even help you identify things you didn't even know you're spending your money on, such as forgotten subscriptions that you may not use (like streaming video and monthly deliveries), and areas where you may find excessive spending, such as that daily coffee run.
### Do Expense Trackers Work?
Yes, expense trackers work as long as you put in the work and are honest about your spending. If you're determined to make changes and improve your financial situation, an expense tracker can be a valuable tool.
For trackers to work, you have to be honest about your spending. This means logging every dollar you spend (some trackers will do this automatically if you sync up your bank account), whether the money goes through your account or you pay for something in cash. It may seem daunting at first, but it will get easier once you get into a routine.
### Alternatives to Expense Tracker Apps
* **Digital spreadsheets**: For those who’d rather not rely on expense tracking apps, digital spreadsheets are a useful alternative. Consider setting up spreadsheets using Google Sheets or Microsoft Excel. You can customize your spreadsheet to meet your needs and modify it over time as needed.
* **Paper expense tracking**: Some people prefer tracking their expenses on paper. If this sounds like you, your best option is likely keeping receipts and reconciling them against your checkbook, credit card, and bank statements each month. Consider creating an easy-to-track filing system in case you need to go back and review certain expenses.
* **Reconciling online statements**: You could also track your spending by reconciling your online statements once a week (or more often if you prefer). This way, purchases will be fresh in your mind and you should be able to confirm that both vendors and amounts on your statements are correct.
* **Digital calendars:** If your primary goal is to track monthly payments, relying on your phone’s digital calendar could be a helpful and no-cost option. Review your monthly bills, and set up reminders on your phone so you don’t miss any payments or pay late.
## Pros and Cons of Expense Tracker Apps
Pros
* Can simplify financial management
* Free options are available
* May help you budget and improve credit
* May help you meet money goals
Cons
* Certain apps cost money
* Features vary
* Not all financial institutions connect
* Requires some upfront and ongoing work
### Pros Explained
* **Can simplify financial management:** Expense tracker apps may make it easier to manage your money, separate business and personal expenses, and track your monthly spending.
* **Free options are available:** Certain apps are free, and you can find a good tracker without worrying about any added monthly costs.
* **May help you budget and improve credit:** If you commit to using an expense tracker app, it could help you establish and stick to your budget. It may also help you improve your credit score, as many apps have helpful features like monthly payment alerts; these can help you avoid missed or late payments. Your payment history has a [big effect on your credit score](https://www.investopedia.com/ask/answers/05/creditscorecalculation.asp).
* **May help you meet money goals:** Certain apps let you set savings goals and track your progress toward those goals. If used consistently, a personal expense tracker app could help you save for a down payment or take that vacation you’ve been putting off.
### Cons Explained
* **Certain apps cost money:** While some expense tracker apps are free, this isn’t the case with all of them. But, it’s worth considering the money you may save by using a paid tracker app, which may have more/better features than free apps.
* **Features vary:** Financial features vary across apps, so there isn’t one right option for everyone. You’ll need to do some research to find an app that works well for your situation.
* **Not all financial institutions connect:** Some banks or credit unions may not sync with certain expense tracker apps, meaning you won’t be able to easily track your spending. If you have a question about whether your financial institution will connect to an app, contact the app’s customer service team to confirm.
* **Requires some upfront and ongoing work:** To get the most out of a personal expense tracker app, you’ll need to do some work upfront and commit to using the app moving forward. While most apps don’t require any heavy lifting, there’s a time commitment involved.
Expense tracking apps and other financial management tools require upfront work and ongoing upkeep. They won’t automatically help you achieve your financial goals; instead, you need to commit to using them over time to meet your money goals and improve your situation.
## Why You Should Trust Us
We looked at 30 of the best expense tracker apps available and narrowed it down to the best options based on several features and considerations. We considered pricing, features, reviews, and accessibility. In each case, we evaluated how robust the features were for day-to-day and power users and whether the app was easy to use. Investopedia launched in 1999 and has been helping readers find the best expense tracker apps since 2021.
## Frequently Asked Questions
* ### What Does an Expense Tracker App Do?
An expense tracker app allows you to monitor and categorize your expenses across different bank and investment accounts and credit cards. Some of these apps also offer budgeting tools, credit monitoring, mileage tracking, receipt keeping, and advice to grow your net worth.
* ### Do Expense Tracker Apps Work?
That depends on you. Expense tracker apps only work if you put in the time and effort to make them work. It may seem daunting and difficult to sit down and review your finances, but these tools are only helpful if you are honest about your spending and track your expenses consistently.
* ### How Do I Track Daily Personal Expenses?
You can track daily personal expenses on your mobile device using an expense tracking app for iPhone or Android, or you could opt for paper tracking while reviewing and reconciling your online credit card or [bank statements](https://www.investopedia.com/terms/b/bank-statement.asp) regularly. Your personal preferences will dictate which option is best for you.
Some expense tracker apps are tailored for personal use, while others are designed for small business use. If you need to track business expenses, opt for an app like [QuickBooks Accounting](https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/) or [Expensify](https://www.expensify.com/).
* ### How Do I Keep Track of My Monthly Payments?
An expense tracking app could help simplify the process of tracking your [monthly payments](https://www.investopedia.com/terms/m/minimum-monthly-payment.asp). If you’re interested in doing so for your small business, an app like [Quickbooks Accounting](https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/) may be a good choice.
* ### How Much Does an Expense Tracker App Cost?
Expense tracker apps vary in cost, although many are free. Paid apps are typically less than $10 per month, although if you want business features like invoice creation and management, you’re more likely to pay well above that. Before paying for an expense tracker app, check to see if there’s a free trial. A lot of apps offer 30 days to test drive all of their features.
* ### Is an Expense Tracker App Worth the Cost?
Many expense tracker apps are free or low cost, so explore your options and decide if you need a paid app. These apps can help you gain control of your finances, pay down debt, and grow your net worth. Some even allow you to upload receipts, track mileage, and send invoices, which are all helpful if you run a business.
* ### What Is the Best App to Track Personal Expenses?
The best app for tracking personal expenses is one that lets you track and categorize your spending while also seeing your overall financial picture. It should be affordable, with the features you need to stay in control of your budget.
* ### What’s the Best Expense Tracker App for iPhone?
The best expense tracker app for iPhone depends on your individual needs. What’s right for someone else won’t necessarily work for you. For instance, if you’re more focused on tracking your investments, [Empower](https://personalcapital.sjv.io/c/328256/1058725/13439?subid1=5114591&subid2=n53464118697c4bf9ae1c3541a912c9ea18) may be a better choice.
:max_bytes(150000):strip_icc()/best-expense-tracker-apps-5114591-final-b6aaf014e0f742a9ab587f078780b073.png)
:max_bytes(150000):strip_icc()/best-expense-tracker-apps-5114591-final-b6aaf014e0f742a9ab587f078780b073.png)
Investopedia / Tara Anand
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. Quickbooks. "[Try Advanced Free for 30 days](https://quickbooks.intuit.com/online/advanced/free-trial/)."
2. Quickbooks. "[Enjoy Exclusive Savings](https://quickbooks.intuit.com/partners/dotdash/?cid=par_dotdash_gpt_2022_QBO_CO-US/#for-self-employed)."
3. QuickBooks. "[Integrations](https://quickbooks.intuit.com/online/integrations/)."
4. QuickBooks. "[Manage Cash Flow](https://quickbooks.intuit.com/payments/manage-cash-flow/)."
5. Empower. "[Take control of your finances with our free Budget Planner](https://www.empower.com/personal-investors/budget-planner)."
6. Empower. "[Wealth Management](https://www.personalcapital.com/wealth-management)."
7. Expensify. "[Pricing](https://www.expensify.com/pricing)."
8. Expensify. "[How We Got Here](https://we.are.expensify.com/how-we-got-here)."
9. Everlance. "[Pricing](https://www.everlance.com/pricing)."
10. PR News Wire. "[Everlance Reaches 500,000 User Milestone and Launches New Partnerships With Xero and FreshBooks](https://www.prnewswire.com/news-releases/everlance-reaches-500-000-user-milestone-and-launches-new-partnerships-with-xero-and-freshbooks-300729123.html)."
11. Everlance. "[Automatically track mileage & expenses](https://www.everlance.com)."
12. Nerdwallet. "[Financial clarity all in one place](https://www.nerdwallet.com/p/mobile-app)."
13. Crunchbase. "[Nerdwallet](https://www.crunchbase.com/organization/nerdwallet)."
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|
Most people know the importance of keeping business receipts in case they’re audited. The problem with paper receipts is that they're easy to lose. By immediately uploading these into an expense tracker app, you save space and time instead of having to dig through a shoebox full of receipts at tax time.
We reviewed 30 different options to determine the best expense tracker apps, based on price, features, reviews, and accessibility. The apps we picked have the ability to sync and categorize account transactions, are reasonably priced, and offer reporting tools to track your personal and business financial health.
Best Expense Tracker Apps for May 2024
Best for Small Businesses:
QuickBooks Accounting
Best for Investors:
Empower (Formerly Personal Capital)
Best for Receipt Saving:
Expensify
Best for Reimbursement and Mileage:
Everlance
Best Free Option:
NerdWallet
Best Expense Tracker Apps for May 2024
Expand
Best Expense Tracker Apps for May 2024
Our Top Picks
QuickBooks Accounting
Empower (Formerly Personal Capital)
Expensify
Everlance
NerdWallet
See More (2)
The Bottom Line
Compare Expense Tracker Apps
How to Choose
Pros and Cons
Why You Should Trust Us
FAQ
Best for Small Businesses
:
QuickBooks Accounting
QuickBooks
Price: $30 and up - 50% off for the first three months on each planPlatform: Android, iOSReceipt scanner: Yes
Sign Up Now
Why We Chose It
We chose QuickBooks Accounting as the best expense tracking app for small businesses because users can send and track invoices and automatically track mileage. It also has a built-in photo tool to snap pictures of receipts—all on-the-go.
Pros and Cons
Pros
Automatically track mileage and snap pictures of receipts
Send and track invoices in multiple currencies
Link bank and credit card accounts
Cons
One of the more expensive expense tracker apps
E-signature is available only on the app
No chat support
Overview
Owned by Intuit, QuickBooks is a leader in business accounting and bookkeeping. Its app helps small businesses track expenses, send invoices, and manage most financial aspects of a business.
QuickBooks Accounting offers a free 30-day trial with no credit card or commitment required. And, if you have QuickBooks online, the Accounting app is free. Otherwise, choose from a variety of plans starting at $30 per month and get 50% off of each plan for the first three months.
Some popular features for small business owners include:
Integrations with over 750 apps, like inventory management and advanced CRM
Give your accountant access
Customize invoices with your logo and business info
Create and track invoices in multiple currencies
Generate profit and loss reports
Photograph receipts and attach them to expenses
Track sales and customers on-the-go
Categorize expenses
Mileage tracking uses GPS without draining the battery
Forecast cash flow over 90 days and use Envelopes to set aside money for business payroll and taxes
Connect bank and credit card accounts to track revenue and expenses
Best for Investors
:
Empower (Formerly Personal Capital)
Empower
Price: FreePlatform: Android, iOSReceipt scanner: No
Sign Up Now
Why We Chose It
The best expense tracker app for investors is Empower because you can view all of your investment and bank accounts in one app. It gives investment tools, advice, expense categorization, and helps you stay on top of upcoming bills.
Pros and Cons
Pros
Reporting tools make it easy to see the asset allocation and performance of your investments
Offers strategies to lower your tax burden
Recession simulator shows how your investments would’ve performed in historical recessions
Cons
No account reconciliation
Some financial institutions won’t sync with the app
Must have over $100,000 in investable assets for advisory services
Overview
Empower is a personal finance and wealth management company founded in 2009. This app is free and gives you a clear snapshot of your financial health.
If you have over $100,000 in investable assets, you’re eligible for advisory services with Empower. After linking your accounts, receive a free initial consultation with one of their financial advisors.
Compared to similar companies, its annual fee for investment management is high. You pay an annual fee is 0.89% for the first $1 million in assets, 0.79% for the next $3 million in assets, 0.69% for the next $2 million, 0.59% for the next $5 million, and 0.49% for assets over $10 million.
You can take advantage of this app even if you don't have $100,000 in investable assets. Use the investment management tools to link accounts, plan your retirement, set a budget, and see your cash flow. Each of these services is free with the app or its web interface.
Best for Receipt Saving
:
Expensify
Expensify
Price: Free for up to 25 scans, then $5–$9 per monthPlatform: Android, iOSReceipt scanner: Yes
Sign Up Now
Why We Chose It
When looking for an app for receipt saving, go with Expensify because its app automatically scans, reads, and imports receipt details for you. It also works great for travel—get trip reminders, flight delay notifications, and change notifications sent right to your phone.
Pros and Cons
Pros
Automatically reads and imports receipt details for you—even if it’s foreign currency
Categorize, tag, and group expenses into a report
Automatic mileage tracking using GPS
Cons
Uploading PDF receipts can be difficult to do
Automatic receipt reading sometimes takes longer than it would to manually type in the info
Overview
Expensify was launched in 2008 to manage receipts and expenses. It allows 25 scans per month for free—beyond that, you’ll need a paid account. Expensify offers two plans at $5 for smaller companies and $9 per month for larger companies with greater tracking needs.
This app is targeted toward business users because it has tools to submit receipts directly to a manager or accountant. From there, they can approve or reject expenses right from the app. Expensify even offers a corporate Visa card and a corporate travel assistant.
Integrate accounting apps like QuickBooks, Xero, NetSuite, and Sage Intacct. Next-day reimbursement is a favorite feature of Expensify because employees get their money back quickly.
One of the best features for international travelers is how Expensify works with global currencies and taxes. An app that’s globally compatible makes month-end closing seamless.
Best for Reimbursement and Mileage
:
Everlance
Everlance
Price: Free for 30 trips, then $10 per month and upPlatform: Android, iOSReceipt scanner: Yes
Sign Up Now
Why We Chose It
With Everlance, create an IRS-compliant mileage log and sync your bank accounts and credit cards for expense and receipt tracking. This app is particularly popular with those who are self-employed.
Pros and Cons
Pros
GPS used to create an IRS-compliant mileage log
Syncs to bank or credit card for expenses and receipts
Export mileage and expense reports in PDF, CSV, or Excel formats
Cons
The app creates a new trip if you’ve stopped for 10 minutes
Premium features cost far more than other expense tracker apps
Notifications are cumbersome if manually tracking trips
Overview
Founded in 2015, Everlance is an app designed to track mileage, expenses, and receipts. When you download the app, you automatically start a seven-day Premium trial. At the end of the trial, you’ll revert to a free account unless you choose to upgrade.
To track expenses, sync your credit cards and bank accounts. With one swipe, you can categorize business and personal expenses. For recurring expenses and transactions, users can set custom expense rules. With Everlance, tracking revenue is easy, too—even if you have income from multiple sources.
Everlance uses GPS technology to automatically chart your trips. However, you can also turn that feature off and manually track trips. While the app does advertise you can set it and forget it, user reviews suggest it’s best to double-check that your trip is recorded, as GPS errors have caused the app to miss some trips.
There are three packages available with Everlance:
Free
CPM Program: $12 billed monthly or $10 per month billed annually
FAVR Program: $33 per month billed annually
30 automatic trips per month
Unlimited automatic detection
Unlimited automatic trip detection
Unlimited manual start and stop trip tracking
Automatic expense tracking with bank and credit card sync
Automatic expense tracking with bank and credit card sync
IRS-compliant reports
Deduction finder
Deduction finder
Expense tracking with unlimited receipt uploads
Trip auto-classification with work hours and commute
Trip auto-classification with work hours and commute
Advanced PDF and Excel reports
Custom Excel & PDF data exports
Customized 1x1 training and VIP customer support
Best Free Option
:
NerdWallet
NerdWallet
Price: FreePlatform: Android, iOSReceipt scanner: No
Sign Up Now
Why We Chose It
If you want to get a handle on your personal finances for free, download the NerdWallet app. With it, you can see all of your accounts and their transactions in one place, keep tabs on your credit and net worth, and get helpful reports on your cash flow.
Pros and Cons
Pros
Track income and expenses
Monitor your credit and net worth
It’s completely free
Cons
Limited transaction management
Credit score is only provided by one bureau—TransUnion
Must link your account to reconcile transactions, rather than it pulling from your credit report
Overview
NerdWallet is a personal finance company founded in 2009. Its app gives a complete look at your personal finances and tools to help manage your money. It’s completely free and doesn’t offer in-app purchases.
Link your accounts and categorize your transactions to get a picture of how you spend your money every month. From there, set goals to help pay down debt, invest in your future, and save money.
When you link a debit or credit card, you can receive offers from retailers to get points and other rewards. NerdWallet also offers calculators and editorial content to help you make smart financial decisions.
The app offers tips based on your personal situation. For example, if you're using a high amount of credit on a credit card, the app tells you to make multiple payments per month on that specific card to keep your balance low.
The Bottom Line
The best expense tracker app will depend on your needs. If you're looking for small business expense tracking, go with QuickBooks. If you're an investor, Empower may work well for you with its ability to house your investment and bank account info in one place. If you need receipt scanning capability, Expensify will work well for you.
Compare Expense Tracker Apps
Expense Tracker Apps
Why We Picked It
Key Benefit
QuickBooks Accounting
Best for Small Businesses
Send and track invoices
Empower
Best for Investors
Investment tools, advice, and management
Expensify
Best for Receipt Saving
Automatically reads and imports receipt details for you
Everlance
Best for Reimbursement and Mileage
Automatically create an IRS-compliant mileage log and sync accounts to track expenses
NerdWallet
Best Free Option
It’s completely free and helps you monitor your credit and expenses
In the News
The Federal Reserve has aggressively increased the federal funds rate since February 2022. These rate increases have caused business and consumer loan rates to increase significantly, making it harder to find affordable financing. For those focused on managing their money in the wake of rising rates, expense tracker apps can help simplify the process of tracking spending and saving for specific goals.
Guide to Choosing Expense Tracker Apps
What Is an Expense Tracker App?
Expense tracker apps are tools designed to help you manage your money and track your spending. They allow you to sync bank accounts and credit cards to record your expenses so you can see how much you spend each month and where. After you've inputted all the data, you can review your financial details and decide where to make any changes and adjustments so you can save money.
Do I Need an Expense Tracker?
You may think tracking your expenses is a cumbersome experience. Or that you have a good handle on your finances. But, an expense tracker can be a very useful tool for anyone—even people who are well aware of where their money goes.
Tracking your expenses can help you determine where your money goes and where you can make cuts. It may even help you identify things you didn't even know you're spending your money on, such as forgotten subscriptions that you may not use (like streaming video and monthly deliveries), and areas where you may find excessive spending, such as that daily coffee run.
Do Expense Trackers Work?
Yes, expense trackers work as long as you put in the work and are honest about your spending. If you're determined to make changes and improve your financial situation, an expense tracker can be a valuable tool.
For trackers to work, you have to be honest about your spending. This means logging every dollar you spend (some trackers will do this automatically if you sync up your bank account), whether the money goes through your account or you pay for something in cash. It may seem daunting at first, but it will get easier once you get into a routine.
Alternatives to Expense Tracker Apps
Digital spreadsheets: For those who’d rather not rely on expense tracking apps, digital spreadsheets are a useful alternative. Consider setting up spreadsheets using Google Sheets or Microsoft Excel. You can customize your spreadsheet to meet your needs and modify it over time as needed. Paper expense tracking: Some people prefer tracking their expenses on paper. If this sounds like you, your best option is likely keeping receipts and reconciling them against your checkbook, credit card, and bank statements each month. Consider creating an easy-to-track filing system in case you need to go back and review certain expenses. Reconciling online statements: You could also track your spending by reconciling your online statements once a week (or more often if you prefer). This way, purchases will be fresh in your mind and you should be able to confirm that both vendors and amounts on your statements are correct. Digital calendars: If your primary goal is to track monthly payments, relying on your phone’s digital calendar could be a helpful and no-cost option. Review your monthly bills, and set up reminders on your phone so you don’t miss any payments or pay late.
Pros and Cons of Expense Tracker Apps
Pros
Can simplify financial management
Free options are available
May help you budget and improve credit
May help you meet money goals
Cons
Certain apps cost money
Features vary
Not all financial institutions connect
Requires some upfront and ongoing work
Pros Explained
Can simplify financial management: Expense tracker apps may make it easier to manage your money, separate business and personal expenses, and track your monthly spending.
Free options are available: Certain apps are free, and you can find a good tracker without worrying about any added monthly costs.
May help you budget and improve credit: If you commit to using an expense tracker app, it could help you establish and stick to your budget. It may also help you improve your credit score, as many apps have helpful features like monthly payment alerts; these can help you avoid missed or late payments. Your payment history has a big effect on your credit score.
May help you meet money goals: Certain apps let you set savings goals and track your progress toward those goals. If used consistently, a personal expense tracker app could help you save for a down payment or take that vacation you’ve been putting off.
Cons Explained
Certain apps cost money: While some expense tracker apps are free, this isn’t the case with all of them. But, it’s worth considering the money you may save by using a paid tracker app, which may have more/better features than free apps.Features vary: Financial features vary across apps, so there isn’t one right option for everyone. You’ll need to do some research to find an app that works well for your situation. Not all financial institutions connect: Some banks or credit unions may not sync with certain expense tracker apps, meaning you won’t be able to easily track your spending. If you have a question about whether your financial institution will connect to an app, contact the app’s customer service team to confirm. Requires some upfront and ongoing work: To get the most out of a personal expense tracker app, you’ll need to do some work upfront and commit to using the app moving forward. While most apps don’t require any heavy lifting, there’s a time commitment involved.
Expense tracking apps and other financial management tools require upfront work and ongoing upkeep. They won’t automatically help you achieve your financial goals; instead, you need to commit to using them over time to meet your money goals and improve your situation.
Why You Should Trust Us
We looked at 30 of the best expense tracker apps available and narrowed it down to the best options based on several features and considerations. We considered pricing, features, reviews, and accessibility. In each case, we evaluated how robust the features were for day-to-day and power users and whether the app was easy to use. Investopedia launched in 1999 and has been helping readers find the best expense tracker apps since 2021.
Frequently Asked Questions
What Does an Expense Tracker App Do?
An expense tracker app allows you to monitor and categorize your expenses across different bank and investment accounts and credit cards. Some of these apps also offer budgeting tools, credit monitoring, mileage tracking, receipt keeping, and advice to grow your net worth.
Do Expense Tracker Apps Work?
That depends on you. Expense tracker apps only work if you put in the time and effort to make them work. It may seem daunting and difficult to sit down and review your finances, but these tools are only helpful if you are honest about your spending and track your expenses consistently.
How Do I Track Daily Personal Expenses?
You can track daily personal expenses on your mobile device using an expense tracking app for iPhone or Android, or you could opt for paper tracking while reviewing and reconciling your online credit card or bank statements regularly. Your personal preferences will dictate which option is best for you. Some expense tracker apps are tailored for personal use, while others are designed for small business use. If you need to track business expenses, opt for an app like QuickBooks Accounting or Expensify.
How Do I Keep Track of My Monthly Payments?
An expense tracking app could help simplify the process of tracking your monthly payments. If you’re interested in doing so for your small business, an app like Quickbooks Accounting may be a good choice.
How Much Does an Expense Tracker App Cost?
Expense tracker apps vary in cost, although many are free. Paid apps are typically less than $10 per month, although if you want business features like invoice creation and management, you’re more likely to pay well above that. Before paying for an expense tracker app, check to see if there’s a free trial. A lot of apps offer 30 days to test drive all of their features.
Is an Expense Tracker App Worth the Cost?
Many expense tracker apps are free or low cost, so explore your options and decide if you need a paid app. These apps can help you gain control of your finances, pay down debt, and grow your net worth. Some even allow you to upload receipts, track mileage, and send invoices, which are all helpful if you run a business.
What Is the Best App to Track Personal Expenses?
The best app for tracking personal expenses is one that lets you track and categorize your spending while also seeing your overall financial picture. It should be affordable, with the features you need to stay in control of your budget.
What’s the Best Expense Tracker App for iPhone?
The best expense tracker app for iPhone depends on your individual needs. What’s right for someone else won’t necessarily work for you. For instance, if you’re more focused on tracking your investments, Empower may be a better choice.
Investopedia / Tara Anand
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.
Quickbooks. "Try Advanced Free for 30 days."
Quickbooks. "Enjoy Exclusive Savings."
QuickBooks. "Integrations."
QuickBooks. "Manage Cash Flow."
Empower. "Take control of your finances with our free Budget Planner."
Empower. "Wealth Management."
Expensify. "Pricing."
Expensify. "How We Got Here."
Everlance. "Pricing."
PR News Wire. "Everlance Reaches 500,000 User Milestone and Launches New Partnerships With Xero and FreshBooks."
Everlance. "Automatically track mileage & expenses."
Nerdwallet. "Financial clarity all in one place."
Crunchbase. "Nerdwallet."
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Related Terms
What Is Personal Finance, and Why Is It Important?
Personal finance is about managing your budget and how best to put your money to work to realize your financial independence and goals.
more
What Is a Budget? Plus 11 Budgeting Myths Holding You Back
Budgeting involves estimating revenue and expenses over a specified future period of time. Budgets are usually established and re-evaluated on a periodic basis.
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Mobile trading refers to the use of wireless technology in securities trading and allows investors to use their smartphones to trade.
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Petty Cash: What It Is, How It's Used and Accounted For, Examples
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What Is Online Banking? Definition and How It Works
Online banking allows a user to conduct financial transactions via the Internet. Online banking is also known as Internet banking or web banking.
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https://www.investopedia.com/articles/pf/08/budgeting-for-baby.asp | Budgeting for a New Baby: Ongoing and One-Time Expenses | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 arrival of a new baby can be both exciting and financially overwhelming. A tiny new baby can mean big changes and major expenses for new parents. How much money can you expect to spend on your little one in the first year? What financial tools should you consider creating? Here we'll show you how to financially prepare for your family's newest addition before they arrive.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>One of the largest expenses for new parents can be the delivery—the cost of which depends on the location and health insurance policy.</li><li>One-time costs often include travel, home needs, and nursing/feeding.</li><li>Other things to consider include the cost of child care and savings plans.</li><li>It's important to have an emergency fund if one parent decides to stay home. </li></ul></div></div></div>
<span class="heading-toc" id="toc-one-time-expenses"></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"> One-Time Expenses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In this scenario, we look at the first baby. That means starting from scratch in many areas such as furniture, strollers, and cribs. There is, of course, also the one-time medical expense of delivering a baby in the United States. As we'll see, this expense is by far the hardest to pin down in any meaningful way.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-subheading__text"> Medical Bills </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> In the U.S., the average new parent with insurance coverage can expect to pay almost $14,000 for their labor and delivery, according to a 2020 research article published by the Healthcare Cost Institute. Vaginal deliveries can cost from $7,000 in Arkansas to $17,000 in New York. Interestingly, out-of-pocket costs also exhibited a wide range, from $1,000 in D.C. to $2,400 in South Carolina. (2017 was the most recent year for which data was available.)<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_11-0"> It is important to remember that the cost of routine birthing care is highly variable based on your location and insurance coverage. If you have an insurance policy, review it to determine your out-of-pocket costs for prenatal care, hospital stay, tests, and postpartum care. Unfortunately, it's nearly impossible to accurately predict <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/negotiate-costs-pregnancy-childbirth-6504408">how much you'll pay</a> without reviewing the health coverage you have available to you.
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<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>An insurance policy and location are important factors when determining how much the delivery of a baby will cost. If you lack a private insurance program, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/health-insurance/091016/medicaid-vs-chip-understanding-differences.asp">Medicaid or the Children's Health Insurance Program (CHIP)</a> could be options for you and your child.</p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> Baby Stuff </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The one-time purchases for babies are as variable as medical costs but for different reasons. This category can go up exponentially depending on the wants of the parent.
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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"> Travel Needs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> To get out and about you will most likely want to purchase a stroller, an infant car seat (required by law), a baby carrier, and a diaper bag.<span class="ql-inline-citation" data-cite="17"></span> If you plan on being out a lot, a portable playpen and/or bassinet may make sense. Like many of the things on this list, there is a wide range of costs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Buying an adapter, snuggle bags, and another option for some brands of strollers can be a $1,000 price tag without taking in the cost of the stroller itself. On the other end of that range, a seat and stroller combo can still be purchased new for under $150, and used equipment or hand-me-downs can fill in for all the others. It is worth noting that, at the very least, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/new-vs-used-baby-items-safety-5324723">it is worth buying a new infant car seat</a>. There is no foolproof way to ensure that a used one hasn't been compromised in a previous accident or through hard use.
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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"> Home Needs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> To keep your child occupied, you may want to consider a portable swing, bouncy seat, play mat, and/or jump seat. You may also want to have a crib and/or bassinet, crib mattress, basic bedding with blankets, a changing table, a small dresser, a rocking chair, a monitor, and a diaper pail. Again, this is an area where personal preference dictates cost. Unlike car seats, everything is for use at home, meaning that you can buy it used or even acquire it through one of the many share and swap groups you'll find online.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-subheading__text"> Nursing and Feeding </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Feeding costs for your new infant do, of course, vary like everything else based on your particular situation. A birthing parent who can stay at home and has no issues breastfeeding around the clock will see very minimal costs for months before a high chair and dishes are required. In that situation, some things like a breastfeeding pillow, burp cloths, or even a cape are more than enough.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> If the parent will be storing breast milk for use, then items like bottles, nipples, cleaning equipment, and a single or dual breast pump come into play and your budget will increase. If breastfeeding isn't possible, formula feeding will add significant costs to your first year of parenting.
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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"> Adoption </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> For those interested in a non-biological child, adoption comes with its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-pay-for-adoption-5409336">own set of expenses</a>, including cash payments, medical assistance. The actual costs vary wildly but can go as high as $50,000 or more. Some employers offer adoption benefits such as time off or financial assistance. There are also <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-assistance-for-family-planning-6537614">government programs</a> worth exploring.<br/>
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<span class="heading-toc" id="toc-ongoing-expenses"></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"> Ongoing Expenses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Once your baby arrives, the regular expenses to care for your little one kick in. Factor the following costs into your budget.
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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"> Child Care </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> If both you and your partner will work after your baby's arrival, your single biggest budget item will be child care. Your child care costs vary by where you live, the age of your child, how much care you require, and what type of care you use. The<strong> </strong>Care Index pegs in-center child care costs at just under $10,000 per year. The average cost of a nanny or other in-home care is around $28,350 a year, but again that can be higher or lower based on location and so on.<span class="ql-inline-citation" data-cite="3"></span> Keep in mind, though, some costs might be offset by various <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxcredit.asp">tax credits</a>, such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/childanddependentcarecredit.asp">child and dependent care credit</a>. Be sure to confirm if you are eligible.<span class="ql-inline-citation" data-cite="6"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-subheading__text"> Food and Other Necessities </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Food, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/122215/top-4-companies-owned-nestle.asp">Gerber formula</a>, clothing, and diapers make up most of the necessities in the ongoing costs. Once you begin feeding your child solid food, you can expect to spend roughly $100 a month. The early food costs for children are relatively small compared to what you will see from a teenager.<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_43-0"> <span class="mntl-sc-block-subheading__text"> Clothing and Diapers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> According to the USDA's most recent The Cost of Raising a Child report, it's advised that new parents should estimate clothing costs at around $670 up to $1,110 for the first two years. The amount ranges greatly based on personal preference and budget, but the lower end falls around $56 a month.<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_46-0"> Diapers also vary in cost, but experts advise that you should budget at least $1,000 for diapers and $450 for wipes for the first year alone. That's approximately $120 a month. Parents who choose to use disposable diapers should also expect to go through as many as 3,500 diapers in their child's first year alone.<span class="ql-inline-citation" data-cite="20"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Making homemade cloth diapers out of repurposed fabrics (either fabrics you have on hand, or inexpensive fabrics found at thrift stores) is an option that would reduce diaper costs significantly.
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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"> More Medical Bills </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Plan on six wellness visits the first year for evaluations, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/immunization.asp">immunizations</a>, etc., and a few additional visits for illnesses.<span class="ql-inline-citation" data-cite="21"></span> Check your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/private-health-insurance.asp">health insurance</a> policy for your rates.
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<span class="heading-toc" id="toc-if-one-parent-stays-at-home"></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"> If One Parent Stays at Home </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> If you become a stay-at-home parent, there are important budget changes to consider. The most obvious is reduced family income. Despite the high cost of child care, the cost of one partner leaving an income behind to commit to full-time parenting can be much higher in terms of lost income, benefits, and investment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Under the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp">Family Medical Leave Act (FMLA)</a>, your employer may grant you up to 12 work weeks of unpaid leave for your baby's arrival. Here again, nothing is set in stone as small businesses do not fall under the FMLA.<span class="ql-inline-citation" data-cite="18"></span><span class="ql-inline-citation" data-cite="2"></span> So check to see what type of leave you may qualify for with your employer. If you take unpaid leave, calculate your regular expenses during that period—mortgage, utilities, insurance, groceries, etc.—and determine how you will meet those costs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> This is compounded by diminished earning potential if that partner decides to resume their career. The decision to stay home can be personal or financial—at lower income levels, even government programs cannot balance the high costs in some regions. If it is for personal reasons, however, a couple can at least try the one-income budget before birth to get an idea for it while building an emergency fund with the second income at the same time.
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<span class="heading-toc" id="toc-financial-tools-to-consider"></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"> Financial Tools to Consider </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> With your child's arrival, you'll want to create financial tools to help provide for your child's future. Determine your priorities to begin budgeting.
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<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"> College Savings Tools </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> According to the College Board Report, the average cost per year for college in 2021 to 2022 ranged between $10,740 to attend a public four-year in-state school and $38,070 for a private four-year education.<span class="ql-inline-citation" data-cite="4"></span> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/affordable-college-education.asp">Start saving now</a> through one of several college education investment tools, such as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/529plan.asp">529 plan</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coverdellesa.asp">Coverdell Education Savings Account</a>, or UGMA/<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/utma.asp">UTMA account</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> There have been some changes to the way some accounts can be used—namely the 529 plan. The Tax Cuts and Jobs Act (TCJA) of 2017 and the Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019 have expanded the use of 529 plans to include K to 12 education, apprenticeship programs, and the ability to pay down student debt.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="10"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> The SECURE Act 2.0, passed in January 2023, offers another newly expanded benefit for 529 plans. It allows beneficiaries of these plans to roll over up to $35,000 from any 529 accounts in their name to a Roth IRA in their name over the course of their lifetimes.<span class="ql-inline-citation" data-cite="23"></span>
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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"> Life Insurance </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> If you do not have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeinsurance.asp">life insurance,</a> now is the time to buy it if you can afford to do so. For just a few dollars a month, you can be assured that your child will have financial resources if you and/or your partner were to die unexpectedly. Talk to your employer or an insurance agent for options on both life insurance and disability insurance.
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<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"> Health Insurance </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Without <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/healthinsurance.asp">health insurance</a>, just one serious accident or illness could deplete your savings and put you in significant debt. Investigate your insurance options if you don't already have coverage, or budget for the increased monthly <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/premium.asp">premium</a> to add your child to your policy.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-subheading__text"> Flexible Spending Accounts (FSAs) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flexiblespendingaccount.asp">Flexible Spending Accounts (FSAs)</a> enable you to use pretax dollars to pay for important family budget items, like child care and healthcare expenses.<span class="ql-inline-citation" data-cite="12"></span> Talk with your employer or financial advisor about setting up a dependent-care FSA and/or healthcare FSA.
</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-ways-to-save-money"></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"> Ways to Save Money </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> No matter your income, however, there are numerous ways to meet your new baby's needs without breaking the bank that we've hinted at throughout. Namely:
</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><strong>Consignment/thrift stores: </strong>Babies grow quickly. Instead of paying full price for their clothing, check out gently used and even new items at your local <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consignment.asp">consignment</a> or thrift store. Many stores will also buy back items after your child has outgrown them for cash or store credit. Online swap groups and parent networks can also provide quality goods for cheap—and sometimes even free. </li>
<li><strong>Family/friends for back-up daycare: </strong>Instead of having to take a day off (possibly without pay) when your child is sick, make arrangements for family or friends to help out with emergency back-up daycare.</li>
<li><strong>Borrow items from friends: </strong>Ask friends with young children if you could borrow items—particularly big-ticket items they're not using, like a crib, high chair, or rocking chair.</li>
<li><strong>Baby shower gifts: </strong>Register so party-goers can buy what you really need and avoid ending up with multiple baby rattles and photo albums.</li>
<li><strong>Downgrade your lifestyle</strong>: Having a child is going to change a lot of things, including your financial priorities. After reviewing your new budget, you may not be able to make the numbers add up. Consider closing the gap by downgrading in a few key areas. For example, think about trading in a large car for a more affordable model, shopping at less expensive stores or buying more generic items.</li>
</ul>
<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"> Children are a wonderful gift—if sometimes an expensive one. The main thing to keep in mind is that averages don't mean much when the range is as wide as it is with costs around a baby. Good health insurance can protect you from hospital bills for the most part, but only planning and budgeting can help you handle the rest. The Finnish practice of sending birthing parents home with a simple starter box that can double as a baby bed shows that many of the thousands of dollars spent on our children's first years are more for our status than their well-being.<span class="ql-inline-citation" data-cite="22"></span>
</p></div> | The arrival of a new baby can be both exciting and financially overwhelming. A tiny new baby can mean big changes and major expenses for new parents. How much money can you expect to spend on your little one in the first year? What financial tools should you consider creating? Here we'll show you how to financially prepare for your family's newest addition before they arrive.
### Key Takeaways
* One of the largest expenses for new parents can be the delivery—the cost of which depends on the location and health insurance policy.
* One-time costs often include travel, home needs, and nursing/feeding.
* Other things to consider include the cost of child care and savings plans.
* It's important to have an emergency fund if one parent decides to stay home.
## One-Time Expenses
In this scenario, we look at the first baby. That means starting from scratch in many areas such as furniture, strollers, and cribs. There is, of course, also the one-time medical expense of delivering a baby in the United States. As we'll see, this expense is by far the hardest to pin down in any meaningful way.
### Medical Bills
In the U.S., the average new parent with insurance coverage can expect to pay almost $14,000 for their labor and delivery, according to a 2020 research article published by the Healthcare Cost Institute. Vaginal deliveries can cost from $7,000 in Arkansas to $17,000 in New York. Interestingly, out-of-pocket costs also exhibited a wide range, from $1,000 in D.C. to $2,400 in South Carolina. (2017 was the most recent year for which data was available.)
It is important to remember that the cost of routine birthing care is highly variable based on your location and insurance coverage. If you have an insurance policy, review it to determine your out-of-pocket costs for prenatal care, hospital stay, tests, and postpartum care. Unfortunately, it's nearly impossible to accurately predict [how much you'll pay](https://www.investopedia.com/negotiate-costs-pregnancy-childbirth-6504408) without reviewing the health coverage you have available to you.
###
An insurance policy and location are important factors when determining how much the delivery of a baby will cost. If you lack a private insurance program, [Medicaid or the Children's Health Insurance Program (CHIP)](https://www.investopedia.com/articles/health-insurance/091016/medicaid-vs-chip-understanding-differences.asp) could be options for you and your child.
### Baby Stuff
The one-time purchases for babies are as variable as medical costs but for different reasons. This category can go up exponentially depending on the wants of the parent.
### Travel Needs
To get out and about you will most likely want to purchase a stroller, an infant car seat (required by law), a baby carrier, and a diaper bag. If you plan on being out a lot, a portable playpen and/or bassinet may make sense. Like many of the things on this list, there is a wide range of costs.
Buying an adapter, snuggle bags, and another option for some brands of strollers can be a $1,000 price tag without taking in the cost of the stroller itself. On the other end of that range, a seat and stroller combo can still be purchased new for under $150, and used equipment or hand-me-downs can fill in for all the others. It is worth noting that, at the very least, [it is worth buying a new infant car seat](https://www.investopedia.com/new-vs-used-baby-items-safety-5324723). There is no foolproof way to ensure that a used one hasn't been compromised in a previous accident or through hard use.
### Home Needs
To keep your child occupied, you may want to consider a portable swing, bouncy seat, play mat, and/or jump seat. You may also want to have a crib and/or bassinet, crib mattress, basic bedding with blankets, a changing table, a small dresser, a rocking chair, a monitor, and a diaper pail. Again, this is an area where personal preference dictates cost. Unlike car seats, everything is for use at home, meaning that you can buy it used or even acquire it through one of the many share and swap groups you'll find online.
### Nursing and Feeding
Feeding costs for your new infant do, of course, vary like everything else based on your particular situation. A birthing parent who can stay at home and has no issues breastfeeding around the clock will see very minimal costs for months before a high chair and dishes are required. In that situation, some things like a breastfeeding pillow, burp cloths, or even a cape are more than enough.
If the parent will be storing breast milk for use, then items like bottles, nipples, cleaning equipment, and a single or dual breast pump come into play and your budget will increase. If breastfeeding isn't possible, formula feeding will add significant costs to your first year of parenting.
### Adoption
For those interested in a non-biological child, adoption comes with its [own set of expenses](https://www.investopedia.com/how-to-pay-for-adoption-5409336), including cash payments, medical assistance. The actual costs vary wildly but can go as high as $50,000 or more. Some employers offer adoption benefits such as time off or financial assistance. There are also [government programs](https://www.investopedia.com/financial-assistance-for-family-planning-6537614) worth exploring.
## Ongoing Expenses
Once your baby arrives, the regular expenses to care for your little one kick in. Factor the following costs into your budget.
### Child Care
If both you and your partner will work after your baby's arrival, your single biggest budget item will be child care. Your child care costs vary by where you live, the age of your child, how much care you require, and what type of care you use. TheCare Index pegs in-center child care costs at just under $10,000 per year. The average cost of a nanny or other in-home care is around $28,350 a year, but again that can be higher or lower based on location and so on. Keep in mind, though, some costs might be offset by various [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp), such as the [child and dependent care credit](https://www.investopedia.com/terms/c/childanddependentcarecredit.asp). Be sure to confirm if you are eligible.
### Food and Other Necessities
Food, such as [Gerber formula](https://www.investopedia.com/articles/markets/122215/top-4-companies-owned-nestle.asp), clothing, and diapers make up most of the necessities in the ongoing costs. Once you begin feeding your child solid food, you can expect to spend roughly $100 a month. The early food costs for children are relatively small compared to what you will see from a teenager.
### Clothing and Diapers
According to the USDA's most recent The Cost of Raising a Child report, it's advised that new parents should estimate clothing costs at around $670 up to $1,110 for the first two years. The amount ranges greatly based on personal preference and budget, but the lower end falls around $56 a month.
Diapers also vary in cost, but experts advise that you should budget at least $1,000 for diapers and $450 for wipes for the first year alone. That's approximately $120 a month. Parents who choose to use disposable diapers should also expect to go through as many as 3,500 diapers in their child's first year alone.
Making homemade cloth diapers out of repurposed fabrics (either fabrics you have on hand, or inexpensive fabrics found at thrift stores) is an option that would reduce diaper costs significantly.
### More Medical Bills
Plan on six wellness visits the first year for evaluations, [immunizations](https://www.investopedia.com/terms/i/immunization.asp), etc., and a few additional visits for illnesses. Check your [health insurance](https://www.investopedia.com/articles/pf/08/private-health-insurance.asp) policy for your rates.
## If One Parent Stays at Home
If you become a stay-at-home parent, there are important budget changes to consider. The most obvious is reduced family income. Despite the high cost of child care, the cost of one partner leaving an income behind to commit to full-time parenting can be much higher in terms of lost income, benefits, and investment.
Under the [Family Medical Leave Act (FMLA)](https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp), your employer may grant you up to 12 work weeks of unpaid leave for your baby's arrival. Here again, nothing is set in stone as small businesses do not fall under the FMLA. So check to see what type of leave you may qualify for with your employer. If you take unpaid leave, calculate your regular expenses during that period—mortgage, utilities, insurance, groceries, etc.—and determine how you will meet those costs.
This is compounded by diminished earning potential if that partner decides to resume their career. The decision to stay home can be personal or financial—at lower income levels, even government programs cannot balance the high costs in some regions. If it is for personal reasons, however, a couple can at least try the one-income budget before birth to get an idea for it while building an emergency fund with the second income at the same time.
## Financial Tools to Consider
With your child's arrival, you'll want to create financial tools to help provide for your child's future. Determine your priorities to begin budgeting.
### College Savings Tools
According to the College Board Report, the average cost per year for college in 2021 to 2022 ranged between $10,740 to attend a public four-year in-state school and $38,070 for a private four-year education. [Start saving now](https://www.investopedia.com/articles/pf/08/affordable-college-education.asp) through one of several college education investment tools, such as a [529 plan](https://www.investopedia.com/terms/1/529plan.asp), [Coverdell Education Savings Account](https://www.investopedia.com/terms/c/coverdellesa.asp), or UGMA/[UTMA account](https://www.investopedia.com/terms/u/utma.asp).
There have been some changes to the way some accounts can be used—namely the 529 plan. The Tax Cuts and Jobs Act (TCJA) of 2017 and the Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019 have expanded the use of 529 plans to include K to 12 education, apprenticeship programs, and the ability to pay down student debt.
The SECURE Act 2.0, passed in January 2023, offers another newly expanded benefit for 529 plans. It allows beneficiaries of these plans to roll over up to $35,000 from any 529 accounts in their name to a Roth IRA in their name over the course of their lifetimes.
### Life Insurance
If you do not have [life insurance,](https://www.investopedia.com/terms/l/lifeinsurance.asp) now is the time to buy it if you can afford to do so. For just a few dollars a month, you can be assured that your child will have financial resources if you and/or your partner were to die unexpectedly. Talk to your employer or an insurance agent for options on both life insurance and disability insurance.
### Health Insurance
Without [health insurance](https://www.investopedia.com/terms/h/healthinsurance.asp), just one serious accident or illness could deplete your savings and put you in significant debt. Investigate your insurance options if you don't already have coverage, or budget for the increased monthly [premium](https://www.investopedia.com/terms/p/premium.asp) to add your child to your policy.
### Flexible Spending Accounts (FSAs)
[Flexible Spending Accounts (FSAs)](https://www.investopedia.com/terms/f/flexiblespendingaccount.asp) enable you to use pretax dollars to pay for important family budget items, like child care and healthcare expenses. Talk with your employer or financial advisor about setting up a dependent-care FSA and/or healthcare FSA.
## Ways to Save Money
No matter your income, however, there are numerous ways to meet your new baby's needs without breaking the bank that we've hinted at throughout. Namely:
* **Consignment/thrift stores:**Babies grow quickly. Instead of paying full price for their clothing, check out gently used and even new items at your local [consignment](https://www.investopedia.com/terms/c/consignment.asp) or thrift store. Many stores will also buy back items after your child has outgrown them for cash or store credit. Online swap groups and parent networks can also provide quality goods for cheap—and sometimes even free.
* **Family/friends for back-up daycare:**Instead of having to take a day off (possibly without pay) when your child is sick, make arrangements for family or friends to help out with emergency back-up daycare.
* **Borrow items from friends:**Ask friends with young children if you could borrow items—particularly big-ticket items they're not using, like a crib, high chair, or rocking chair.
* **Baby shower gifts:**Register so party-goers can buy what you really need and avoid ending up with multiple baby rattles and photo albums.
* **Downgrade your lifestyle**: Having a child is going to change a lot of things, including your financial priorities. After reviewing your new budget, you may not be able to make the numbers add up. Consider closing the gap by downgrading in a few key areas. For example, think about trading in a large car for a more affordable model, shopping at less expensive stores or buying more generic items.
## The Bottom Line
Children are a wonderful gift—if sometimes an expensive one. The main thing to keep in mind is that averages don't mean much when the range is as wide as it is with costs around a baby. Good health insurance can protect you from hospital bills for the most part, but only planning and budgeting can help you handle the rest. The Finnish practice of sending birthing parents home with a simple starter box that can double as a baby bed shows that many of the thousands of dollars spent on our children's first years are more for our status than their well-being.
| The arrival of a new baby can be both exciting and financially overwhelming. A tiny new baby can mean big changes and major expenses for new parents. How much money can you expect to spend on your little one in the first year? What financial tools should you consider creating? Here we'll show you how to financially prepare for your family's newest addition before they arrive.
Key Takeaways
One of the largest expenses for new parents can be the delivery—the cost of which depends on the location and health insurance policy.One-time costs often include travel, home needs, and nursing/feeding.Other things to consider include the cost of child care and savings plans.It's important to have an emergency fund if one parent decides to stay home.
One-Time Expenses
In this scenario, we look at the first baby. That means starting from scratch in many areas such as furniture, strollers, and cribs. There is, of course, also the one-time medical expense of delivering a baby in the United States. As we'll see, this expense is by far the hardest to pin down in any meaningful way.
Medical Bills
In the U.S., the average new parent with insurance coverage can expect to pay almost $14,000 for their labor and delivery, according to a 2020 research article published by the Healthcare Cost Institute. Vaginal deliveries can cost from $7,000 in Arkansas to $17,000 in New York. Interestingly, out-of-pocket costs also exhibited a wide range, from $1,000 in D.C. to $2,400 in South Carolina. (2017 was the most recent year for which data was available.)
It is important to remember that the cost of routine birthing care is highly variable based on your location and insurance coverage. If you have an insurance policy, review it to determine your out-of-pocket costs for prenatal care, hospital stay, tests, and postpartum care. Unfortunately, it's nearly impossible to accurately predict how much you'll pay without reviewing the health coverage you have available to you.
An insurance policy and location are important factors when determining how much the delivery of a baby will cost. If you lack a private insurance program, Medicaid or the Children's Health Insurance Program (CHIP) could be options for you and your child.
Baby Stuff
The one-time purchases for babies are as variable as medical costs but for different reasons. This category can go up exponentially depending on the wants of the parent.
Travel Needs
To get out and about you will most likely want to purchase a stroller, an infant car seat (required by law), a baby carrier, and a diaper bag. If you plan on being out a lot, a portable playpen and/or bassinet may make sense. Like many of the things on this list, there is a wide range of costs.
Buying an adapter, snuggle bags, and another option for some brands of strollers can be a $1,000 price tag without taking in the cost of the stroller itself. On the other end of that range, a seat and stroller combo can still be purchased new for under $150, and used equipment or hand-me-downs can fill in for all the others. It is worth noting that, at the very least, it is worth buying a new infant car seat. There is no foolproof way to ensure that a used one hasn't been compromised in a previous accident or through hard use.
Home Needs
To keep your child occupied, you may want to consider a portable swing, bouncy seat, play mat, and/or jump seat. You may also want to have a crib and/or bassinet, crib mattress, basic bedding with blankets, a changing table, a small dresser, a rocking chair, a monitor, and a diaper pail. Again, this is an area where personal preference dictates cost. Unlike car seats, everything is for use at home, meaning that you can buy it used or even acquire it through one of the many share and swap groups you'll find online.
Nursing and Feeding
Feeding costs for your new infant do, of course, vary like everything else based on your particular situation. A birthing parent who can stay at home and has no issues breastfeeding around the clock will see very minimal costs for months before a high chair and dishes are required. In that situation, some things like a breastfeeding pillow, burp cloths, or even a cape are more than enough.
If the parent will be storing breast milk for use, then items like bottles, nipples, cleaning equipment, and a single or dual breast pump come into play and your budget will increase. If breastfeeding isn't possible, formula feeding will add significant costs to your first year of parenting.
Adoption
For those interested in a non-biological child, adoption comes with its own set of expenses, including cash payments, medical assistance. The actual costs vary wildly but can go as high as $50,000 or more. Some employers offer adoption benefits such as time off or financial assistance. There are also government programs worth exploring.
Ongoing Expenses
Once your baby arrives, the regular expenses to care for your little one kick in. Factor the following costs into your budget.
Child Care
If both you and your partner will work after your baby's arrival, your single biggest budget item will be child care. Your child care costs vary by where you live, the age of your child, how much care you require, and what type of care you use. The Care Index pegs in-center child care costs at just under $10,000 per year. The average cost of a nanny or other in-home care is around $28,350 a year, but again that can be higher or lower based on location and so on. Keep in mind, though, some costs might be offset by various tax credits, such as the child and dependent care credit. Be sure to confirm if you are eligible.
Food and Other Necessities
Food, such as Gerber formula, clothing, and diapers make up most of the necessities in the ongoing costs. Once you begin feeding your child solid food, you can expect to spend roughly $100 a month. The early food costs for children are relatively small compared to what you will see from a teenager.
Clothing and Diapers
According to the USDA's most recent The Cost of Raising a Child report, it's advised that new parents should estimate clothing costs at around $670 up to $1,110 for the first two years. The amount ranges greatly based on personal preference and budget, but the lower end falls around $56 a month.
Diapers also vary in cost, but experts advise that you should budget at least $1,000 for diapers and $450 for wipes for the first year alone. That's approximately $120 a month. Parents who choose to use disposable diapers should also expect to go through as many as 3,500 diapers in their child's first year alone.
Making homemade cloth diapers out of repurposed fabrics (either fabrics you have on hand, or inexpensive fabrics found at thrift stores) is an option that would reduce diaper costs significantly.
More Medical Bills
Plan on six wellness visits the first year for evaluations, immunizations, etc., and a few additional visits for illnesses. Check your health insurance policy for your rates.
If One Parent Stays at Home
If you become a stay-at-home parent, there are important budget changes to consider. The most obvious is reduced family income. Despite the high cost of child care, the cost of one partner leaving an income behind to commit to full-time parenting can be much higher in terms of lost income, benefits, and investment.
Under the Family Medical Leave Act (FMLA), your employer may grant you up to 12 work weeks of unpaid leave for your baby's arrival. Here again, nothing is set in stone as small businesses do not fall under the FMLA. So check to see what type of leave you may qualify for with your employer. If you take unpaid leave, calculate your regular expenses during that period—mortgage, utilities, insurance, groceries, etc.—and determine how you will meet those costs.
This is compounded by diminished earning potential if that partner decides to resume their career. The decision to stay home can be personal or financial—at lower income levels, even government programs cannot balance the high costs in some regions. If it is for personal reasons, however, a couple can at least try the one-income budget before birth to get an idea for it while building an emergency fund with the second income at the same time.
Financial Tools to Consider
With your child's arrival, you'll want to create financial tools to help provide for your child's future. Determine your priorities to begin budgeting.
College Savings Tools
According to the College Board Report, the average cost per year for college in 2021 to 2022 ranged between $10,740 to attend a public four-year in-state school and $38,070 for a private four-year education. Start saving now through one of several college education investment tools, such as a 529 plan, Coverdell Education Savings Account, or UGMA/UTMA account.
There have been some changes to the way some accounts can be used—namely the 529 plan. The Tax Cuts and Jobs Act (TCJA) of 2017 and the Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019 have expanded the use of 529 plans to include K to 12 education, apprenticeship programs, and the ability to pay down student debt.
The SECURE Act 2.0, passed in January 2023, offers another newly expanded benefit for 529 plans. It allows beneficiaries of these plans to roll over up to $35,000 from any 529 accounts in their name to a Roth IRA in their name over the course of their lifetimes.
Life Insurance
If you do not have life insurance, now is the time to buy it if you can afford to do so. For just a few dollars a month, you can be assured that your child will have financial resources if you and/or your partner were to die unexpectedly. Talk to your employer or an insurance agent for options on both life insurance and disability insurance.
Health Insurance
Without health insurance, just one serious accident or illness could deplete your savings and put you in significant debt. Investigate your insurance options if you don't already have coverage, or budget for the increased monthly premium to add your child to your policy.
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts (FSAs) enable you to use pretax dollars to pay for important family budget items, like child care and healthcare expenses. Talk with your employer or financial advisor about setting up a dependent-care FSA and/or healthcare FSA.
Ways to Save Money
No matter your income, however, there are numerous ways to meet your new baby's needs without breaking the bank that we've hinted at throughout. Namely:
Consignment/thrift stores: Babies grow quickly. Instead of paying full price for their clothing, check out gently used and even new items at your local consignment or thrift store. Many stores will also buy back items after your child has outgrown them for cash or store credit. Online swap groups and parent networks can also provide quality goods for cheap—and sometimes even free.
Family/friends for back-up daycare: Instead of having to take a day off (possibly without pay) when your child is sick, make arrangements for family or friends to help out with emergency back-up daycare.
Borrow items from friends: Ask friends with young children if you could borrow items—particularly big-ticket items they're not using, like a crib, high chair, or rocking chair.
Baby shower gifts: Register so party-goers can buy what you really need and avoid ending up with multiple baby rattles and photo albums.
Downgrade your lifestyle: Having a child is going to change a lot of things, including your financial priorities. After reviewing your new budget, you may not be able to make the numbers add up. Consider closing the gap by downgrading in a few key areas. For example, think about trading in a large car for a more affordable model, shopping at less expensive stores or buying more generic items.
The Bottom Line
Children are a wonderful gift—if sometimes an expensive one. The main thing to keep in mind is that averages don't mean much when the range is as wide as it is with costs around a baby. Good health insurance can protect you from hospital bills for the most part, but only planning and budgeting can help you handle the rest. The Finnish practice of sending birthing parents home with a simple starter box that can double as a baby bed shows that many of the thousands of dollars spent on our children's first years are more for our status than their well-being.
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https://www.investopedia.com/articles/investing/042116/4-factors-know-about-money-market-reform-2016-fii-bac.asp | 4 Factors to Know About the Money Market Reform of 2016 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 Security and Exchange Commission's widely anticipated reforms for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-marketfund.asp" rel="noopener noreferrer">money market funds</a> were implemented on Oct. 14, 2016.<span class="ql-inline-citation" data-cite="1"></span> These reform rules drastically changed the way investors and the affected fund providers view money market funds as an alternative for short-term cash investing. Many investors, especially institutions, faced increased risks or lower yields on their short-term money, while fund providers reconsidered the worth of their offerings.
</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"> With about $3 trillion invested in money market funds, investors and providers alike had a lot at stake in the changes in how funds were managed.<span class="ql-inline-citation" data-cite="1"></span> Although nominal for most individual or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailinvestor.asp" rel="noopener noreferrer">retail investors</a>, for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp" rel="noopener noreferrer">institutional investors</a> and the fund providers, the money market reform of 2016 required significant rethinking on the value of money market funds.
</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>In 2016, the Securities and Exchange Commission (SEC) implemented reforms to enhance the stability of money market funds and to reduce investor risks.</li><li>As a means of preventing a run on a fund, the regulations require money market fund providers to institute liquidity fees and suspension gates.</li><li>A key change was to require money market funds to move from a fixed $1 share price to a floating net asset value (NAV).</li><li>The SEC decided to implement these changes after the 2008 financial crisis caused a large New York fund manager to reduce the NAV of its money market fund below $1, a move that caused panic selling among institutional investors.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-reason-behind-money-market-fund-reform"></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 Reason Behind Money Market Fund Reform </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> At the peak of the 2008 financial crisis, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp" rel="noopener noreferrer">Reserve Primary Fund</a>, a large New York-based fund manager, was forced to reduce the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp" rel="noopener noreferrer">net asset value (NAV)</a> of its money market fund below $1 due to massive losses generated by failed short-term loans issued by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lehman-brothers.asp" rel="noopener noreferrer">Lehman Brothers</a>. It was the first time a major money market fund had to break the $1 NAV, which caused a panic among institutional investors, who began mass redemptions. The fund lost two-thirds of its assets in 24 hours and eventually had to suspend operations and commence liquidation.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Six years later in 2014, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp" rel="noopener noreferrer">Securities and Exchange Commission (SEC)</a> issued new rules for the management of money market funds to enhance the stability and resilience of all money market funds. Generally, the rules placed tighter restrictions on portfolio <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdings.asp" rel="noopener noreferrer">holdings</a> while enhancing <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp" rel="noopener noreferrer">liquidity</a> and quality requirements. The most fundamental change was the requirement for money market funds to move from a fixed $1 share price to a floating NAV, which introduced the risk of principal where it had never existed.<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"> In addition, the rules required fund providers to institute liquidity fees and suspension gates as a means of preventing a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/run-on-the-fund.asp" rel="noopener noreferrer">run on the fund</a>. The requirements included asset level triggers for imposing a liquidity fee of 1% or 2%. If weekly <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidasset.asp" rel="noopener noreferrer">liquid assets</a> fell below 10% of total assets, it triggered a 1% fee. Below 30%, the fee increased to 2%. Funds also suspended redemptions for up to 10 business days in a 90-day period.<span class="ql-inline-citation" data-cite="3"></span> While those are the fundamental rule changes, there are several factors investors need to know about the reform and how it might affect them.
</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-retail-investors-not-completely-affected"></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"> Retail Investors Not Completely Affected </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The most significant rule change, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/floating-rate-fund.asp" rel="noopener noreferrer">floating</a> NAV, did not affect investors investing in retail money market funds. These funds maintained the $1 NAV.<span class="ql-inline-citation" data-cite="3"></span> However, they were still required to institute the redemption triggers for charging a liquidity fee or suspending redemptions. Many of the larger fund groups took actions to either limit the possibility of a redemption trigger or avoid it altogether by converting their funds into a government money market fund, which had no requirement.
</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 same cannot be said for people who invest in prime money market funds inside their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp" rel="noopener noreferrer">401(k) plans</a> because these are typically <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalfund.asp" rel="noopener noreferrer">institutional funds</a> subject to all of the new rules. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/plansponsor.asp" rel="noopener noreferrer">Plan sponsors</a> had to change out their fund options, offering a government money market fund or some other alternative.
</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-institutional-investors-have-a-dilemma"></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"> Institutional Investors Have a Dilemma </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Because institutional investors are the target of the new rules, they were the most affected. For them, it came down to a choice of securing a higher yield or higher risk. They could invest in U.S. government money markets, which were not subject to the floating NAV or redemption triggers. However, they had to accept a lower yield. Institutional investors seeking higher yields had to consider other options, such as bank certificates of deposit (CDs), alternative prime funds that invested primarily in very short maturity assets to limit <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> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrisk.asp" rel="noopener noreferrer">credit risk</a>, or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ultra_short_bond_fund.asp" rel="noopener noreferrer">ultra-short duration</a> funds that offered higher yields but also had more volatility.
</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-fund-groups-must-adapt-or-get-out-of-money-market-funds"></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"> Fund Groups Must Adapt or Get Out of Money Market Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> After the SEC announced its money market reforms, most of the major fund groups, such as Fidelity Investments, Federated Investors Inc., and Vanguard Group, said they planned to offer viable alternatives to their investors. Fidelity converted its largest prime fund into a U.S. government fund.<span class="ql-inline-citation" data-cite="5"></span> Federated took steps to shorten the maturities of its prime funds to make it easier to maintain a $1 NAV.<span class="ql-inline-citation" data-cite="6"></span> Vanguard assured its investors that its prime funds had more than enough liquidity to avoid triggering a liquidity fee or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redemptionsuspension.asp" rel="noopener noreferrer">redemption suspension</a>.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> However, many fund groups had to assess whether the cost of compliance with the new regulations was worth keeping their funds. In anticipation of the new rules, 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" rel="noopener noreferrer">BAC</a>) sold its money market business to BlackRock Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=blk" rel="noopener noreferrer">BLK</a>) in 2016.<span class="ql-inline-citation" data-cite="7"></span> Notwithstanding the approach any particular fund group took, investors experienced a flurry of communications explaining any changes to their funds and their options.
</p></div> | The Security and Exchange Commission's widely anticipated reforms for [money market funds](https://www.investopedia.com/terms/m/money-marketfund.asp) were implemented on Oct. 14, 2016. These reform rules drastically changed the way investors and the affected fund providers view money market funds as an alternative for short-term cash investing. Many investors, especially institutions, faced increased risks or lower yields on their short-term money, while fund providers reconsidered the worth of their offerings.
With about $3 trillion invested in money market funds, investors and providers alike had a lot at stake in the changes in how funds were managed. Although nominal for most individual or [retail investors](https://www.investopedia.com/terms/r/retailinvestor.asp), for [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) and the fund providers, the money market reform of 2016 required significant rethinking on the value of money market funds.
### Key Takeaways
* In 2016, the Securities and Exchange Commission (SEC) implemented reforms to enhance the stability of money market funds and to reduce investor risks.
* As a means of preventing a run on a fund, the regulations require money market fund providers to institute liquidity fees and suspension gates.
* A key change was to require money market funds to move from a fixed $1 share price to a floating net asset value (NAV).
* The SEC decided to implement these changes after the 2008 financial crisis caused a large New York fund manager to reduce the NAV of its money market fund below $1, a move that caused panic selling among institutional investors.
## The Reason Behind Money Market Fund Reform
At the peak of the 2008 financial crisis, the [Reserve Primary Fund](https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp), a large New York-based fund manager, was forced to reduce the [net asset value (NAV)](https://www.investopedia.com/terms/n/nav.asp) of its money market fund below $1 due to massive losses generated by failed short-term loans issued by [Lehman Brothers](https://www.investopedia.com/terms/l/lehman-brothers.asp). It was the first time a major money market fund had to break the $1 NAV, which caused a panic among institutional investors, who began mass redemptions. The fund lost two-thirds of its assets in 24 hours and eventually had to suspend operations and commence liquidation.
Six years later in 2014, the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) issued new rules for the management of money market funds to enhance the stability and resilience of all money market funds. Generally, the rules placed tighter restrictions on portfolio [holdings](https://www.investopedia.com/terms/h/holdings.asp) while enhancing [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) and quality requirements. The most fundamental change was the requirement for money market funds to move from a fixed $1 share price to a floating NAV, which introduced the risk of principal where it had never existed.
In addition, the rules required fund providers to institute liquidity fees and suspension gates as a means of preventing a [run on the fund](https://www.investopedia.com/terms/r/run-on-the-fund.asp). The requirements included asset level triggers for imposing a liquidity fee of 1% or 2%. If weekly [liquid assets](https://www.investopedia.com/terms/l/liquidasset.asp) fell below 10% of total assets, it triggered a 1% fee. Below 30%, the fee increased to 2%. Funds also suspended redemptions for up to 10 business days in a 90-day period. While those are the fundamental rule changes, there are several factors investors need to know about the reform and how it might affect them.
## Retail Investors Not Completely Affected
The most significant rule change, the [floating](https://www.investopedia.com/terms/f/floating-rate-fund.asp) NAV, did not affect investors investing in retail money market funds. These funds maintained the $1 NAV. However, they were still required to institute the redemption triggers for charging a liquidity fee or suspending redemptions. Many of the larger fund groups took actions to either limit the possibility of a redemption trigger or avoid it altogether by converting their funds into a government money market fund, which had no requirement.
The same cannot be said for people who invest in prime money market funds inside their [401(k) plans](https://www.investopedia.com/terms/1/401kplan.asp) because these are typically [institutional funds](https://www.investopedia.com/terms/i/institutionalfund.asp) subject to all of the new rules. [Plan sponsors](https://www.investopedia.com/terms/p/plansponsor.asp) had to change out their fund options, offering a government money market fund or some other alternative.
## Institutional Investors Have a Dilemma
Because institutional investors are the target of the new rules, they were the most affected. For them, it came down to a choice of securing a higher yield or higher risk. They could invest in U.S. government money markets, which were not subject to the floating NAV or redemption triggers. However, they had to accept a lower yield. Institutional investors seeking higher yields had to consider other options, such as bank certificates of deposit (CDs), alternative prime funds that invested primarily in very short maturity assets to limit [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) and [credit risk](https://www.investopedia.com/terms/c/creditrisk.asp), or [ultra-short duration](https://www.investopedia.com/terms/u/ultra_short_bond_fund.asp) funds that offered higher yields but also had more volatility.
## Fund Groups Must Adapt or Get Out of Money Market Funds
After the SEC announced its money market reforms, most of the major fund groups, such as Fidelity Investments, Federated Investors Inc., and Vanguard Group, said they planned to offer viable alternatives to their investors. Fidelity converted its largest prime fund into a U.S. government fund. Federated took steps to shorten the maturities of its prime funds to make it easier to maintain a $1 NAV. Vanguard assured its investors that its prime funds had more than enough liquidity to avoid triggering a liquidity fee or [redemption suspension](https://www.investopedia.com/terms/r/redemptionsuspension.asp).
However, many fund groups had to assess whether the cost of compliance with the new regulations was worth keeping their funds. In anticipation of the new rules, Bank of America Corp. ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac)) sold its money market business to BlackRock Inc. ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=blk)) in 2016. Notwithstanding the approach any particular fund group took, investors experienced a flurry of communications explaining any changes to their funds and their options.
| The Security and Exchange Commission's widely anticipated reforms for money market funds were implemented on Oct. 14, 2016. These reform rules drastically changed the way investors and the affected fund providers view money market funds as an alternative for short-term cash investing. Many investors, especially institutions, faced increased risks or lower yields on their short-term money, while fund providers reconsidered the worth of their offerings.
With about $3 trillion invested in money market funds, investors and providers alike had a lot at stake in the changes in how funds were managed. Although nominal for most individual or retail investors, for institutional investors and the fund providers, the money market reform of 2016 required significant rethinking on the value of money market funds.
Key Takeaways
In 2016, the Securities and Exchange Commission (SEC) implemented reforms to enhance the stability of money market funds and to reduce investor risks.As a means of preventing a run on a fund, the regulations require money market fund providers to institute liquidity fees and suspension gates.A key change was to require money market funds to move from a fixed $1 share price to a floating net asset value (NAV).The SEC decided to implement these changes after the 2008 financial crisis caused a large New York fund manager to reduce the NAV of its money market fund below $1, a move that caused panic selling among institutional investors.
The Reason Behind Money Market Fund Reform
At the peak of the 2008 financial crisis, the Reserve Primary Fund, a large New York-based fund manager, was forced to reduce the net asset value (NAV) of its money market fund below $1 due to massive losses generated by failed short-term loans issued by Lehman Brothers. It was the first time a major money market fund had to break the $1 NAV, which caused a panic among institutional investors, who began mass redemptions. The fund lost two-thirds of its assets in 24 hours and eventually had to suspend operations and commence liquidation.
Six years later in 2014, the Securities and Exchange Commission (SEC) issued new rules for the management of money market funds to enhance the stability and resilience of all money market funds. Generally, the rules placed tighter restrictions on portfolio holdings while enhancing liquidity and quality requirements. The most fundamental change was the requirement for money market funds to move from a fixed $1 share price to a floating NAV, which introduced the risk of principal where it had never existed.
In addition, the rules required fund providers to institute liquidity fees and suspension gates as a means of preventing a run on the fund. The requirements included asset level triggers for imposing a liquidity fee of 1% or 2%. If weekly liquid assets fell below 10% of total assets, it triggered a 1% fee. Below 30%, the fee increased to 2%. Funds also suspended redemptions for up to 10 business days in a 90-day period. While those are the fundamental rule changes, there are several factors investors need to know about the reform and how it might affect them.
Retail Investors Not Completely Affected
The most significant rule change, the floating NAV, did not affect investors investing in retail money market funds. These funds maintained the $1 NAV. However, they were still required to institute the redemption triggers for charging a liquidity fee or suspending redemptions. Many of the larger fund groups took actions to either limit the possibility of a redemption trigger or avoid it altogether by converting their funds into a government money market fund, which had no requirement.
The same cannot be said for people who invest in prime money market funds inside their 401(k) plans because these are typically institutional funds subject to all of the new rules. Plan sponsors had to change out their fund options, offering a government money market fund or some other alternative.
Institutional Investors Have a Dilemma
Because institutional investors are the target of the new rules, they were the most affected. For them, it came down to a choice of securing a higher yield or higher risk. They could invest in U.S. government money markets, which were not subject to the floating NAV or redemption triggers. However, they had to accept a lower yield. Institutional investors seeking higher yields had to consider other options, such as bank certificates of deposit (CDs), alternative prime funds that invested primarily in very short maturity assets to limit interest rate and credit risk, or ultra-short duration funds that offered higher yields but also had more volatility.
Fund Groups Must Adapt or Get Out of Money Market Funds
After the SEC announced its money market reforms, most of the major fund groups, such as Fidelity Investments, Federated Investors Inc., and Vanguard Group, said they planned to offer viable alternatives to their investors. Fidelity converted its largest prime fund into a U.S. government fund. Federated took steps to shorten the maturities of its prime funds to make it easier to maintain a $1 NAV. Vanguard assured its investors that its prime funds had more than enough liquidity to avoid triggering a liquidity fee or redemption suspension.
However, many fund groups had to assess whether the cost of compliance with the new regulations was worth keeping their funds. In anticipation of the new rules, Bank of America Corp. (BAC) sold its money market business to BlackRock Inc. (BLK) in 2016. Notwithstanding the approach any particular fund group took, investors experienced a flurry of communications explaining any changes to their funds and their options.
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]
] |
https://www.investopedia.com/terms/s/stif.asp | Short-Term Investment Fund (STIF): What it is, How it Works | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-short-term-investment-fund-stif"></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 Short-Term Investment Fund (STIF)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A short-term investment fund (STIF) invests in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shorterminvestments.asp">short-term money market investments</a> of high quality and low risk. This type of fund is viewed as one of the most conservative investments in the financial industry. In addition, short-term investment funds are generally considered to be liquid investments and earn marginally higher returns than a standard personal <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings account</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<span class="heading-toc" id="toc-understanding-short-term-investment-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0"> <span class="mntl-sc-block-heading__text"> Understanding Short-Term Investment Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Many short-term investments funds provide investors with personal checks and some also give investors online access to make deposits and withdrawals, or view monthly, annual, and quarterly statements. Investors can make deposits and withdrawals to these funds whenever they want; many advertise 100% daily <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>Short-term investment funds are highly liquid accounts that offer higher returns than savings accounts.</li><li>Returns are often tied to returns from a Treasury bill index.</li><li>STIFs sometimes offer checks and online access for withdrawals and deposits.</li><li>Money market funds are broadly known as short-term investment funds.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Short-term investment funds offer investors the opportunity to protect capital while earning a marginal rate of return. Many short-term investment funds benchmark their fund returns to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">Treasury bill</a> index. Short-term <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-fund.asp">investment funds</a> typically include cash, bank notes, government bills and conservative bond holdings characterized as safe <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shorttermdebt.asp">short-term debt</a> instruments.
</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 who seek a short-term holding before moving their investments to another investment such as stocks or mutual funds often use short-term investment funds as a parking place before the money is deployed. STIFs funds traditionally have low transaction costs and minimal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managementfee.asp">management fees</a>, usually well below 1% per year.
</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-short-term-investment-fund-managers"></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"> Short-Term Investment Fund Managers </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Money market funds are the most broadly known short-term investment funds. Below are examples of investment providers that offer a wide array of money market funds for investors.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0">
<li><strong>Schwab: </strong><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.schwab.com/public/schwab/investing/accounts_products/investment/money_markets_funds/purchased_money_funds#government_treasury" rel="sponsored nofollow">Schwab Purchased Money Funds</a> are grouped into three categories: prime, government and treasury, and municipal.<span class="ql-inline-citation" data-cite="1"></span></li>
<li><strong>Vanguard: </strong>Vanguard offers two taxable <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://investor.vanguard.com/mutual-funds/list?filterAllAssetClasses=false&filterMoneyMarket=true&filterFiftyThousandAndUp=true&filterLowCostInvestor=true#/mutual-funds/asset-class/month-end-returns" rel="sponsored nofollow">money market funds</a> and three non-taxable municipal funds.<span class="ql-inline-citation" data-cite="2"></span></li>
<li><strong>JPMorgan: </strong>JPMorgan offers six money market funds.<span class="ql-inline-citation" data-cite="3"></span></li>
<li><strong>American Century: </strong>American Century offers six funds in its money market category.<span class="ql-inline-citation" data-cite="4"></span></li>
</ul></div> | ## What Is a Short-Term Investment Fund (STIF)?
A short-term investment fund (STIF) invests in [short-term money market investments](https://www.investopedia.com/terms/s/shorterminvestments.asp) of high quality and low risk. This type of fund is viewed as one of the most conservative investments in the financial industry. In addition, short-term investment funds are generally considered to be liquid investments and earn marginally higher returns than a standard personal [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp).
## Understanding Short-Term Investment Funds
Many short-term investments funds provide investors with personal checks and some also give investors online access to make deposits and withdrawals, or view monthly, annual, and quarterly statements. Investors can make deposits and withdrawals to these funds whenever they want; many advertise 100% daily [liquidity](https://www.investopedia.com/terms/l/liquidity.asp).
### Key Takeaways
* Short-term investment funds are highly liquid accounts that offer higher returns than savings accounts.
* Returns are often tied to returns from a Treasury bill index.
* STIFs sometimes offer checks and online access for withdrawals and deposits.
* Money market funds are broadly known as short-term investment funds.
Short-term investment funds offer investors the opportunity to protect capital while earning a marginal rate of return. Many short-term investment funds benchmark their fund returns to a [Treasury bill](https://www.investopedia.com/terms/t/treasurybill.asp) index. Short-term [investment funds](https://www.investopedia.com/terms/i/investment-fund.asp) typically include cash, bank notes, government bills and conservative bond holdings characterized as safe [short-term debt](https://www.investopedia.com/terms/s/shorttermdebt.asp) instruments.
Investors who seek a short-term holding before moving their investments to another investment such as stocks or mutual funds often use short-term investment funds as a parking place before the money is deployed. STIFs funds traditionally have low transaction costs and minimal [management fees](https://www.investopedia.com/terms/m/managementfee.asp), usually well below 1% per year.
## Short-Term Investment Fund Managers
Money market funds are the most broadly known short-term investment funds. Below are examples of investment providers that offer a wide array of money market funds for investors.
* **Schwab:** [Schwab Purchased Money Funds](https://www.schwab.com/public/schwab/investing/accounts_products/investment/money_markets_funds/purchased_money_funds#government_treasury) are grouped into three categories: prime, government and treasury, and municipal.
* **Vanguard:** Vanguard offers two taxable [money market funds](https://investor.vanguard.com/mutual-funds/list?filterAllAssetClasses=false&filterMoneyMarket=true&filterFiftyThousandAndUp=true&filterLowCostInvestor=true#/mutual-funds/asset-class/month-end-returns) and three non-taxable municipal funds.
* **JPMorgan:** JPMorgan offers six money market funds.
* **American Century:** American Century offers six funds in its money market category.
| What Is a Short-Term Investment Fund (STIF)?
A short-term investment fund (STIF) invests in short-term money market investments of high quality and low risk. This type of fund is viewed as one of the most conservative investments in the financial industry. In addition, short-term investment funds are generally considered to be liquid investments and earn marginally higher returns than a standard personal savings account.
Understanding Short-Term Investment Funds
Many short-term investments funds provide investors with personal checks and some also give investors online access to make deposits and withdrawals, or view monthly, annual, and quarterly statements. Investors can make deposits and withdrawals to these funds whenever they want; many advertise 100% daily liquidity.
Key Takeaways
Short-term investment funds are highly liquid accounts that offer higher returns than savings accounts.Returns are often tied to returns from a Treasury bill index.STIFs sometimes offer checks and online access for withdrawals and deposits.Money market funds are broadly known as short-term investment funds.
Short-term investment funds offer investors the opportunity to protect capital while earning a marginal rate of return. Many short-term investment funds benchmark their fund returns to a Treasury bill index. Short-term investment funds typically include cash, bank notes, government bills and conservative bond holdings characterized as safe short-term debt instruments.
Investors who seek a short-term holding before moving their investments to another investment such as stocks or mutual funds often use short-term investment funds as a parking place before the money is deployed. STIFs funds traditionally have low transaction costs and minimal management fees, usually well below 1% per year.
Short-Term Investment Fund Managers
Money market funds are the most broadly known short-term investment funds. Below are examples of investment providers that offer a wide array of money market funds for investors.
Schwab: Schwab Purchased Money Funds are grouped into three categories: prime, government and treasury, and municipal.
Vanguard: Vanguard offers two taxable money market funds and three non-taxable municipal funds.
JPMorgan: JPMorgan offers six money market funds.
American Century: American Century offers six funds in its money market category.
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https://www.investopedia.com/5-best-investments-for-military-families-5198722 | 5 Best Investments for Military Families | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Serving in the military doesn’t afford much free time, which can make it tough to research and choose the best investments. The good news is that many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-saving-and-investing-for-military-personnel-5193117">savings and investment opportunities</a> can help you prepare for a comfortable future—without adding a lot of time or stress to your busy schedule. Here are five of the best investments for military members to consider.
</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>Service members have access to numerous savings and investment opportunities, including some unavailable to civilians.</li>
<li>The federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/thrift-savings-plan-vs-401-k-5212330">Thrift Savings Plan (TSP) resembles a 401(k) plan</a> and offers automatic payroll deductions and matching contributions.<span class="ql-inline-citation" data-cite="9"></span></li>
<li>Traditional and Roth IRAs feature a wide range of investment choices and can be an excellent way to supplement a TSP.<span class="ql-inline-citation" data-cite="10"></span></li>
<li>Other investments include the Savings Deposit Program, 529 college <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/special-savings-plans-for-military-5193105">savings plans</a>, and real estate.<span class="ql-inline-citation" data-cite="22"></span><span class="ql-inline-citation" data-cite="2"></span></li>
</ul></div></div></div>
<span class="heading-toc" id="toc-federal-thrift-savings-plan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Federal Thrift Savings Plan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102714/thrift-savings-plan-tsp-qualified-retirement-plan.asp">Thrift Savings Plan (TSP)</a> is a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qrp.asp">qualified retirement plan</a> that provides a low-cost, tax-advantaged way for federal employees and service members to invest. You can select <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/061113/breaking-down-tsp-investment-funds.asp">your own mix of investments</a>, from a short-term U.S. <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">Treasury bond</a> to <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index funds</a> to a <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/life_cycle_funds.asp">life-cycle fund</a>, the last of which automatically rebalances your assets as you near retirement.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> You can choose between two tax treatments for your TSP contributions:<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>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <li><strong>Traditional TSP</strong>—With this pretax plan, you get a tax break in the year when you make the contribution and pay taxes when you withdraw funds during retirement.</li><li><strong>Roth TSP</strong>—You don’t get any up-front tax benefits from this after-tax plan, but qualified withdrawals are tax free in retirement.<br/></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 unsure which option makes the most sense for you, check out TSP.gov’s contribution comparison calculator.<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_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> For 2022, you can contribute up to $20,500 to a TSP (rising to $22,500 in 2023.)<span class="ql-inline-citation" data-cite="21"></span> That figure jumps to $27,000 in 2022 if you’re age 50 or older (rising to $30,000 in 2023).<span class="ql-inline-citation" data-cite="23"></span><span class="ql-inline-citation" data-cite="11"></span> If you’re part of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062513/what-federal-employees-retirement-system-fers-and-how-does-it-work.asp">Federal Employees Retirement System (FERS)</a> or the Blended Retirement System (BRS), you can earn up to 5% more in matching contributions from the military. You’ll get a dollar-for-dollar match on the first 3% of your paycheck that you contribute to the TSP, with 50 cents on the dollar for the next 2%.<span class="ql-inline-citation" data-cite="12"></span> The more you save, the greater the match, so it pays to max out your contributions if possible.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Like a 401(k), you can set up automatic deposits that come straight out of your paycheck, so it’s easy to “set it and forget it.” It’s a good idea to set up automatic deposits before you get your first check—that way, you’ll never miss the money.
</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-individual-retirement-accounts-iras"></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"> Individual Retirement Accounts (IRAs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Even if you max out your contributions to the TSP, you can still stash away money in an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account (IRA)</a>. An IRA can be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/roth-tsp-vs-roth-ira-how-do-they-compare-4770656">a great way to supplement your TSP</a> and help ensure a secure retirement.
</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"> Like the TSP, IRAs are available in <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/">traditional (pretax) or Roth (after-tax)</a> varieties. In general, IRAs offer greater flexibility than TSPs due to the vast number of investment choices. However, the contribution limits are much lower. For 2022, you can contribute up to $6,000 to your IRAs ($7,000 if you’re age 50 or older). For 2023, the contribution limits increase to $6,500 and $7,500 respectively.<span class="ql-inline-citation" data-cite="23"></span><span class="ql-inline-citation" data-cite="13"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<span class="heading-toc" id="toc-529-college-savings-plans"></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"> 529 College Savings Plans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If you have children and anticipate education expenses in your future, then 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> can be a tax-advantaged way to save. Under tax laws passed in 2017 and 2019, you can <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/how-new-tax-changes-promote-529-investments/">use a 529 plan to pay for K–12 expenses</a>—not just college and other postsecondary education. While contributions are not tax deductible at the federal level, more than 30 states offer a full or partial tax deduction or credit.<span class="ql-inline-citation" data-cite="15"></span> A 529 plan grows tax free, and withdrawals are tax free if used for qualified education expenses.<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_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> You can contribute any amount to a 529, but anything over $16,000 per individual—the annual 2022 gift tax exclusion—can trigger federal gift taxes (the gift tax exclusion rises to $17,000 in 2023).<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="1"></span> Most plans let you set up automatic investments, which make it easy to stay on track.
</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-savings-deposit-program"></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"> Savings Deposit Program </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The U.S. Department of Defense’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-saving-and-investing-for-military-personnel-5193117">Savings Deposit Program (SDP)</a> gives deployed military personnel serving in designated combat zones a guaranteed 10% annual return on deposited amounts of up to $10,000. To qualify, you must be receiving Hostile Fire Pay and be deployed for either 30 consecutive days or at least one day per month for three consecutive months. You continue to earn 10% interest for 90 days after you redeploy home, unless you request to withdraw your money sooner.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> While an extra $1,000 can be helpful, keep in mind that income from the SDP is reported on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/form-1099-int.asp">1099-INT form</a> in the year when you withdraw funds, which means that you could owe taxes on the earnings.<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_32-0"></div>
<span class="heading-toc" id="toc-real-estate"></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"> Real Estate </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Real estate can be an excellent way to diversify and achieve higher returns. The tradeoff is that it involves more risk (and effort) than lower-risk investments. Still, real estate investments offer numerous advantages, including tax benefits and ongoing passive income. A common way to invest in real estate is to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/military-family-s-guide-to-buying-and-selling-homes-5195303">buy a house</a> and convert it into a rental property (some service members buy property near their bases to make managing the rentals easier).
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/013103.asp">Real estate investment trust (REITs)</a> are another popular option. A REIT is a company that owns, operates, or finances income-producing properties. Investors buy shares of publicly traded REITs using 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> or an IRA. By law, REITs must pay out 90% of their profits each year in the form of dividends, which can result in high dividend yields for investors.<span class="ql-inline-citation" data-cite="16"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<span class="heading-toc" id="toc-investing-help-from-the-sec"></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"> Investing Help From the SEC </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">U.S. Securities and Exchange Commission (SEC)</a> encourages service members to reach out with questions about investing or for information on how to check the license or registration of an individual or a firm. To do so, call the SEC’s toll-free investor assistance line at 1-800-732-0330 (dial 1-202-551-6551 if calling from outside of the United States) or email [email protected]. The SEC participates in the Department of Defense’s Financial Readiness Network and regularly conducts investor education briefings at military bases. If interested, email [email protected].<span class="ql-inline-citation" data-cite="25"></span><br/><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-what-can-service-members-invest-in"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Can Service Members Invest in?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Military families have access to the same investments as civilians, plus a few unique to federal government employees and service members.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="2"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_43-0"><span class="heading-toc" id="toc-can-service-members-invest-in-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Service Members Invest in Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, service members can open taxable brokerage accounts to buy and sell stocks, <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>, and other securities.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-how-many-years-do-i-have-to-serve-to-qualify-for-a-military-pension"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Years Do I Have to Serve to Qualify for a Military Pension?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You must serve at least 20 years to qualify for the lifetime monthly annuity. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-military-pensions-work-5271044">Your benefit</a> depends on the number of years served and how much you earned. The specific method for determining benefits depends on when you first entered the military.<span class="ql-inline-citation" data-cite="18"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Keep in mind that there are many other ways to save and invest, such as U.S. Savings Bonds (Series I Savings Bonds are paying 6.89% through April 30, 2023) and Servicemembers’ Group Life Insurance.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Service members also have access to programs that, while not investments, can save you money. For example, the VA Home Loan program offers mortgages with no down payment, low interest rates, limited closing costs, and no need for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-guide/mortgage-insurance/">private mortgage insurance (PMI)</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_51-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Also, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/post911-gi-bill.asp">Post-9/11 GI Bill</a> pays the full cost of in-state tuition and fees at public colleges for up to 36 months and up to $26,042.81 per year for private colleges and foreign schools. You can also get money for housing (if you’re in school more than half time), books, supplies, and moving costs if you move from a rural area to attend school. Longtime service members can transfer their benefits to a spouse or child.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="5"></span>
</p></div> | Serving in the military doesn’t afford much free time, which can make it tough to research and choose the best investments. The good news is that many [savings and investment opportunities](https://www.investopedia.com/retirement-saving-and-investing-for-military-personnel-5193117) can help you prepare for a comfortable future—without adding a lot of time or stress to your busy schedule. Here are five of the best investments for military members to consider.
### Key Takeaways
* Service members have access to numerous savings and investment opportunities, including some unavailable to civilians.
* The federal [Thrift Savings Plan (TSP) resembles a 401(k) plan](https://www.investopedia.com/thrift-savings-plan-vs-401-k-5212330) and offers automatic payroll deductions and matching contributions.
* Traditional and Roth IRAs feature a wide range of investment choices and can be an excellent way to supplement a TSP.
* Other investments include the Savings Deposit Program, 529 college [savings plans](https://www.investopedia.com/special-savings-plans-for-military-5193105), and real estate.
## Federal Thrift Savings Plan
The [Thrift Savings Plan (TSP)](https://www.investopedia.com/ask/answers/102714/thrift-savings-plan-tsp-qualified-retirement-plan.asp) is a [qualified retirement plan](https://www.investopedia.com/terms/q/qrp.asp) that provides a low-cost, tax-advantaged way for federal employees and service members to invest. You can select [your own mix of investments](https://www.investopedia.com/articles/investing/061113/breaking-down-tsp-investment-funds.asp), from a short-term U.S. [Treasury bond](https://www.investopedia.com/terms/t/treasurybond.asp) to [index funds](https://www.investopedia.com/terms/i/indexfund.asp) to a [life-cycle fund](https://www.investopedia.com/terms/l/life_cycle_funds.asp), the last of which automatically rebalances your assets as you near retirement.
You can choose between two tax treatments for your TSP contributions:
* **Traditional TSP**—With this pretax plan, you get a tax break in the year when you make the contribution and pay taxes when you withdraw funds during retirement.
* **Roth TSP**—You don’t get any up-front tax benefits from this after-tax plan, but qualified withdrawals are tax free in retirement.
If you’re unsure which option makes the most sense for you, check out TSP.gov’s contribution comparison calculator.
For 2022, you can contribute up to $20,500 to a TSP (rising to $22,500 in 2023.) That figure jumps to $27,000 in 2022 if you’re age 50 or older (rising to $30,000 in 2023). If you’re part of the [Federal Employees Retirement System (FERS)](https://www.investopedia.com/articles/personal-finance/062513/what-federal-employees-retirement-system-fers-and-how-does-it-work.asp) or the Blended Retirement System (BRS), you can earn up to 5% more in matching contributions from the military. You’ll get a dollar-for-dollar match on the first 3% of your paycheck that you contribute to the TSP, with 50 cents on the dollar for the next 2%. The more you save, the greater the match, so it pays to max out your contributions if possible.
Like a 401(k), you can set up automatic deposits that come straight out of your paycheck, so it’s easy to “set it and forget it.” It’s a good idea to set up automatic deposits before you get your first check—that way, you’ll never miss the money.
## Individual Retirement Accounts (IRAs)
Even if you max out your contributions to the TSP, you can still stash away money in an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp). An IRA can be [a great way to supplement your TSP](https://www.investopedia.com/roth-tsp-vs-roth-ira-how-do-they-compare-4770656) and help ensure a secure retirement.
Like the TSP, IRAs are available in [traditional (pretax) or Roth (after-tax)](https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/) varieties. In general, IRAs offer greater flexibility than TSPs due to the vast number of investment choices. However, the contribution limits are much lower. For 2022, you can contribute up to $6,000 to your IRAs ($7,000 if you’re age 50 or older). For 2023, the contribution limits increase to $6,500 and $7,500 respectively.
## 529 College Savings Plans
If you have children and anticipate education expenses in your future, then a [529 plan](https://www.investopedia.com/terms/1/529plan.asp) can be a tax-advantaged way to save. Under tax laws passed in 2017 and 2019, you can [use a 529 plan to pay for K–12 expenses](https://www.investopedia.com/personal-finance/how-new-tax-changes-promote-529-investments/)—not just college and other postsecondary education. While contributions are not tax deductible at the federal level, more than 30 states offer a full or partial tax deduction or credit. A 529 plan grows tax free, and withdrawals are tax free if used for qualified education expenses.
You can contribute any amount to a 529, but anything over $16,000 per individual—the annual 2022 gift tax exclusion—can trigger federal gift taxes (the gift tax exclusion rises to $17,000 in 2023). Most plans let you set up automatic investments, which make it easy to stay on track.
## Savings Deposit Program
The U.S. Department of Defense’s [Savings Deposit Program (SDP)](https://www.investopedia.com/retirement-saving-and-investing-for-military-personnel-5193117) gives deployed military personnel serving in designated combat zones a guaranteed 10% annual return on deposited amounts of up to $10,000. To qualify, you must be receiving Hostile Fire Pay and be deployed for either 30 consecutive days or at least one day per month for three consecutive months. You continue to earn 10% interest for 90 days after you redeploy home, unless you request to withdraw your money sooner.
While an extra $1,000 can be helpful, keep in mind that income from the SDP is reported on a [1099-INT form](https://www.investopedia.com/terms/f/form-1099-int.asp) in the year when you withdraw funds, which means that you could owe taxes on the earnings.
## Real Estate
Real estate can be an excellent way to diversify and achieve higher returns. The tradeoff is that it involves more risk (and effort) than lower-risk investments. Still, real estate investments offer numerous advantages, including tax benefits and ongoing passive income. A common way to invest in real estate is to [buy a house](https://www.investopedia.com/military-family-s-guide-to-buying-and-selling-homes-5195303) and convert it into a rental property (some service members buy property near their bases to make managing the rentals easier).
[Real estate investment trust (REITs)](https://www.investopedia.com/articles/03/013103.asp) are another popular option. A REIT is a company that owns, operates, or finances income-producing properties. Investors buy shares of publicly traded REITs using a taxable [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp) or an IRA. By law, REITs must pay out 90% of their profits each year in the form of dividends, which can result in high dividend yields for investors.
## Investing Help From the SEC
The [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) encourages service members to reach out with questions about investing or for information on how to check the license or registration of an individual or a firm. To do so, call the SEC’s toll-free investor assistance line at 1-800-732-0330 (dial 1-202-551-6551 if calling from outside of the United States) or email [email protected]. The SEC participates in the Department of Defense’s Financial Readiness Network and regularly conducts investor education briefings at military bases. If interested, email [email protected].
## What Can Service Members Invest in?
Military families have access to the same investments as civilians, plus a few unique to federal government employees and service members.
## Can Service Members Invest in Stocks?
Yes, service members can open taxable brokerage accounts to buy and sell stocks, [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp), and other securities.
## How Many Years Do I Have to Serve to Qualify for a Military Pension?
You must serve at least 20 years to qualify for the lifetime monthly annuity. [Your benefit](https://www.investopedia.com/how-military-pensions-work-5271044) depends on the number of years served and how much you earned. The specific method for determining benefits depends on when you first entered the military.
## The Bottom Line
Keep in mind that there are many other ways to save and invest, such as U.S. Savings Bonds (Series I Savings Bonds are paying 6.89% through April 30, 2023) and Servicemembers’ Group Life Insurance.
Service members also have access to programs that, while not investments, can save you money. For example, the VA Home Loan program offers mortgages with no down payment, low interest rates, limited closing costs, and no need for [private mortgage insurance (PMI)](https://www.investopedia.com/mortgage/mortgage-guide/mortgage-insurance/).
Also, the [Post-9/11 GI Bill](https://www.investopedia.com/terms/p/post911-gi-bill.asp) pays the full cost of in-state tuition and fees at public colleges for up to 36 months and up to $26,042.81 per year for private colleges and foreign schools. You can also get money for housing (if you’re in school more than half time), books, supplies, and moving costs if you move from a rural area to attend school. Longtime service members can transfer their benefits to a spouse or child.
| Serving in the military doesn’t afford much free time, which can make it tough to research and choose the best investments. The good news is that many savings and investment opportunities can help you prepare for a comfortable future—without adding a lot of time or stress to your busy schedule. Here are five of the best investments for military members to consider.
Key Takeaways
Service members have access to numerous savings and investment opportunities, including some unavailable to civilians.
The federal Thrift Savings Plan (TSP) resembles a 401(k) plan and offers automatic payroll deductions and matching contributions.
Traditional and Roth IRAs feature a wide range of investment choices and can be an excellent way to supplement a TSP.
Other investments include the Savings Deposit Program, 529 college savings plans, and real estate.
Federal Thrift Savings Plan
The Thrift Savings Plan (TSP) is a qualified retirement plan that provides a low-cost, tax-advantaged way for federal employees and service members to invest. You can select your own mix of investments, from a short-term U.S. Treasury bond to index funds to a life-cycle fund, the last of which automatically rebalances your assets as you near retirement.
You can choose between two tax treatments for your TSP contributions:
Traditional TSP—With this pretax plan, you get a tax break in the year when you make the contribution and pay taxes when you withdraw funds during retirement.Roth TSP—You don’t get any up-front tax benefits from this after-tax plan, but qualified withdrawals are tax free in retirement.
If you’re unsure which option makes the most sense for you, check out TSP.gov’s contribution comparison calculator.
For 2022, you can contribute up to $20,500 to a TSP (rising to $22,500 in 2023.) That figure jumps to $27,000 in 2022 if you’re age 50 or older (rising to $30,000 in 2023). If you’re part of the Federal Employees Retirement System (FERS) or the Blended Retirement System (BRS), you can earn up to 5% more in matching contributions from the military. You’ll get a dollar-for-dollar match on the first 3% of your paycheck that you contribute to the TSP, with 50 cents on the dollar for the next 2%. The more you save, the greater the match, so it pays to max out your contributions if possible.
Like a 401(k), you can set up automatic deposits that come straight out of your paycheck, so it’s easy to “set it and forget it.” It’s a good idea to set up automatic deposits before you get your first check—that way, you’ll never miss the money.
Individual Retirement Accounts (IRAs)
Even if you max out your contributions to the TSP, you can still stash away money in an individual retirement account (IRA). An IRA can be a great way to supplement your TSP and help ensure a secure retirement.
Like the TSP, IRAs are available in traditional (pretax) or Roth (after-tax) varieties. In general, IRAs offer greater flexibility than TSPs due to the vast number of investment choices. However, the contribution limits are much lower. For 2022, you can contribute up to $6,000 to your IRAs ($7,000 if you’re age 50 or older). For 2023, the contribution limits increase to $6,500 and $7,500 respectively.
529 College Savings Plans
If you have children and anticipate education expenses in your future, then a 529 plan can be a tax-advantaged way to save. Under tax laws passed in 2017 and 2019, you can use a 529 plan to pay for K–12 expenses—not just college and other postsecondary education. While contributions are not tax deductible at the federal level, more than 30 states offer a full or partial tax deduction or credit. A 529 plan grows tax free, and withdrawals are tax free if used for qualified education expenses.
You can contribute any amount to a 529, but anything over $16,000 per individual—the annual 2022 gift tax exclusion—can trigger federal gift taxes (the gift tax exclusion rises to $17,000 in 2023). Most plans let you set up automatic investments, which make it easy to stay on track.
Savings Deposit Program
The U.S. Department of Defense’s Savings Deposit Program (SDP) gives deployed military personnel serving in designated combat zones a guaranteed 10% annual return on deposited amounts of up to $10,000. To qualify, you must be receiving Hostile Fire Pay and be deployed for either 30 consecutive days or at least one day per month for three consecutive months. You continue to earn 10% interest for 90 days after you redeploy home, unless you request to withdraw your money sooner.
While an extra $1,000 can be helpful, keep in mind that income from the SDP is reported on a 1099-INT form in the year when you withdraw funds, which means that you could owe taxes on the earnings.
Real Estate
Real estate can be an excellent way to diversify and achieve higher returns. The tradeoff is that it involves more risk (and effort) than lower-risk investments. Still, real estate investments offer numerous advantages, including tax benefits and ongoing passive income. A common way to invest in real estate is to buy a house and convert it into a rental property (some service members buy property near their bases to make managing the rentals easier).
Real estate investment trust (REITs) are another popular option. A REIT is a company that owns, operates, or finances income-producing properties. Investors buy shares of publicly traded REITs using a taxable brokerage account or an IRA. By law, REITs must pay out 90% of their profits each year in the form of dividends, which can result in high dividend yields for investors.
Investing Help From the SEC
The U.S. Securities and Exchange Commission (SEC) encourages service members to reach out with questions about investing or for information on how to check the license or registration of an individual or a firm. To do so, call the SEC’s toll-free investor assistance line at 1-800-732-0330 (dial 1-202-551-6551 if calling from outside of the United States) or email [email protected]. The SEC participates in the Department of Defense’s Financial Readiness Network and regularly conducts investor education briefings at military bases. If interested, email [email protected].
What Can Service Members Invest in?
Military families have access to the same investments as civilians, plus a few unique to federal government employees and service members.
Can Service Members Invest in Stocks?
Yes, service members can open taxable brokerage accounts to buy and sell stocks, exchange-traded funds (ETFs), and other securities.
How Many Years Do I Have to Serve to Qualify for a Military Pension?
You must serve at least 20 years to qualify for the lifetime monthly annuity. Your benefit depends on the number of years served and how much you earned. The specific method for determining benefits depends on when you first entered the military.
The Bottom Line
Keep in mind that there are many other ways to save and invest, such as U.S. Savings Bonds (Series I Savings Bonds are paying 6.89% through April 30, 2023) and Servicemembers’ Group Life Insurance.
Service members also have access to programs that, while not investments, can save you money. For example, the VA Home Loan program offers mortgages with no down payment, low interest rates, limited closing costs, and no need for private mortgage insurance (PMI).
Also, the Post-9/11 GI Bill pays the full cost of in-state tuition and fees at public colleges for up to 36 months and up to $26,042.81 per year for private colleges and foreign schools. You can also get money for housing (if you’re in school more than half time), books, supplies, and moving costs if you move from a rural area to attend school. Longtime service members can transfer their benefits to a spouse or child.
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"https://www.investopedia.com/personal-finance/how-new-tax-changes-promote-529-investments/"
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"https://www.investopedia.com/retirement-saving-and-investing-for-military-personnel-5193117"
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"1099-INT form",
"https://www.investopedia.com/terms/f/form-1099-int.asp"
],
[
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"https://www.investopedia.com/military-family-s-guide-to-buying-and-selling-homes-5195303"
],
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"Real estate investment trust (REITs)",
"https://www.investopedia.com/articles/03/013103.asp"
],
[
"brokerage account",
"https://www.investopedia.com/terms/b/brokerageaccount.asp"
],
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"U.S. Securities and Exchange Commission (SEC)",
"https://www.investopedia.com/terms/s/sec.asp"
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"exchange-traded funds (ETFs)",
"https://www.investopedia.com/terms/e/etf.asp"
],
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"Your benefit",
"https://www.investopedia.com/how-military-pensions-work-5271044"
],
[
"private mortgage insurance (PMI)",
"https://www.investopedia.com/mortgage/mortgage-guide/mortgage-insurance/"
],
[
"Post-9/11 GI Bill",
"https://www.investopedia.com/terms/p/post911-gi-bill.asp"
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https://www.investopedia.com/articles/forex/09/mcginley-dynamic-indicator.asp | The Most Reliable Indicator You've Never Heard Of | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 McGinley Dynamic is a little-known yet highly reliable indicator invented by John R. McGinley, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cmt.asp">chartered market technician</a> and former editor of the Market Technicians Association's <em>Journal of Technical Analysis</em>. Working within the context of moving averages throughout the 1990s, McGinley sought to invent a responsive indicator that would automatically adjust itself in relation to the speed of the market.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> His eponymous Dynamic, first published in the <em>Journal of Technical Analysis </em>in 1997, is a 10-day simple and exponential moving average with a filter that smooths the data to avoid whipsaws.<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>John R. McGinley is a chartered market technician known for his work with technical market strategies and trading techniques.</li><li>The McGinley Dynamic is a moving average indicator he created in the 1990s that looks to automatically adjust itself to the pace of the financial markets.</li><li>The technique helps address the tendency to inappropriately apply moving averages.</li><li>It also helps to account for the gap that often exists between prices and moving average lines.</li></ul></div></div></div>
<span class="heading-toc" id="toc-simple-moving-average-sma-vs-exponential-moving-average-ema"></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"> Simple Moving Average (SMA) vs. Exponential Moving Average (EMA) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sma.asp">simple moving average</a> (SMA) smooths out <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-action.asp">price action</a> by calculating past <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/closingprice.asp">closing prices</a> and dividing by the number of periods. To calculate a 10-day simple moving average, add the closing prices of the last 10 days and divide by 10. The smoother the moving average, the slower it reacts to prices.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> A 50-day moving average moves slower than a 10-day moving average. A 10- and 20-day moving average can at times experience the volatility of prices that can make it harder to interpret price action. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/false-signal.asp">False signals</a> may occur during these periods, creating losses because prices may get too far ahead of the market.
</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"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ema.asp">exponential moving average</a> (EMA) responds to prices much more quickly than a simple moving average. This is because the EMA gives more weight to the latest data rather than older data. It's a good indicator for the short term and a great method to catch short-term trends, which is why traders use both simple and exponential moving averages simultaneously for entry and exits. Nevertheless, it too can leave data behind.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<span class="heading-toc" id="toc-the-problem-with-moving-averages"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> The Problem With Moving Averages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> In his research, McGinley found moving averages had many problems. In the first place, they were inappropriately applied. Moving averages in different periods operate with varying degrees in different markets. For example, how can one know when to use a 10-day, 20-day, or 50-day moving average in a fast or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/slow_market.asp">slow market</a>? In order to solve the problem of choosing the right length of the moving average, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mcginley-dynamic.asp">McGinley Dynamic</a> was built to automatically adjust to the current speed of the market.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> McGinley believes moving averages should only be used as a smoothing mechanism rather than a trading system or signal generator. It is a monitor of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trend.asp">trends</a>. Further, McGinley found moving averages failed to follow prices since large separations frequently exist between prices and moving average lines. He sought to eliminate these problems by inventing an indicator that would hug prices more closely, avoid price separation and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/whipsaw.asp">whipsaws</a>, and follow prices automatically in fast or slow markets.
</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-mcginley-dynamic-formula"></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"> McGinley Dynamic Formula </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> This he did with the invention of the McGinley Dynamic. The formula is:
</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"> <span data-value="\begin{aligned} &\text{MD}_i = MD_{i-1} + \frac{ \text{Close} - MD_{i-1} }{ k \times N \times \left ( \frac{ \text{Close} }{ MD_{i-1} } \right )^4 } \\ &\textbf{where:}\\ &\text{MD}_i = \text{Current McGinley Dynamic} \\ &MD_{i-1} = \text{Previous McGinley Dynamic} \\ &\text{Close} = \text{Closing price} \\ &k = .6\ \text{(Constant 60\% of selected period N)} \\ &N = \text{Moving average period} \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mtable>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<msub>
<mtext>
MD
</mtext>
<mi>
i
</mi>
</msub>
<mo>
=
</mo>
<mi>
M
</mi>
<msub>
<mi>
D
</mi>
<mrow>
<mi>
i
</mi>
<mo>
−
</mo>
<mn>
1
</mn>
</mrow>
</msub>
<mo>
+
</mo>
<mfrac>
<mrow>
<mtext>
Close
</mtext>
<mo>
−
</mo>
<mi>
M
</mi>
<msub>
<mi>
D
</mi>
<mrow>
<mi>
i
</mi>
<mo>
−
</mo>
<mn>
1
</mn>
</mrow>
</msub>
</mrow>
<mrow>
<mi>
k
</mi>
<mo>
×
</mo>
<mi>
N
</mi>
<mo>
×
</mo>
<msup>
<mrow>
<mo>
(
</mo>
<mfrac>
<mtext>
Close
</mtext>
<mrow>
<mi>
M
</mi>
<msub>
<mi>
D
</mi>
<mrow>
<mi>
i
</mi>
<mo>
−
</mo>
<mn>
1
</mn>
</mrow>
</msub>
</mrow>
</mfrac>
<mo>
)
</mo>
</mrow>
<mn>
4
</mn>
</msup>
</mrow>
</mfrac>
</mrow>
</mstyle>
</mtd>
</mtr>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<mtext>
where:
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<msub>
<mtext>
MD
</mtext>
<mi>
i
</mi>
</msub>
<mo>
=
</mo>
<mtext>
Current McGinley Dynamic
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<mi>
M
</mi>
<msub>
<mi>
D
</mi>
<mrow>
<mi>
i
</mi>
<mo>
−
</mo>
<mn>
1
</mn>
</mrow>
</msub>
<mo>
=
</mo>
<mtext>
Previous McGinley Dynamic
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<mtext>
Close
</mtext>
<mo>
=
</mo>
<mtext>
Closing price
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<mi>
k
</mi>
<mo>
=
</mo>
<mi>
.
</mi>
<mn>
6
</mn>
<mtext>
(Constant 60% of selected period N)
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
<mtr>
<mtd>
<mstyle>
<mrow></mrow>
</mstyle>
</mtd>
<mtd>
<mstyle>
<mrow>
<mrow></mrow>
<mi>
N
</mi>
<mo>
=
</mo>
<mtext>
Moving average period
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
</mtable>
<annotation encoding="application/x-tex">
\begin{aligned} &\text{MD}_i = MD_{i-1} + \frac{ \text{Close} - MD_{i-1} }{ k \times N \times \left ( \frac{ \text{Close} }{ MD_{i-1} } \right )^4 } \\ &\textbf{where:}\\ &\text{MD}_i = \text{Current McGinley Dynamic} \\ &MD_{i-1} = \text{Previous McGinley Dynamic} \\ &\text{Close} = \text{Closing price} \\ &k = .6\ \text{(Constant 60\% of selected period N)} \\ &N = \text{Moving average period} \\ \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 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 text"><span class="mord">MD</span></span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">i</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 mathdefault">M</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"><span class="mord mathdefault mtight">i</span><span class="mbin mtight">−</span><span class="mord mtight">1</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><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 mathdefault">k</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord mathdefault">N</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="minner"><span class="minner"><span class="mopen delimcenter"><span class="delimsizing size2">(</span></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 mathdefault mtight">M</span><span class="mord mtight"><span class="mord mathdefault mtight">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-size3 size1 mtight"><span class="mord mtight"><span class="mord mathdefault mtight">i</span><span class="mbin mtight">−</span><span class="mord mtight">1</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></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">Close</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="mclose delimcenter"><span class="delimsizing size2">)</span></span></span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">4</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 text"><span class="mord">Close</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord mathdefault">M</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"><span class="mord mathdefault mtight">i</span><span class="mbin mtight">−</span><span class="mord mtight">1</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></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"><span class="mord text"><span class="mord">MD</span></span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">i</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">Current McGinley Dynamic</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathdefault">M</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"><span class="mord mathdefault mtight">i</span><span class="mbin mtight">−</span><span class="mord mtight">1</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Previous McGinley Dynamic</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Close</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Closing price</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">.</span><span class="mord">6</span><span class="mspace"> </span><span class="mord text"><span class="mord">(Constant 60% of selected period N)</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathdefault">N</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Moving average period</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_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The McGinley Dynamic looks like a moving average line, yet it is actually a smoothing mechanism for prices that turns out to track far better than any moving average. It minimizes price separation, price whipsaws, and hugs prices much more closely. And it does this automatically as a factor of its formula.
</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"> Because of the calculation, the Dynamic Line speeds up in down markets as it follows prices yet moves more slowly in up markets. One wants to be quick to sell in a down market, yet ride an up-market as long as possible. The constant N determines how closely the Dynamic tracks the index or stock. If one is emulating a 20-day moving average, for instance, use an N value half that of the moving average, or in this case 10.
</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"> It greatly avoids whipsaws because the Dynamic Line automatically follows and stays aligned to prices in any market—fast or slow—like a steering mechanism of a car that can adjust to the changing conditions of the road. Traders can rely on it to make decisions and time entrances and exits.
</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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/102914/technical-analysis-strategies-beginners.asp" rel="noopener noreferrer">Technical Analysis Strategies for Beginners</a><em> </em>guide<em> </em>offers more information on indicators and market tools.</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"> McGinley invented the Dynamic to act as a market tool rather than as a trading indicator. But whatever it's used for, whether it is called a tool or indicator, the McGinley Dynamic is quite a fascinating instrument invented by a market technician that has followed and studied markets and indicators for nearly 40 years. In creating the Dynamic, McGinley sought to create a technical aid that would be more responsive to the raw data than simple or exponential moving averages.
</p></div> | The McGinley Dynamic is a little-known yet highly reliable indicator invented by John R. McGinley, a [chartered market technician](https://www.investopedia.com/terms/c/cmt.asp) and former editor of the Market Technicians Association's *Journal of Technical Analysis*. Working within the context of moving averages throughout the 1990s, McGinley sought to invent a responsive indicator that would automatically adjust itself in relation to the speed of the market.
His eponymous Dynamic, first published in the *Journal of Technical Analysis* in 1997, is a 10-day simple and exponential moving average with a filter that smooths the data to avoid whipsaws.
### Key Takeaways
* John R. McGinley is a chartered market technician known for his work with technical market strategies and trading techniques.
* The McGinley Dynamic is a moving average indicator he created in the 1990s that looks to automatically adjust itself to the pace of the financial markets.
* The technique helps address the tendency to inappropriately apply moving averages.
* It also helps to account for the gap that often exists between prices and moving average lines.
## Simple Moving Average (SMA) vs. Exponential Moving Average (EMA)
A [simple moving average](https://www.investopedia.com/terms/s/sma.asp) (SMA) smooths out [price action](https://www.investopedia.com/terms/p/price-action.asp) by calculating past [closing prices](https://www.investopedia.com/terms/c/closingprice.asp) and dividing by the number of periods. To calculate a 10-day simple moving average, add the closing prices of the last 10 days and divide by 10. The smoother the moving average, the slower it reacts to prices.
A 50-day moving average moves slower than a 10-day moving average. A 10- and 20-day moving average can at times experience the volatility of prices that can make it harder to interpret price action. [False signals](https://www.investopedia.com/terms/f/false-signal.asp) may occur during these periods, creating losses because prices may get too far ahead of the market.
An [exponential moving average](https://www.investopedia.com/terms/e/ema.asp) (EMA) responds to prices much more quickly than a simple moving average. This is because the EMA gives more weight to the latest data rather than older data. It's a good indicator for the short term and a great method to catch short-term trends, which is why traders use both simple and exponential moving averages simultaneously for entry and exits. Nevertheless, it too can leave data behind.
## The Problem With Moving Averages
In his research, McGinley found moving averages had many problems. In the first place, they were inappropriately applied. Moving averages in different periods operate with varying degrees in different markets. For example, how can one know when to use a 10-day, 20-day, or 50-day moving average in a fast or [slow market](https://www.investopedia.com/terms/s/slow_market.asp)? In order to solve the problem of choosing the right length of the moving average, the [McGinley Dynamic](https://www.investopedia.com/terms/m/mcginley-dynamic.asp) was built to automatically adjust to the current speed of the market.
McGinley believes moving averages should only be used as a smoothing mechanism rather than a trading system or signal generator. It is a monitor of [trends](https://www.investopedia.com/terms/t/trend.asp). Further, McGinley found moving averages failed to follow prices since large separations frequently exist between prices and moving average lines. He sought to eliminate these problems by inventing an indicator that would hug prices more closely, avoid price separation and [whipsaws](https://www.investopedia.com/terms/w/whipsaw.asp), and follow prices automatically in fast or slow markets.
## McGinley Dynamic Formula
This he did with the invention of the McGinley Dynamic. The formula is:
MD
i
=
M
D
i
−
1
+
Close
−
M
D
i
−
1
k
×
N
×
(
Close
M
D
i
−
1
)
4
where:
MD
i
=
Current McGinley Dynamic
M
D
i
−
1
=
Previous McGinley Dynamic
Close
=
Closing price
k
=
.
6
(Constant 60% of selected period N)
N
=
Moving average period
\begin{aligned} &\text{MD}\_i = MD\_{i-1} + \frac{ \text{Close} - MD\_{i-1} }{ k \times N \times \left ( \frac{ \text{Close} }{ MD\_{i-1} } \right )^4 } \\ &\textbf{where:}\\ &\text{MD}\_i = \text{Current McGinley Dynamic} \\ &MD\_{i-1} = \text{Previous McGinley Dynamic} \\ &\text{Close} = \text{Closing price} \\ &k = .6\ \text{(Constant 60\% of selected period N)} \\ &N = \text{Moving average period} \\ \end{aligned}
MDi=MDi−1+k×N×(MDi−1Close)4Close−MDi−1where:MDi=Current McGinley DynamicMDi−1=Previous McGinley DynamicClose=Closing pricek=.6 (Constant 60% of selected period N)N=Moving average period
The McGinley Dynamic looks like a moving average line, yet it is actually a smoothing mechanism for prices that turns out to track far better than any moving average. It minimizes price separation, price whipsaws, and hugs prices much more closely. And it does this automatically as a factor of its formula.
Because of the calculation, the Dynamic Line speeds up in down markets as it follows prices yet moves more slowly in up markets. One wants to be quick to sell in a down market, yet ride an up-market as long as possible. The constant N determines how closely the Dynamic tracks the index or stock. If one is emulating a 20-day moving average, for instance, use an N value half that of the moving average, or in this case 10.
It greatly avoids whipsaws because the Dynamic Line automatically follows and stays aligned to prices in any market—fast or slow—like a steering mechanism of a car that can adjust to the changing conditions of the road. Traders can rely on it to make decisions and time entrances and exits.
###
Investopedia's [Technical Analysis Strategies for Beginners](https://www.investopedia.com/articles/active-trading/102914/technical-analysis-strategies-beginners.asp)guideoffers more information on indicators and market tools.
## The Bottom Line
McGinley invented the Dynamic to act as a market tool rather than as a trading indicator. But whatever it's used for, whether it is called a tool or indicator, the McGinley Dynamic is quite a fascinating instrument invented by a market technician that has followed and studied markets and indicators for nearly 40 years. In creating the Dynamic, McGinley sought to create a technical aid that would be more responsive to the raw data than simple or exponential moving averages.
| The McGinley Dynamic is a little-known yet highly reliable indicator invented by John R. McGinley, a chartered market technician and former editor of the Market Technicians Association's Journal of Technical Analysis. Working within the context of moving averages throughout the 1990s, McGinley sought to invent a responsive indicator that would automatically adjust itself in relation to the speed of the market.
His eponymous Dynamic, first published in the Journal of Technical Analysis in 1997, is a 10-day simple and exponential moving average with a filter that smooths the data to avoid whipsaws.
Key Takeaways
John R. McGinley is a chartered market technician known for his work with technical market strategies and trading techniques.The McGinley Dynamic is a moving average indicator he created in the 1990s that looks to automatically adjust itself to the pace of the financial markets.The technique helps address the tendency to inappropriately apply moving averages.It also helps to account for the gap that often exists between prices and moving average lines.
Simple Moving Average (SMA) vs. Exponential Moving Average (EMA)
A simple moving average (SMA) smooths out price action by calculating past closing prices and dividing by the number of periods. To calculate a 10-day simple moving average, add the closing prices of the last 10 days and divide by 10. The smoother the moving average, the slower it reacts to prices.
A 50-day moving average moves slower than a 10-day moving average. A 10- and 20-day moving average can at times experience the volatility of prices that can make it harder to interpret price action. False signals may occur during these periods, creating losses because prices may get too far ahead of the market.
An exponential moving average (EMA) responds to prices much more quickly than a simple moving average. This is because the EMA gives more weight to the latest data rather than older data. It's a good indicator for the short term and a great method to catch short-term trends, which is why traders use both simple and exponential moving averages simultaneously for entry and exits. Nevertheless, it too can leave data behind.
The Problem With Moving Averages
In his research, McGinley found moving averages had many problems. In the first place, they were inappropriately applied. Moving averages in different periods operate with varying degrees in different markets. For example, how can one know when to use a 10-day, 20-day, or 50-day moving average in a fast or slow market? In order to solve the problem of choosing the right length of the moving average, the McGinley Dynamic was built to automatically adjust to the current speed of the market.
McGinley believes moving averages should only be used as a smoothing mechanism rather than a trading system or signal generator. It is a monitor of trends. Further, McGinley found moving averages failed to follow prices since large separations frequently exist between prices and moving average lines. He sought to eliminate these problems by inventing an indicator that would hug prices more closely, avoid price separation and whipsaws, and follow prices automatically in fast or slow markets.
McGinley Dynamic Formula
This he did with the invention of the McGinley Dynamic. The formula is:
MD
i
=
M
D
i
−
1
+
Close
−
M
D
i
−
1
k
×
N
×
(
Close
M
D
i
−
1
)
4
where:
MD
i
=
Current McGinley Dynamic
M
D
i
−
1
=
Previous McGinley Dynamic
Close
=
Closing price
k
=
.
6
(Constant 60% of selected period N)
N
=
Moving average period
\begin{aligned} &\text{MD}_i = MD_{i-1} + \frac{ \text{Close} - MD_{i-1} }{ k \times N \times \left ( \frac{ \text{Close} }{ MD_{i-1} } \right )^4 } \\ &\textbf{where:}\\ &\text{MD}_i = \text{Current McGinley Dynamic} \\ &MD_{i-1} = \text{Previous McGinley Dynamic} \\ &\text{Close} = \text{Closing price} \\ &k = .6\ \text{(Constant 60\% of selected period N)} \\ &N = \text{Moving average period} \\ \end{aligned}
MDi=MDi−1+k×N×(MDi−1Close)4Close−MDi−1where:MDi=Current McGinley DynamicMDi−1=Previous McGinley DynamicClose=Closing pricek=.6 (Constant 60% of selected period N)N=Moving average period
The McGinley Dynamic looks like a moving average line, yet it is actually a smoothing mechanism for prices that turns out to track far better than any moving average. It minimizes price separation, price whipsaws, and hugs prices much more closely. And it does this automatically as a factor of its formula.
Because of the calculation, the Dynamic Line speeds up in down markets as it follows prices yet moves more slowly in up markets. One wants to be quick to sell in a down market, yet ride an up-market as long as possible. The constant N determines how closely the Dynamic tracks the index or stock. If one is emulating a 20-day moving average, for instance, use an N value half that of the moving average, or in this case 10.
It greatly avoids whipsaws because the Dynamic Line automatically follows and stays aligned to prices in any market—fast or slow—like a steering mechanism of a car that can adjust to the changing conditions of the road. Traders can rely on it to make decisions and time entrances and exits.
Investopedia's Technical Analysis Strategies for Beginners guide offers more information on indicators and market tools.
The Bottom Line
McGinley invented the Dynamic to act as a market tool rather than as a trading indicator. But whatever it's used for, whether it is called a tool or indicator, the McGinley Dynamic is quite a fascinating instrument invented by a market technician that has followed and studied markets and indicators for nearly 40 years. In creating the Dynamic, McGinley sought to create a technical aid that would be more responsive to the raw data than simple or exponential moving averages.
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],
[
"price action",
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],
[
"closing prices",
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],
[
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],
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],
[
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[
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],
[
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],
[
"whipsaws",
"https://www.investopedia.com/terms/w/whipsaw.asp"
],
[
"Technical Analysis Strategies for Beginners",
"https://www.investopedia.com/articles/active-trading/102914/technical-analysis-strategies-beginners.asp"
]
] |
https://www.investopedia.com/inv-100-top-financial-advisors-7556227 | Investopedia 100 Top Financial Advisors of 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"><figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_1-0"> <div class="figure-media">
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<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 / Alice Morgan</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Investopedia 100 celebrates independent financial advisors who are making significant contributions to critical conversations about financial literacy, investing strategies, life-stage planning and wealth management. With more than 100,000 independent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp">financial advisors</a> in the U.S., the Investopedia 100 spotlights the country’s most engaged, influential, and educational advisors.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Read on to learn about the 2023 class of the Investopedia 100 Top Financial Advisors. (The Top 10 are named in order, while the remaining 90 are categorized in alphabetical order by last name within each advisor's designated state.)
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<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_9-0"> <div class="figure-media">
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <strong>1. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/michael-kitces-7551966">Michael Kitces</a></strong><em><br/>Head of Planning Strategy, Buckingham Strategic Wealth | Reston, VA</em><br/><br/>For more than two decades, Kitces has been a financial advisor and educator who helps clients and readers at all stages of life. Prior to joining Buckingham Wealth Partners, Michael founded XY Planning Network to serve 'next generation' clients who seek financial advice but don't have the assets to be served by more traditional financial advisors. XY Planning Network now has 1,700 advisors who work with underserved consumer segments.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <strong>4. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/peter-lazaroff-7552540">Peter Lazaroff</a></strong><em><br/>Chief Investment Officer, Plancorp | St. Louis, MO </em><br/><br/>When he started his career, Lazaroff created a newsletter to teach people about investing and financial planning in easy-to-understand language, which now reaches more than 10,000 subscribers. In addition to his podcast "The Long-Term Investor," Lazaroff works with Rooted, a local St. Louis initiative, to develop financial planning curriculum and financial advisor support for 50 households in his community.
</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>5. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/contributors/98041/">Jamie Hopkins</a></strong><em><br/>Managing Partner, Wealth Solutions, Carson Group | Omaha, NE</em><br/><br/>Hopkins founded the nonprofit FinServ Foundation, which supports the next generation of financial professionals through coaching and mentorship. At the end of 2022, Hopkins and his team at the Carson Group also created the Youtube series, "The Financial Advisor’s Guide to the SECURE 2.0 Act" to break down each major provision of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secure-2-0-definition-5225115">SECURE 2.0 Act</a> and highlight important planning points for financial advisors to understand.
</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>6. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/douglas-boneparth-7553273">Douglas Boneparth</a></strong><em><br/>President, Bone Fide Wealth, LLC | New York, NY</em><br/><br/>For over a decade, Boneparth has been educating young adults to help them meet their financial goals, and leverages YouTube, social media channels, and his newsletter “This is the Top” to keep the education accessible for all. He also offers weekly, live pre-market commentary on Public.com and co-authored a book <em>The Millennial Money Fix.</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"> <strong>7. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/preston-cherry-7553785">Dr. Preston D. Cherry</a></strong><em><br/>Founder & President, Concurrent Financial | Green Bay, WI</em><br/><br/>Cherry is the founder and director of the Charles Schwab Foundation Center for Financial Wellness at the University of Wisconsin, Green Bay where he provides financial literacy services to college students, community residences, and organizations through peer coaching, a podcast, and one-on-one pro bono planning. Cherry also leads the financial planning program at the University of Wisconsin, Green Bay, and publishes scholarly research about personal financial planning, household economics, and behavioral finance.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <strong>8. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/stephanie-mccullough-7553867">Stephanie McCullough</a></strong><em><br/>Founder & Financial Planner, Sofia Financial | Berwyn, PA</em><br/><br/>McCullough founded Sofia Financial, an independent business that aims to empower women to make wise financial decisions and reduce their money stress. She also hosts a podcast called “Take Back Retirement” where she has conversations with women who have gone through a financial situation and a subject-matter experts to provide information and motivation to help others gain financial control. McCullough also offers free financial literacy classes through Wayne, Pennsylvania-based nonprofit Women's Resource Center.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <strong>9. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mary-beth-storjohann-7552581">Mary Beth Storjohann</a></strong><em><br/>Co-CEO, Abacus Wealth Partners | Santa Monica, CA</em><br/><br/>Storjohann founded the website and podcast Workable Wealth, which offers education and empowerment to those in their 20s through 40s. She serves as a mentor and career coach to other women in the industry to amplify their voices and brands, and helps lead Abacus's pro bono financial services program. Her book, <em>Work Your Wealth: 9 Steps to Making Smarter Choices With Your Money</em>, breaks down jargon and complex financial topics for consumers.
</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>10. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/elaine-king-7554853">Elaine King</a></strong><em><br/>Founder, Family and Money Matters Institute | Miami, FL</em><br/><br/>King is an award-winning author dedicated to elevating the available financial literacy resources for the U.S. Hispanic population. She produces content in Spanish across her social media platforms, hosts a monthly segment on Telemundo, and runs three Spanish-language online financial education courses, which currently have more than 18,000 students enrolled. King is also an external director for accounting firm Shechter & Everett, LLP, where she works with women before, during, and after marital separation to help them gain financial independence.
</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_1-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>For additional content that highlights more of the amazing work our winners are doing in their own communities and beyond, check out the Finding a Financial Advisor content hub, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/finding-a-financial-advisor-6834423">here</a>.</p></div></div></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_32-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/68TxC/4/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Where Do the Investopedia 100 Honorees Live?"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<span class="heading-toc" id="toc-alabama"></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"> Alabama </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_35-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Standout Achievements</em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://everthrivefinancial.com/" rel="nofollow">Valerie R. Leonard</a></td>
<td>CEO & Financial Advisor, EverThrive Financial Group | Birmingham, Ala.</td>
<td>In addition to working with her clients to further their retirement and wealth-building plans, Leonard educates over 7,000 U.S. workers via in-person group meetings, videos, and virtual courses on her social platforms. </td>
</tr>
</tbody>
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</div></figure>
<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-arizona"></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"> Arizona </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_38-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements</em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.dekkerfinancial.com/" rel="nofollow">Adam Dekker</a></td>
<td>Chief Executive & Lead Advisor, Dekker Financial Services | Chandler, Ariz. </td>
<td>Dekker is recognized for his passionate embrace of technology’s impact on the financial services industry, which has helped propel Dekker Financial forward. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://moneyalignmentacademy.com/" rel="nofollow">George Grombacher</a></td>
<td>President, Financial Consulting | Scottsdale, Ariz.</td>
<td>Besides being a published author of two financial education books, Grombacher is the founder of financial wellness platform Money Alignment Academy. </td>
</tr>
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<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-california"></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"> California </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_41-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bahnsen.com/" rel="nofollow">David Bahnsen</a></td>
<td>Founder & Managing Partner & CIO, The Bahnsen Group | Newport Beach, Calif.</td>
<td>Bahnsen regularly publishes financial education lessons on Youtube, and more recently launched economics courses for purchase, too.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.louisbarajas.com" rel="nofollow">Louis Barajas</a></td>
<td>CEO & Senior Wealth Manager, International Private Wealth Advisors | Irvine, Calif.</td>
<td>Barajas is recognized for increasing financial education among Latino individuals, both in his client work at International Private Wealth Advisors and through his multiple published books, television appearances, and position as the first Latino on the Financial Planning Association’s National Board of Directors.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.manafld.com/" rel="nofollow">Stephanie Bucko</a></td>
<td>Chief Investment Officer, Mana Financial Life Design | Los Angeles, Calif.</td>
<td>Bucko is active in the advisor-focused community, XY Planning Network, and participates in a bi-weekly study group called growth-minded advisors.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://curtisfinancialplanning.com/" rel="nofollow">Cathy Curtis</a></td>
<td>Founder, Curtis Financial Planning, LLC | Oakland, Calif.</td>
<td>In addition to leading Curtis Financial Planning, Cathy Curtis regularly consults with and coaches female advisors on how to build an independent RIA practice and have a balanced life.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://empyrionwealth.com/" rel="nofollow">Kimberly Foss</a></td>
<td>President & Founder, Empyrion Wealth Management Inc. | Roseville, Calif.</td>
<td>Kimberly Foss is recognized for her individualized strategy with her clients, which include affluent family stewards, women in transition, and thriving retirees.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://hendershottwealth.com/" rel="nofollow">Hilary Hendershott</a></td>
<td>President & Chief Advisor, Hendershott Wealth Management | San Jose, Calif.</td>
<td>Hilary Hendershott is recognized for her dedication to educating women on financial topics through her podcast for female entrepreneurs, Profit Boss Radio, her guest appearances in the media, and the webpage resource tool she created for working moms looking to improve their financial life.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.baystreetcapitalholdings.com/" rel="nofollow">William Huston</a></td>
<td>Founder & CIO, Bay Street Capital Holdings | Palo Alto, Calif.</td>
<td>William Huston leads Bay Street Capital Holdings, one of the top 10 largest Black-owned and diverse-led RIAs in the U.S., where he consistently promotes and advocates for diverse and emerging investment advisors.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.manafld.com/" rel="nofollow">Cristina Livadary</a></td>
<td>CEO Mana Financial Life Design | Los Angeles, Calif.</td>
<td>Livadary not only leads her financial wellness–focused program, Mana Money School, she also provides financial education and empowerment to local charitable organizations and small businesses in order to improve financial confidence beyond her client base. </td>
</tr>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://mai.capital/" rel="nofollow">Joe McLean</a></td>
<td>Chief Growth & Innovation Officer, MAI Capital | San Ramon, Calif.</td>
<td>In addition to his work with MAI Capital and his frequent appearances on prominent networks, McLean is recognized for his mission to connect financial advisors with one another and invest together to effect positive change in society.</td>
</tr>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://gennextwealth.com/" rel="nofollow">Emlen Miles-Mattingly</a></td>
<td>Founder and Financial Advisor, Gen Next Wealth | Madera, Calif.</td>
<td>Miles-Mattingly co-founded the BLX Internship program, which places Black and Latino individuals at fee-only financial planning firms, and is also the host of Minority Money podcast, where he discusses finance, family, and education, and how all of these things affect your overall wealth.</td>
</tr>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.advizewealth.com/" rel="nofollow">Colin Overweg </a></td>
<td>Founder, Advize Wealth Management | Los Angeles, Calif.</td>
<td>Overweg is recognized for his work to educate financial advisors, specifically those who are new to this industry, which he does by hosting six virtual events per year for new advisors to network and learn with well-known leaders in the space.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.onmywaytowealth.com/" rel="nofollow">Luis Rosa</a></td>
<td>Founder, Build a Better Financial Future LLC | Los Angeles, Calif.</td>
<td>In addition to his podcast On My Way to Wealth and speaking at industry events, Rosa promotes financial literacy through public speaking engagements, such as the National Association of Hispanic Real Estate Professionals and the Los Angeles AARP.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://youstaywealthy.com/" rel="nofollow">Taylor Schulte</a></td>
<td>Founder & CEO, Define Financial | San Diego, Calif.</td>
<td>In addition to publishing consumer-facing educational content on his various platforms, Taylor Schulte co-hosts Kitces Summits, a twice-a-year learning event for practicing advisors. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.falconwealthplanning.com/" rel="nofollow">Gabriel Shahin</a></td>
<td>Principal & CEO, Falcon Wealth Planning | Ontario, Calif.</td>
<td>Besides his work with Falcon Wealth Planning, Gabriel Shahin is the founder of the Financial Community Education Foundation, where he and his team teach financial literacy courses to the local community.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.ascentwealthadvisors.com/" rel="nofollow">Jared Tanimoto</a></td>
<td>President, Ascent Wealth Advisors | Irvine, Calif.</td>
<td>Jared Tanimoto is an active member of the FPA of Orange County (and was formerly the youngest president of his chapter), where he hosts free financial education webinars on a regular basis. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.modernfp.com/" rel="nofollow">Mike Troxell</a></td>
<td>Founder & Financial Planner Modern Financial Planning | Oakland, Calif.</td>
<td>Troxell is recognized for his efforts to educate younger clients, as well as his volunteer work, which in 2023 included bringing together a group of advisors to volunteer time to help those affected by layoffs.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.ballastpointfp.com/blog" rel="nofollow">Shawn Tydlaska</a></td>
<td>Founder and CEO, Ballast Point Financial Planning | Burlingame, Calif.</td>
<td>Shawn Tydlaska is recognized for co-founding the BLX Internship Program, which places Black and Latino individuals at fee-only financial planning firms to obtain their first job in the financial planning profession.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.yarnwaywealth.com" rel="nofollow">Dasarte Yarnway</a></td>
<td>Founder & CEO, Yarnway Wealth Management | Sacramento, Calif.</td>
<td>Dasarte Yarnway is recognized for co-founding the ONYX Network, a membership organization that brings minority advisors together to start, scale, and sustain their financial planning practices. </td>
</tr>
</tbody>
</table>
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<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-colorado"></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"> Colorado </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_44-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.royalfinancials.com" rel="nofollow">Prince Dykes</a> </td>
<td>Private Investment Advisor, Royal Financial Investment Group | Aurora, Colo.</td>
<td>Dykes is president of the Global Children Financial Literacy Foundation and recognized for co-founding Wesley Learns Book Club, a national financial literacy program that incentivizes young children to become the first stockholders in their families.</td>
</tr>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.hoskincapital.com/" rel="nofollow">Nate Hoskin</a></td>
<td>Founder and Lead Advisor, Hoskin Capital | Denver, Colo.</td>
<td>Hoskin is dedicated to educating Gen Z about finances and investing, and has drawn more than 200,000 followers on TikTok, where he contextualizes market headlines and offers realistic advice for young adults. </td>
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<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-connecticut"></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"> Connecticut </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_47-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.johndrowwealth.com/" rel="nofollow">Magdalena G. Johndrow</a></td>
<td>Financial Advisor & Managing Partner, Johndrow Wealth Management LLC | West Hartford & Westport, Conn.</td>
<td>Johndrow is recognized for her grassroots teaching efforts, hosting workshops at Albert Einstein's College of Medicine, Miss Porter’s School, and Providence College, and volunteering with the Connecticut Money School to reach children and families below the poverty line. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.olsonplanner.com" rel="nofollow">Tyler Olson</a></td>
<td>Financial Planner, Olson Consulting LLC | Manchester, Conn.</td>
<td>Olson provides free and low-cost financial education for medical students and physician trainees via Advice Residency, a quarterly seminar program he created.</td>
</tr>
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<span class="heading-toc" id="toc-district-of-columbia"></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"> District of Columbia </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_50-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://illumintfc.com/" rel="nofollow">Kevin Mahoney</a></td>
<td>Founder & CEO, Illumint | District of Columbia</td>
<td>Mahoney is committed to helping other Millennial parents create a financial plan to pay for their children’s college, from navigating 529 plan options to applying for merit aid.</td>
</tr>
</tbody>
</table>
</div></figure>
<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-florida"></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"> Florida </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_53-0"> <div class="mntl-sc-block-table__table-wrapper">
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<tbody data-check="-1">
<tr>
<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://carycarbonaro.com/" rel="nofollow">Cary Carbonaro</a></td>
<td>SVP & Director of Women and Wealth, Advisors Capital Management, LLC | Winter Garden, Fla.</td>
<td>Carbonaro has dedicated her career to helping women build financial independence through her professional role, her book <em>The Money Queen’s Guide: For Women Who Want to Build Wealth and Banish Fear, </em>and her nonprofit work, including the Women’s Giving Alliance.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://carolynmcclanahan.com/" rel="nofollow">Carolyn McClanahan</a></td>
<td>Founder, Life Planning Partners, Inc. | Jacksonville, Fla.</td>
<td>McClanahan is recognized for her financial planning work, which focuses on the intersection of health and personal finance, a topic she speaks about at various events for financial advisors. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.advise-financial.com/" rel="nofollow">Alonso Rodriguez Segarra</a></td>
<td>CEO & Founder, Advise Financial LLC | Plantation, Fla.</td>
<td>Segarra is recognized for his work to bring financial education to more individuals with free Spanish-language news and financial content on his firm's website and YouTube channel.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://amesfinancialsolutions.com/" rel="nofollow">Reshell Smith</a></td>
<td>President and CEO, AMES Financial Solutions | Ocoee, Fla.</td>
<td>Smith is recognized for creating an online academy, She’s So Wealthy, to help create accessible education options for women and first-generation wealth builders. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.raymondjames.com/clarkyorkwp">Camille York Adrien</a></td>
<td>Financial Advisor, Clark and York Wealth Partners of Raymond James | Tampa, Fla.</td>
<td>In addition to her work with clients navigating major life changes and milestones, Adrien hosts and supports numerous wealth workshops and seminars each year, underscoring her commitment to bring women into the financial industry. </td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<span class="heading-toc" id="toc-georgia"></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"> Georgia </span> </h2>
<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">
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<tr>
<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://hoffmancorporation.com/" rel="nofollow">Christopher Hoffman</a></td>
<td>Founder, Hoffman Financial Group | Multiple Offices in Ga.</td>
<td>Hoffman is a nationally recognized fiduciary advisor and as such, hosts weekly segments on radio and television for outlets like CBS46 & WSB-TV’s Good Morning America weekend edition.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.financialstaples.com/" rel="nofollow">Chloé Moore</a></td>
<td>Founder, Financial Staples | Atlanta, Ga.</td>
<td>Moore works not only with her own firm, but also as an active community speaker, visiting middle school classrooms to share financial and career advice and joining corporate and nonprofit seminars as an expert on financial wellness and retirement planning. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.integrivestwealthadvisors.com/" rel="nofollow">Sibyl Slade</a></td>
<td>Founder & President IntegriVest Wealth Advisors, LLC | Atlanta, Ga.</td>
<td>Slade is recognized for her efforts to connect Black families and entrepreneurs with financial therapy and money management workshops via organizations such as Innovative Science, Technology, Engineering and Mathematics Workforce Development Project, and the HBCU Community Development Action Coalition. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.wcfingroup.com/" rel="nofollow">Martin A. Smith</a></td>
<td>President, Wealthcare Financial Group, Inc. | Peachtree City, Ga.</td>
<td>In addition to his work with Wealthcare Financial Group, Inc., Martin is recognized for launching a robo-advisor that serves undergraduates, graduate students, and alumni of Black colleges and universities in an effort to close the racial wealth gap.</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-illinois"></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"> Illinois </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_59-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://wealthcareadvisorsllc.com/" rel="nofollow">Eric Billimoria</a></td>
<td>Vice President , WealthCare Advisors | Schaumburg, Ill.</td>
<td>Billimoria advocates for financial literacy and planning policies with members of Congress, serves as a financial mentor for young adults through the Foundation of Financial Planning, and provides planning services to below-average-income individuals through the San Diego Financial LIteracy Center.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://1genwealth.com/" rel="nofollow">Valerie Rivera</a></td>
<td>Founder and Financial Planner, FirstGen Wealth | Chicago, Ill.</td>
<td>Rivera is recognized for her firm’s dedication to reaching first-generation wealth builders with inclusive, shame-free advice to help young adults build a strong, stable financial foundation. </td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div>
<span class="heading-toc" id="toc-indiana"></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"> Indiana </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_62-0"> <div class="mntl-sc-block-table__table-wrapper">
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<colgroup span="1" style=""></colgroup>
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.vincerewealth.com/" rel="nofollow">Josh Bennett</a></td>
<td>Managing Partner, Vincere Wealth Management | Indianapolis, Ind.</td>
<td>Bennett has created several online and social learning centers to help teach others about the basics of money and wealth management, paying for college, and filing taxes. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.justincastelli.io/" rel="nofollow">Justin Castelli</a></td>
<td>Founder & Financial Advisor, RLS Wealth | Fisher, Ind.</td>
<td>Justin Castelli is the co-founder of the Advisors Growing Community (AGC)—an online community and platform for financial advisors—as well as the curator of the book, <em>More Than Money: Real Life Stories of Financial Planning</em>.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://thomaskopelman.com" rel="nofollow">Thomas Kopelman</a></td>
<td>Co-Founder & Lead Financial Planner, AllStreet Wealth | Indianapolis, Ind.</td>
<td>Kopelman is recognized for his consistent commitment to educating millennials via his weekly blog, “The Long Game” podcast, and on X (formerly Twitter) to his more than 16,000 followers. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.elevationfinancial.com/" rel="nofollow">Michael Reynolds</a></td>
<td>Principal, Elevation Financial LLC | Westfield, Ind.</td>
<td>Reynolds is recognized in part for his YouTube-based webinars that provide how-to information for investors as well as budgeting advice. </td>
</tr>
</tbody>
</table>
</div></figure>
<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-iowa"></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"> Iowa </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_65-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://blackmammoth.com/" rel="nofollow">Stoy Hall</a></td>
<td>Founder & CEO, Black Mammoth | Ankeny, Iowa</td>
<td>In addition to leading his firm, Hall hosts the Money Mindset Series, a video podcast series on his YouTube channel that breaks down the basics, emotional connections, and planning philosophies of building wealth. </td>
</tr>
</tbody>
</table>
</div></figure>
<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-kansas"></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"> Kansas </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_68-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://creativeplanning.com/" rel="nofollow">Peter Mallouk</a></td>
<td>CEO, Creative Planning | Overland Park, Kan.</td>
<td>Mallouk is recognized for his program, Started Pathway Financial, which educates adults, business owners, and high school students in his community. </td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<span class="heading-toc" id="toc-kentucky"></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"> Kentucky </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_71-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://usecommas.com/member/jordan-patrick/" rel="nofollow">Jordan Patrick</a></td>
<td>Financial Advisor, Commas | Lexington, Ky. </td>
<td>Patrick is dedicated to bringing his goal-focused, financial planning lessons into his community by hosting seminars for school district teachers and speaking with local child caregivers. </td>
</tr>
</tbody>
</table>
</div></figure>
<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-maryland"></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"> Maryland </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_74-0"> <div class="mntl-sc-block-table__table-wrapper">
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<colgroup span="1" style=""></colgroup>
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<tr>
<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.riankadorsainvil.com/" rel="nofollow">Rianka Dorsainvil</a></td>
<td>Co-Founder & Co-CEO, 2050 Wealth Partners | Upper Marlboro, Md.</td>
<td>Dorsainvil is recognized for her commitment to sharing personal finance tips, tax information, investment news, and more in videos and blogs on Greenwood, a Black-owned digital platform created to help Black and Latino individuals build generational wealth.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.hhwealth.com" rel="nofollow">Zaneilia Harris</a></td>
<td>President, Harris & Harris Wealth Management Group | Upper Marlboro, Md.</td>
<td>In addition to her numerous speaking engagements for financial advisors and college students, Harris wrote <em>Finance ‘n Stilettos: Money Matters for the Well-Heeled Woman</em> to bring her online advice to more women seeking financial confidence.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://shermanwealth.com/" rel="nofollow">Brad Sherman</a></td>
<td>President, Sherman Wealth Management LLC | Gaithersburg, Md.</td>
<td>Sherman is honored in part for his work with high school students and young entrepreneurs via hosted financial literacy workshops.</td>
</tr>
</tbody>
</table>
</div></figure>
<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-massachusetts"></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"> Massachusetts </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_77-0"> <div class="mntl-sc-block-table__table-wrapper">
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<tr>
<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://heritagefinancial.net/people/sammy-azzouz/" rel="nofollow">Sammy Azzouz</a></td>
<td>President & CEO, Heritage Financial Services, LLC | Westwood, Mass.</td>
<td>Author of the book <em>Beyond The Basics, Maximizing, Allocating and Protecting Your Capital</em>, Azzouz also created The Boston Advisor platform to distribute advice, reading lists, and financial wellness insights via blog posts and weekly newsletters to help investors build long-term wealth and make smart money decisions. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://innovativewealth.com/" rel="nofollow">Kirk Chisholm</a></td>
<td>Wealth Manager, Innovative Advisory Group | Lexington, Mass.</td>
<td>In addition to his podcast, “Money Tree Investing,” where he offers advice for how to build a personalized investment strategy, Chisholm mentors fellow financial advisors.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://assistfp.com/" rel="nofollow">Justin Green</a></td>
<td>Founder & Financial Planner Assist Financial Planning | Marlborough, Mass.</td>
<td>Green is dedicated to supporting online fitness coaches with his podcast “Dollars & Dumbbells,” which covers personal finance tips and business development strategies.</td>
</tr>
</tbody>
</table>
</div></figure>
<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-michigan"></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"> Michigan </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_80-0"> <div class="mntl-sc-block-table__table-wrapper">
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<tr>
<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.preferredfinancialgrouppfg.com/podcast" rel="nofollow">Connor Bauserman</a></td>
<td>Financial Advisor, Preferred Financial Group | Battle Creek, Mich.</td>
<td>Bauserman is the host of Preferred Financial Group’s financial education podcast, The Wealthy HOMES. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.zhangfinancial.com" rel="nofollow">Lynn Chen-Zhang</a></td>
<td>CEO, Chief Compliance Officer Zhang Financial | Portage, Mich.</td>
<td>Chen-Zhang established the Zhang Career Center at Western Michigan University to give students financial and career planning support and has developed a financial literacy seminar series for seniors in her community. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://sghwm.com/" rel="nofollow">Sam Huszczo</a></td>
<td>Founder, SGH Wealth Management | Lathrup Village, Mich.</td>
<td>Huszczo is recognized for his work with Michigan universities to establish and award more than 25 annual Charter Financial Analyst (CFA) scholarships each year. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://pearlplan.com" rel="nofollow">Melissa Joy</a></td>
<td>Founder, Pearl Planning | Dexter, Mich.</td>
<td>Joy is recognized for her effort to increase financial literacy for women through not only client work, but also by hosting the podcast “52 Pearls: Weekly Money Wisdom” and by volunteering her time to the Women’s Leadership Alliance mentorship program for female financial advisors.</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div>
<span class="heading-toc" id="toc-minnesota"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-heading__text"> Minnesota </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_83-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.flourishwealthmanagement.com/" rel="nofollow">Kathy Longo</a></td>
<td>President & Founder Flourish Wealth Management | Edina, Minn.</td>
<td>Longo is an active board member for Moneyweave Academy, a nonprofit providing financial planning education to women with a focus on sound decision-making, purposeful action, and philanthropy. </td>
</tr>
</tbody>
</table>
</div></figure>
<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-missouri"></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"> Missouri </span> </h2>
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<td><em>Name</em></td>
<td><em>Title</em></td>
<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.treyton.com/" rel="nofollow">Treyton DeVore</a></td>
<td>Co-Founder, AllStreet Wealth | Kansas City, Mo.</td>
<td>DeVore is recognized for his efforts to support self-employed individuals with accessible wealth management resources, including an online money management tool, free book (<em>Freelance Finances Made Simple</em>), and weekly newsletter for self-employed creatives. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="momentprivatewealth.com">Jacob Turner</a></td>
<td>Founder & Partner, Moment Private Wealth | Saint Louis, Mo.</td>
<td>Turner is a former Major League Baseball player turned financial advisor who offers wealth management, business, and tax planning advice to professional athletes. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.javawealth.com" rel="nofollow">Mike Zung</a></td>
<td>Principal, Java Wealth Planning | Lees Summit, Mo.</td>
<td>Zung hosts the Java Wealth YouTube channel, a content and live stream platform for tech professionals seeking equity compensation and wealth-building advice. </td>
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<span class="heading-toc" id="toc-montana"></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"> Montana </span> </h2>
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<td><em>Name</em></td>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.evergreenfinancialgroup.org" rel="noopener noreferrer nofollow">Tim Bauer</a></td>
<td>Founder & Financial Planner, Evergreen Financial Group | Billings, Mont.</td>
<td>Bauer is recognized for his community outreach efforts, including bi-weekly pro-bono financial education courses, high school seminars, and advocating with state senators for additional CFP education to better support consumers planning for retirement. </td>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div>
<span class="heading-toc" id="toc-new-jersey"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_91-0"> <span class="mntl-sc-block-heading__text"> New Jersey </span> </h2>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.nicolebsimpson.com" rel="nofollow">Dr. Nicole B. Simpson</a></td>
<td>CEO, Harvest Wealth Financial | Piscataway, N.J.</td>
<td>Dr. Simpson is recognized for her programs hosted through the Dare 2 Dream Institute, including “You Are a Business” internship, “Financially Fit Bootcamp,” and “Wealth and Protection Masterclass for Entrepreneurs.”</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.runnymede.com/blog" rel="nofollow">Andrew Wang</a></td>
<td>Managing Partner, Runnymede Capital Management, Inc. | Morristown, N.J.</td>
<td>Wang hosts the “Inspired Money Podcast,” which explores positive money stories from people of all backgrounds to encourage a positive outlook on money and goal setting. </td>
</tr>
</tbody>
</table>
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<span class="heading-toc" id="toc-new-york"></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"> New York </span> </h2>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://michelleab.com/" rel="nofollow">Michelle Arpin Begina</a></td>
<td>Senior Partner & Financial Advisor, Snowden Lane Partners | New York, N.Y.</td>
<td>In addition to disseminating financial education through the TEDx network, Begina has successfully lobbied for financial psychology education with the New Jersey Department of Education. </td>
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<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lazetta.com/" rel="nofollow">Lazetta Braxton</a></td>
<td>Founder & CEO, Lazetta & Associates | New York, N.Y.</td>
<td>Braxton is recognized for her consistent efforts to make the financial services industry inclusive and increase DEI initiatives, whether that’s through her firm Lazetta & Associates or through her various media appearances. </td>
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<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://druckerwealth.com/" rel="nofollow">Gideon Drucker</a></td>
<td>Managing Partner Drucker Wealth, New York, N.Y.</td>
<td>Drucker hosts free webinars twice per month that have reached more than 9,000 people to date, has a bi-weekly blog, and contributes to financial newsletters regularly. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://lizfrazier.com" rel="nofollow">Liz Frazier Peck</a></td>
<td>Financial Planner & Author, Frazier Financial Consultants | Katonah, N.Y.</td>
<td>Peck is recognized for her dedication to children’s financial literacy, namely her book <em>Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance</em>, a step-by-step guide for parents to teach young children the fundamentals of finance.</td>
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<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.rootedpg.com/blogs" rel="nofollow">Amy Irvine</a></td>
<td>Founder and CEO, Rooted Planning Group | Corning, N.Y.</td>
<td>Irvine hosts the “Wine and Dime” podcast where she and her guests break down economic headlines, simplify wealth transfer tips, and explore tax planning information.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.veronicakaras.com" rel="nofollow">Veronica Karas</a></td>
<td>Senior Financial Advisor, Captrust | Lake Success, N.Y.</td>
<td>Karas is the author of the Money Matters book series and volunteers for the Captrust Community Foundation national financial literacy program, which brings 30-60-minute money management lessons to high school teens. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.virtuosoassetmanagement.com" rel="nofollow">Tiffany Soricelli</a></td>
<td>Principal & CEO, Virtuoso Asset Management LLC | Burnt Hills, N.Y.</td>
<td>Soricelli is recognized in part for the financial literacy seminars her firm hosts for artists and musicians. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.mitlinfinancial.com" rel="nofollow">Lawrence Sprung</a></td>
<td>Founder & Wealth Advisor, Mitlin Financial Inc | Hauppauge, N.Y.</td>
<td>Sprung hosts the Mitlin Money Mindset podcast, and is a frequent guest on Experian’s weekly X Credit Chats to help bring practical financial education to the masses. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://blog.myrawealth.com/" rel="nofollow">Sahil Vakil</a></td>
<td>Founder, MyraWealth | New York, N.Y.</td>
<td>Vakil is recognized for founding MyraWealth and for his work through MYRA Cares, a nonprofit dedicated to providing financial literacy to immigrants.</td>
</tr>
</tbody>
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<span class="heading-toc" id="toc-north-carolina"></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"> North Carolina </span> </h2>
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<td><em>Name</em></td>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://melaninmoney.com/" rel="nofollow">George Acheampong</a></td>
<td>CEO & Founder, Capitalwize, LLC | Charlotte, N.C.</td>
<td>Acheampong’s commitment to supporting Black wealth development shines with his organization Melanin Money, a financial social network committed to making education more accessible, and its programs, including the Melanin Money Awards, Black Wealth Friday, and Melanin Millionaires Social Club.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://archerim.com/" rel="nofollow">Emily Casey Rassam</a></td>
<td>Partner & Senior Financial Planner, Archer Investment Management | Charlotte, N.C.</td>
<td>Rassam offers free, quarterly Zoom sessions on financial education for women in her community and visits women’s shelters to offer pro-bono financial counseling. </td>
</tr>
</tbody>
</table>
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<span class="heading-toc" id="toc-north-dakota"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-heading__text"> North Dakota </span> </h2>
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<td><em>Name</em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.caserta-dejongh.com" rel="nofollow">Benjamin Brandt</a></td>
<td>President & Founder, Capital City Wealth Management | Bismarck, N.D.</td>
<td>Brandt is recognized for his all-in approach to retirement planning education, from his “Retirement Starts Today” podcast to his Retirement Income University web program.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://legacywealthfargo.com" rel="nofollow">Paul Meyers</a></td>
<td>LPL Financial Advisor, Legacy Wealth Management | Fargo, N.D.</td>
<td>In addition to hosting live segments on ABC in North Dakota and leading financial education lessons on his Youtube channel, Meyers hosts free, regularly scheduled financial education seminars for the local community.</td>
</tr>
</tbody>
</table>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_102-0"></div>
<span class="heading-toc" id="toc-oklahoma"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_103-0"> <span class="mntl-sc-block-heading__text"> Oklahoma </span> </h2>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://styledwealth.com/" rel="nofollow">Autumn K. Campbell</a></td>
<td>Founder, Lead Planner, Styled Wealth | Tulsa, Okla. </td>
<td>Campbell has donated her time to more than 150 clients through her firm, plus she provides education to Teach For America and Pro Bono Financial Planning. </td>
</tr>
</tbody>
</table>
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<span class="heading-toc" id="toc-pennsylvania"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_106-0"> <span class="mntl-sc-block-heading__text"> Pennsylvania </span> </h2>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.opulus.us" rel="nofollow">Ryan Greiser</a></td>
<td>Co-Founder & Financial Advisor, Opulus LLC | Doylestown, Pa.</td>
<td>Besides offering Master Your Money courses through his firm, Greiser volunteers at community high schools to share financial education resources and advice with young adults. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.opulus.us/" rel="nofollow">Francis Walsh</a></td>
<td>Owner & Co-Founder Opulus LLC | Doylestown, Pa.</td>
<td>Walsh is recognized in part for his work on the Opulus podcast “Inside the Path to Success,” which supplies financial news to entrepreneurs and investors looking for advice for their own journeys. </td>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_108-0"></div>
<span class="heading-toc" id="toc-tennessee"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_109-0"> <span class="mntl-sc-block-heading__text"> Tennessee </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_110-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.whatthewealth.com" rel="nofollow">Jonathan Bednar</a></td>
<td>Certified Financial Planner Paradigm Wealth Partners | Knoxville, Tenn.</td>
<td>Bednar runs the blog and podcast, "What the Wealth?!," where he shares simple, bite-sized financial tips to empower people to take control of their finances. (His first book shares the same title.) </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://financiallysimple.com/" rel="nofollow">Justin Goodbread</a></td>
<td>President, WealthSource Partners, LLC | Knoxville, Tenn.</td>
<td>Goodbread is recognized for his ability to share complex financial concepts in simple terms, which he frequently does as an expert source for national media outlets such as CNBC.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.newmoneynewproblems.com/" rel="nofollow">Brenton Harrison</a></td>
<td>Founder and Financial Advisor, New Money, New Problems | Nashville, Tenn. </td>
<td>Harrison is a volunteer educator for Super Money Kids POWER Youth initiative, a summer program held by the city of Nashville to provide summer internships and jobs to local high school students, and plans the annual Riverside Chapel Financial Literacy Symposium for North Nashville residents seeking credit, debt, and tax filing assistance. </td>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div>
<span class="heading-toc" id="toc-texas"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_112-0"> <span class="mntl-sc-block-heading__text"> Texas </span> </h2>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://bannermanwealth.com/" rel="nofollow">Josh Bannerman</a></td>
<td>Founder, Bannerman Wealth | Lewisville, Texas</td>
<td>Bannerman published 150 “Stacking Benjamins” financial planning podcast episodes last year, which reached more than 1.2 million unique listeners. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://measuretwicemoney.com/" rel="nofollow">Cody Garrett</a></td>
<td>Financial Planner & Owner, Measure Twice Financial | Houston, Texas</td>
<td>Garrett is recognized in part for his multi-platform education approach to supporting DIY investors on their path to building goals- and values-based financial freedom. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://moneyscriptwealth.com" rel="nofollow">Yohance Harrison</a></td>
<td>Founder & Behavioral Financial Advisor, Money Script Wealth Management, PLLC | Cedar Hill, Texas</td>
<td>Harrison is honored in part for his financial education coursework developed for teens through The Royalty Project, an enrichment program for Black youth. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://domhendersonsr.com/" rel="nofollow">Dominique Henderson</a></td>
<td>Founder, DJH Capital Management | Dallas, Texas</td>
<td>Henderson is honored for his efforts to deliver actionable financial advice through his podcast "Conversations for Financial Professionals" and Youtube channel Jumpstart YOUniversity, both of which are dedicated to those looking to pursue a career in financial services.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.themoneycouple.com" rel="nofollow">Taylor Kovar</a></td>
<td>Founder & CEO, Kovar Wealth Management | Lufkin, Texas</td>
<td>Kovar is one-half of The Money Couple and dedicated to helping unite couples over their finances with creative tools, including conversation cards and a money personality quiz.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://guidingwealth.com/" rel="nofollow">Hannah Moore</a></td>
<td>Owner & Financial Planner, Amplified Planning & Guiding Wealth | Richardson, Texas</td>
<td>Moore has created several free resources to help individuals manage their money, including the “Everyday Money Workbook” and “Budgeting Blocks,” a hands-on way to visualize income and expenses without using a spreadsheet. </td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://oakharvestfg.com" rel="nofollow">Troy Sharpe</a></td>
<td>CEO, Oak Harvest Investment Services | Houston, Texas</td>
<td>Sharpe’s YouTube channel, which focuses on comprehensive retirement and tax planning education, has garnered over 8 million views since its inception in 2019.</td>
</tr>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div>
<span class="heading-toc" id="toc-virgina"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_115-0"> <span class="mntl-sc-block-heading__text"> Virgina </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_116-0"> <div class="mntl-sc-block-table__table-wrapper">
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<td><em>Name</em></td>
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<td><em>Standout Achievements </em></td>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.jasonhowell.com/" rel="nofollow">Jason Howell</a></td>
<td>Family Wealth Advisor, Jason Howell Company | Fairfax, Va.</td>
<td>Howell serves as an adjunct professor at George Mason University and American University and hosts a monthly podcast, “Joy of Financial Planning,” to further educate the other first generation personal wealth managers seeking guidance they did not get growing up.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.mindovermoney.net" rel="nofollow">Tremaine Wills</a></td>
<td>Financial Planner, Mind Over Money | Newport News, Va.</td>
<td>Wills reaches more than 40,000 consumers on her social media platforms, where she hosts free, money-focused community classes for her followers. </td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_117-0"></div>
<span class="heading-toc" id="toc-washington"></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"> Washington </span> </h2>
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<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://xenafp.com/" rel="nofollow">Danika Waddell</a></td>
<td>President & Founder, Xena Financial Planning | Seattle, Wash.</td>
<td>Waddell is being honored in part for her work to increase diversity, equity, and inclusion within the financial services industry, namely as a board member of the NAPFA West Region.</td>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div>
<span class="heading-toc" id="toc-methodology"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_121-0"> <span class="mntl-sc-block-heading__text"> Methodology </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_122-0"> The annual Investopedia 100 list honors independent U.S.-based financial advisors who have demonstrated top-of-the-industry skills in the following critical areas:
</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>Reach</strong>: defined as the domain authority of their personal blog or website, followers across socials (LinkedIn, X, TikTok, Instagram, and YouTube), and podcasts (including appearances or ownership of a personal podcast).</li><li><strong>Commitment to financial literacy:</strong> measured by the advisor’s participation in workshops, programs, nonprofits or collaboration with others in the community to spread financial education to those who need it most, as well as the creation of accessible content. </li><li><strong>Community support: </strong>measured through peer nominations by industry professionals outside of their own firms, as well as the advisor’s presence and engagement with others in the financial planning industry. </li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_125-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> Each advisor CRD number was checked for validity, and each application was checked for accuracy and quality. Final scores were tabulated according to weights designated for each of the criteria above. Investopedia receives no compensation from placing advisors on our list, nor does an advisor's appearance on our list constitute an individual endorsement by Investopedia of such advisor.<br>
</br></p></div> |
![Investopedia 100 top financial advisors 2023]()
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Investopedia / Alice Morgan
The Investopedia 100 celebrates independent financial advisors who are making significant contributions to critical conversations about financial literacy, investing strategies, life-stage planning and wealth management. With more than 100,000 independent [financial advisors](https://www.investopedia.com/terms/f/financial-advisor.asp) in the U.S., the Investopedia 100 spotlights the country’s most engaged, influential, and educational advisors.
This year’s list highlights advisors who provide unique value to communities across the board, from those who represent clients in various industries—from music to dentistry—advisors who offer pro bono financial planning tips for women, to those who volunteer to educate students within their own community. It's an honor to get to highlight the work these individuals do.
Read on to learn about the 2023 class of the Investopedia 100 Top Financial Advisors. (The Top 10 are named in order, while the remaining 90 are categorized in alphabetical order by last name within each advisor's designated state.)
## The Top 10 Advisors
![INV100 top 10 winners]()
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Investopedia / Alice Morgan
**1. [Michael Kitces](https://www.investopedia.com/michael-kitces-7551966)** *Head of Planning Strategy, Buckingham Strategic Wealth | Reston, VA*
For more than two decades, Kitces has been a financial advisor and educator who helps clients and readers at all stages of life. Prior to joining Buckingham Wealth Partners, Michael founded XY Planning Network to serve 'next generation' clients who seek financial advice but don't have the assets to be served by more traditional financial advisors. XY Planning Network now has 1,700 advisors who work with underserved consumer segments.
**2. [Marguerita Cheng](https://www.investopedia.com/marguerita-cheng-4684136)** *Founder & CEO, Blue Ocean Global Wealth | Gaithersburg, MD*
Cheng educates the public, policy makers, and media about the benefits of competent, ethical financial planning as a Certified Financial Planner Board of Standards Ambassador. Cheng volunteers her time through the FPA Pro Bono Program and the Foundation for Financial Planning and is a former spokesperson for the AARP Financial Freedom Campaign with a focus on serving the AANHPI community. Her firm Blue Ocean Global Wealth works with the BLX Internship program which places Black and Latino individuals at fee-only financial planning firms to obtain their first job in the financial planning profession.
**3. [Rebecca Walser](https://www.investopedia.com/rebecca-walser-7552624)** *Principal, Walser Wealth Management | Tampa, FL*
Walser is a wealth advisor and tax mitigation attorney who reaches consumers across multiple platforms and mediums including her podcast “Crashes and Taxes,” which breaks down micro- and macro-economic trends to help people better understand their finances and preserve wealth. She also wrote an Amazon best-selling personal finance education book: *Wealth Unbroken: Growing Wealth Uninterrupted by Market Crashes, Taxes, and Even Death*.
**4. [Peter Lazaroff](https://www.investopedia.com/peter-lazaroff-7552540)** *Chief Investment Officer, Plancorp | St. Louis, MO*
When he started his career, Lazaroff created a newsletter to teach people about investing and financial planning in easy-to-understand language, which now reaches more than 10,000 subscribers. In addition to his podcast "The Long-Term Investor," Lazaroff works with Rooted, a local St. Louis initiative, to develop financial planning curriculum and financial advisor support for 50 households in his community.
**5. [Jamie Hopkins](https://www.investopedia.com/contributors/98041/)** *Managing Partner, Wealth Solutions, Carson Group | Omaha, NE*
Hopkins founded the nonprofit FinServ Foundation, which supports the next generation of financial professionals through coaching and mentorship. At the end of 2022, Hopkins and his team at the Carson Group also created the Youtube series, "The Financial Advisor’s Guide to the SECURE 2.0 Act" to break down each major provision of the [SECURE 2.0 Act](https://www.investopedia.com/secure-2-0-definition-5225115) and highlight important planning points for financial advisors to understand.
**6. [Douglas Boneparth](https://www.investopedia.com/douglas-boneparth-7553273)** *President, Bone Fide Wealth, LLC | New York, NY*
For over a decade, Boneparth has been educating young adults to help them meet their financial goals, and leverages YouTube, social media channels, and his newsletter “This is the Top” to keep the education accessible for all. He also offers weekly, live pre-market commentary on Public.com and co-authored a book *The Millennial Money Fix.*
**7. [Dr. Preston D. Cherry](https://www.investopedia.com/preston-cherry-7553785)** *Founder & President, Concurrent Financial | Green Bay, WI*
Cherry is the founder and director of the Charles Schwab Foundation Center for Financial Wellness at the University of Wisconsin, Green Bay where he provides financial literacy services to college students, community residences, and organizations through peer coaching, a podcast, and one-on-one pro bono planning. Cherry also leads the financial planning program at the University of Wisconsin, Green Bay, and publishes scholarly research about personal financial planning, household economics, and behavioral finance.
**8. [Stephanie McCullough](https://www.investopedia.com/stephanie-mccullough-7553867)** *Founder & Financial Planner, Sofia Financial | Berwyn, PA*
McCullough founded Sofia Financial, an independent business that aims to empower women to make wise financial decisions and reduce their money stress. She also hosts a podcast called “Take Back Retirement” where she has conversations with women who have gone through a financial situation and a subject-matter experts to provide information and motivation to help others gain financial control. McCullough also offers free financial literacy classes through Wayne, Pennsylvania-based nonprofit Women's Resource Center.
**9. [Mary Beth Storjohann](https://www.investopedia.com/mary-beth-storjohann-7552581)** *Co-CEO, Abacus Wealth Partners | Santa Monica, CA*
Storjohann founded the website and podcast Workable Wealth, which offers education and empowerment to those in their 20s through 40s. She serves as a mentor and career coach to other women in the industry to amplify their voices and brands, and helps lead Abacus's pro bono financial services program. Her book, *Work Your Wealth: 9 Steps to Making Smarter Choices With Your Money*, breaks down jargon and complex financial topics for consumers.
**10. [Elaine King](https://www.investopedia.com/elaine-king-7554853)** *Founder, Family and Money Matters Institute | Miami, FL*
King is an award-winning author dedicated to elevating the available financial literacy resources for the U.S. Hispanic population. She produces content in Spanish across her social media platforms, hosts a monthly segment on Telemundo, and runs three Spanish-language online financial education courses, which currently have more than 18,000 students enrolled. King is also an external director for accounting firm Shechter & Everett, LLP, where she works with women before, during, and after marital separation to help them gain financial independence.
### Tip
For additional content that highlights more of the amazing work our winners are doing in their own communities and beyond, check out the Finding a Financial Advisor content hub, [here](https://www.investopedia.com/finding-a-financial-advisor-6834423).
## Alabama
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Valerie R. Leonard](https://everthrivefinancial.com/) | CEO & Financial Advisor, EverThrive Financial Group | Birmingham, Ala. | In addition to working with her clients to further their retirement and wealth-building plans, Leonard educates over 7,000 U.S. workers via in-person group meetings, videos, and virtual courses on her social platforms. |
## Arizona
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Adam Dekker](https://www.dekkerfinancial.com/) | Chief Executive & Lead Advisor, Dekker Financial Services | Chandler, Ariz. | Dekker is recognized for his passionate embrace of technology’s impact on the financial services industry, which has helped propel Dekker Financial forward. |
| [George Grombacher](https://moneyalignmentacademy.com/) | President, Financial Consulting | Scottsdale, Ariz. | Besides being a published author of two financial education books, Grombacher is the founder of financial wellness platform Money Alignment Academy. |
## California
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [David Bahnsen](https://www.bahnsen.com/) | Founder & Managing Partner & CIO, The Bahnsen Group | Newport Beach, Calif. | Bahnsen regularly publishes financial education lessons on Youtube, and more recently launched economics courses for purchase, too. |
| [Louis Barajas](http://www.louisbarajas.com) | CEO & Senior Wealth Manager, International Private Wealth Advisors | Irvine, Calif. | Barajas is recognized for increasing financial education among Latino individuals, both in his client work at International Private Wealth Advisors and through his multiple published books, television appearances, and position as the first Latino on the Financial Planning Association’s National Board of Directors. |
| [Stephanie Bucko](https://www.manafld.com/) | Chief Investment Officer, Mana Financial Life Design | Los Angeles, Calif. | Bucko is active in the advisor-focused community, XY Planning Network, and participates in a bi-weekly study group called growth-minded advisors. |
| [Cathy Curtis](https://curtisfinancialplanning.com/) | Founder, Curtis Financial Planning, LLC | Oakland, Calif. | In addition to leading Curtis Financial Planning, Cathy Curtis regularly consults with and coaches female advisors on how to build an independent RIA practice and have a balanced life. |
| [Kimberly Foss](https://empyrionwealth.com/) | President & Founder, Empyrion Wealth Management Inc. | Roseville, Calif. | Kimberly Foss is recognized for her individualized strategy with her clients, which include affluent family stewards, women in transition, and thriving retirees. |
| [Hilary Hendershott](https://hendershottwealth.com/) | President & Chief Advisor, Hendershott Wealth Management | San Jose, Calif. | Hilary Hendershott is recognized for her dedication to educating women on financial topics through her podcast for female entrepreneurs, Profit Boss Radio, her guest appearances in the media, and the webpage resource tool she created for working moms looking to improve their financial life. |
| [William Huston](https://www.baystreetcapitalholdings.com/) | Founder & CIO, Bay Street Capital Holdings | Palo Alto, Calif. | William Huston leads Bay Street Capital Holdings, one of the top 10 largest Black-owned and diverse-led RIAs in the U.S., where he consistently promotes and advocates for diverse and emerging investment advisors. |
| [Cristina Livadary](https://www.manafld.com/) | CEO Mana Financial Life Design | Los Angeles, Calif. | Livadary not only leads her financial wellness–focused program, Mana Money School, she also provides financial education and empowerment to local charitable organizations and small businesses in order to improve financial confidence beyond her client base. |
| [Joe McLean](https://mai.capital/) | Chief Growth & Innovation Officer, MAI Capital | San Ramon, Calif. | In addition to his work with MAI Capital and his frequent appearances on prominent networks, McLean is recognized for his mission to connect financial advisors with one another and invest together to effect positive change in society. |
| [Emlen Miles-Mattingly](https://gennextwealth.com/) | Founder and Financial Advisor, Gen Next Wealth | Madera, Calif. | Miles-Mattingly co-founded the BLX Internship program, which places Black and Latino individuals at fee-only financial planning firms, and is also the host of Minority Money podcast, where he discusses finance, family, and education, and how all of these things affect your overall wealth. |
| [Colin Overweg](https://www.advizewealth.com/) | Founder, Advize Wealth Management | Los Angeles, Calif. | Overweg is recognized for his work to educate financial advisors, specifically those who are new to this industry, which he does by hosting six virtual events per year for new advisors to network and learn with well-known leaders in the space. |
| [Luis Rosa](https://www.onmywaytowealth.com/) | Founder, Build a Better Financial Future LLC | Los Angeles, Calif. | In addition to his podcast On My Way to Wealth and speaking at industry events, Rosa promotes financial literacy through public speaking engagements, such as the National Association of Hispanic Real Estate Professionals and the Los Angeles AARP. |
| [Taylor Schulte](https://youstaywealthy.com/) | Founder & CEO, Define Financial | San Diego, Calif. | In addition to publishing consumer-facing educational content on his various platforms, Taylor Schulte co-hosts Kitces Summits, a twice-a-year learning event for practicing advisors. |
| [Gabriel Shahin](https://www.falconwealthplanning.com/) | Principal & CEO, Falcon Wealth Planning | Ontario, Calif. | Besides his work with Falcon Wealth Planning, Gabriel Shahin is the founder of the Financial Community Education Foundation, where he and his team teach financial literacy courses to the local community. |
| [Jared Tanimoto](https://www.ascentwealthadvisors.com/) | President, Ascent Wealth Advisors | Irvine, Calif. | Jared Tanimoto is an active member of the FPA of Orange County (and was formerly the youngest president of his chapter), where he hosts free financial education webinars on a regular basis. |
| [Mike Troxell](https://www.modernfp.com/) | Founder & Financial Planner Modern Financial Planning | Oakland, Calif. | Troxell is recognized for his efforts to educate younger clients, as well as his volunteer work, which in 2023 included bringing together a group of advisors to volunteer time to help those affected by layoffs. |
| [Shawn Tydlaska](https://www.ballastpointfp.com/blog) | Founder and CEO, Ballast Point Financial Planning | Burlingame, Calif. | Shawn Tydlaska is recognized for co-founding the BLX Internship Program, which places Black and Latino individuals at fee-only financial planning firms to obtain their first job in the financial planning profession. |
| [Dasarte Yarnway](https://www.yarnwaywealth.com) | Founder & CEO, Yarnway Wealth Management | Sacramento, Calif. | Dasarte Yarnway is recognized for co-founding the ONYX Network, a membership organization that brings minority advisors together to start, scale, and sustain their financial planning practices. |
## Colorado
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Prince Dykes](http://www.royalfinancials.com) | Private Investment Advisor, Royal Financial Investment Group | Aurora, Colo. | Dykes is president of the Global Children Financial Literacy Foundation and recognized for co-founding Wesley Learns Book Club, a national financial literacy program that incentivizes young children to become the first stockholders in their families. |
| [Nate Hoskin](https://www.hoskincapital.com/) | Founder and Lead Advisor, Hoskin Capital | Denver, Colo. | Hoskin is dedicated to educating Gen Z about finances and investing, and has drawn more than 200,000 followers on TikTok, where he contextualizes market headlines and offers realistic advice for young adults. |
## Connecticut
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Magdalena G. Johndrow](https://www.johndrowwealth.com/) | Financial Advisor & Managing Partner, Johndrow Wealth Management LLC | West Hartford & Westport, Conn. | Johndrow is recognized for her grassroots teaching efforts, hosting workshops at Albert Einstein's College of Medicine, Miss Porter’s School, and Providence College, and volunteering with the Connecticut Money School to reach children and families below the poverty line. |
| [Tyler Olson](http://www.olsonplanner.com) | Financial Planner, Olson Consulting LLC | Manchester, Conn. | Olson provides free and low-cost financial education for medical students and physician trainees via Advice Residency, a quarterly seminar program he created. |
## District of Columbia
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Kevin Mahoney](https://illumintfc.com/) | Founder & CEO, Illumint | District of Columbia | Mahoney is committed to helping other Millennial parents create a financial plan to pay for their children’s college, from navigating 529 plan options to applying for merit aid. |
## Florida
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Cary Carbonaro](https://carycarbonaro.com/) | SVP & Director of Women and Wealth, Advisors Capital Management, LLC | Winter Garden, Fla. | Carbonaro has dedicated her career to helping women build financial independence through her professional role, her book *The Money Queen’s Guide: For Women Who Want to Build Wealth and Banish Fear,* and her nonprofit work, including the Women’s Giving Alliance. |
| [Carolyn McClanahan](https://carolynmcclanahan.com/) | Founder, Life Planning Partners, Inc. | Jacksonville, Fla. | McClanahan is recognized for her financial planning work, which focuses on the intersection of health and personal finance, a topic she speaks about at various events for financial advisors. |
| [Alonso Rodriguez Segarra](https://www.advise-financial.com/) | CEO & Founder, Advise Financial LLC | Plantation, Fla. | Segarra is recognized for his work to bring financial education to more individuals with free Spanish-language news and financial content on his firm's website and YouTube channel. |
| [Reshell Smith](https://amesfinancialsolutions.com/) | President and CEO, AMES Financial Solutions | Ocoee, Fla. | Smith is recognized for creating an online academy, She’s So Wealthy, to help create accessible education options for women and first-generation wealth builders. |
| [Camille York Adrien](https://www.raymondjames.com/clarkyorkwp) | Financial Advisor, Clark and York Wealth Partners of Raymond James | Tampa, Fla. | In addition to her work with clients navigating major life changes and milestones, Adrien hosts and supports numerous wealth workshops and seminars each year, underscoring her commitment to bring women into the financial industry. |
## Georgia
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Christopher Hoffman](https://hoffmancorporation.com/) | Founder, Hoffman Financial Group | Multiple Offices in Ga. | Hoffman is a nationally recognized fiduciary advisor and as such, hosts weekly segments on radio and television for outlets like CBS46 & WSB-TV’s Good Morning America weekend edition. |
| [Chloé Moore](https://www.financialstaples.com/) | Founder, Financial Staples | Atlanta, Ga. | Moore works not only with her own firm, but also as an active community speaker, visiting middle school classrooms to share financial and career advice and joining corporate and nonprofit seminars as an expert on financial wellness and retirement planning. |
| [Sibyl Slade](https://www.integrivestwealthadvisors.com/) | Founder & President IntegriVest Wealth Advisors, LLC | Atlanta, Ga. | Slade is recognized for her efforts to connect Black families and entrepreneurs with financial therapy and money management workshops via organizations such as Innovative Science, Technology, Engineering and Mathematics Workforce Development Project, and the HBCU Community Development Action Coalition. |
| [Martin A. Smith](https://www.wcfingroup.com/) | President, Wealthcare Financial Group, Inc. | Peachtree City, Ga. | In addition to his work with Wealthcare Financial Group, Inc., Martin is recognized for launching a robo-advisor that serves undergraduates, graduate students, and alumni of Black colleges and universities in an effort to close the racial wealth gap. |
## Illinois
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Eric Billimoria](https://wealthcareadvisorsllc.com/) | Vice President , WealthCare Advisors | Schaumburg, Ill. | Billimoria advocates for financial literacy and planning policies with members of Congress, serves as a financial mentor for young adults through the Foundation of Financial Planning, and provides planning services to below-average-income individuals through the San Diego Financial LIteracy Center. |
| [Valerie Rivera](https://1genwealth.com/) | Founder and Financial Planner, FirstGen Wealth | Chicago, Ill. | Rivera is recognized for her firm’s dedication to reaching first-generation wealth builders with inclusive, shame-free advice to help young adults build a strong, stable financial foundation. |
## Indiana
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Josh Bennett](https://www.vincerewealth.com/) | Managing Partner, Vincere Wealth Management | Indianapolis, Ind. | Bennett has created several online and social learning centers to help teach others about the basics of money and wealth management, paying for college, and filing taxes. |
| [Justin Castelli](https://www.justincastelli.io/) | Founder & Financial Advisor, RLS Wealth | Fisher, Ind. | Justin Castelli is the co-founder of the Advisors Growing Community (AGC)—an online community and platform for financial advisors—as well as the curator of the book, *More Than Money: Real Life Stories of Financial Planning*. |
| [Thomas Kopelman](http://thomaskopelman.com) | Co-Founder & Lead Financial Planner, AllStreet Wealth | Indianapolis, Ind. | Kopelman is recognized for his consistent commitment to educating millennials via his weekly blog, “The Long Game” podcast, and on X (formerly Twitter) to his more than 16,000 followers. |
| [Michael Reynolds](https://www.elevationfinancial.com/) | Principal, Elevation Financial LLC | Westfield, Ind. | Reynolds is recognized in part for his YouTube-based webinars that provide how-to information for investors as well as budgeting advice. |
## Iowa
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Stoy Hall](https://blackmammoth.com/) | Founder & CEO, Black Mammoth | Ankeny, Iowa | In addition to leading his firm, Hall hosts the Money Mindset Series, a video podcast series on his YouTube channel that breaks down the basics, emotional connections, and planning philosophies of building wealth. |
## Kansas
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Peter Mallouk](https://creativeplanning.com/) | CEO, Creative Planning | Overland Park, Kan. | Mallouk is recognized for his program, Started Pathway Financial, which educates adults, business owners, and high school students in his community. |
## Kentucky
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Jordan Patrick](https://usecommas.com/member/jordan-patrick/) | Financial Advisor, Commas | Lexington, Ky. | Patrick is dedicated to bringing his goal-focused, financial planning lessons into his community by hosting seminars for school district teachers and speaking with local child caregivers. |
## Maryland
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Rianka Dorsainvil](https://www.riankadorsainvil.com/) | Co-Founder & Co-CEO, 2050 Wealth Partners | Upper Marlboro, Md. | Dorsainvil is recognized for her commitment to sharing personal finance tips, tax information, investment news, and more in videos and blogs on Greenwood, a Black-owned digital platform created to help Black and Latino individuals build generational wealth. |
| [Zaneilia Harris](http://www.hhwealth.com) | President, Harris & Harris Wealth Management Group | Upper Marlboro, Md. | In addition to her numerous speaking engagements for financial advisors and college students, Harris wrote *Finance ‘n Stilettos: Money Matters for the Well-Heeled Woman* to bring her online advice to more women seeking financial confidence. |
| [Brad Sherman](https://shermanwealth.com/) | President, Sherman Wealth Management LLC | Gaithersburg, Md. | Sherman is honored in part for his work with high school students and young entrepreneurs via hosted financial literacy workshops. |
## Massachusetts
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Sammy Azzouz](https://heritagefinancial.net/people/sammy-azzouz/) | President & CEO, Heritage Financial Services, LLC | Westwood, Mass. | Author of the book *Beyond The Basics, Maximizing, Allocating and Protecting Your Capital*, Azzouz also created The Boston Advisor platform to distribute advice, reading lists, and financial wellness insights via blog posts and weekly newsletters to help investors build long-term wealth and make smart money decisions. |
| [Kirk Chisholm](https://innovativewealth.com/) | Wealth Manager, Innovative Advisory Group | Lexington, Mass. | In addition to his podcast, “Money Tree Investing,” where he offers advice for how to build a personalized investment strategy, Chisholm mentors fellow financial advisors. |
| [Justin Green](https://assistfp.com/) | Founder & Financial Planner Assist Financial Planning | Marlborough, Mass. | Green is dedicated to supporting online fitness coaches with his podcast “Dollars & Dumbbells,” which covers personal finance tips and business development strategies. |
## Michigan
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Connor Bauserman](https://www.preferredfinancialgrouppfg.com/podcast) | Financial Advisor, Preferred Financial Group | Battle Creek, Mich. | Bauserman is the host of Preferred Financial Group’s financial education podcast, The Wealthy HOMES. |
| [Lynn Chen-Zhang](http://www.zhangfinancial.com) | CEO, Chief Compliance Officer Zhang Financial | Portage, Mich. | Chen-Zhang established the Zhang Career Center at Western Michigan University to give students financial and career planning support and has developed a financial literacy seminar series for seniors in her community. |
| [Sam Huszczo](https://sghwm.com/) | Founder, SGH Wealth Management | Lathrup Village, Mich. | Huszczo is recognized for his work with Michigan universities to establish and award more than 25 annual Charter Financial Analyst (CFA) scholarships each year. |
| [Melissa Joy](https://pearlplan.com) | Founder, Pearl Planning | Dexter, Mich. | Joy is recognized for her effort to increase financial literacy for women through not only client work, but also by hosting the podcast “52 Pearls: Weekly Money Wisdom” and by volunteering her time to the Women’s Leadership Alliance mentorship program for female financial advisors. |
## Minnesota
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Kathy Longo](https://www.flourishwealthmanagement.com/) | President & Founder Flourish Wealth Management | Edina, Minn. | Longo is an active board member for Moneyweave Academy, a nonprofit providing financial planning education to women with a focus on sound decision-making, purposeful action, and philanthropy. |
## Missouri
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Treyton DeVore](https://www.treyton.com/) | Co-Founder, AllStreet Wealth | Kansas City, Mo. | DeVore is recognized for his efforts to support self-employed individuals with accessible wealth management resources, including an online money management tool, free book (*Freelance Finances Made Simple*), and weekly newsletter for self-employed creatives. |
| [Jacob Turner](momentprivatewealth.com) | Founder & Partner, Moment Private Wealth | Saint Louis, Mo. | Turner is a former Major League Baseball player turned financial advisor who offers wealth management, business, and tax planning advice to professional athletes. |
| [Mike Zung](https://www.javawealth.com) | Principal, Java Wealth Planning | Lees Summit, Mo. | Zung hosts the Java Wealth YouTube channel, a content and live stream platform for tech professionals seeking equity compensation and wealth-building advice. |
## Montana
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Tim Bauer](https://www.evergreenfinancialgroup.org) | Founder & Financial Planner, Evergreen Financial Group | Billings, Mont. | Bauer is recognized for his community outreach efforts, including bi-weekly pro-bono financial education courses, high school seminars, and advocating with state senators for additional CFP education to better support consumers planning for retirement. |
## New Jersey
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Dr. Nicole B. Simpson](https://www.nicolebsimpson.com) | CEO, Harvest Wealth Financial | Piscataway, N.J. | Dr. Simpson is recognized for her programs hosted through the Dare 2 Dream Institute, including “You Are a Business” internship, “Financially Fit Bootcamp,” and “Wealth and Protection Masterclass for Entrepreneurs.” |
| [Andrew Wang](https://www.runnymede.com/blog) | Managing Partner, Runnymede Capital Management, Inc. | Morristown, N.J. | Wang hosts the “Inspired Money Podcast,” which explores positive money stories from people of all backgrounds to encourage a positive outlook on money and goal setting. |
## New York
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Michelle Arpin Begina](https://michelleab.com/) | Senior Partner & Financial Advisor, Snowden Lane Partners | New York, N.Y. | In addition to disseminating financial education through the TEDx network, Begina has successfully lobbied for financial psychology education with the New Jersey Department of Education. |
| [Lazetta Braxton](https://www.lazetta.com/) | Founder & CEO, Lazetta & Associates | New York, N.Y. | Braxton is recognized for her consistent efforts to make the financial services industry inclusive and increase DEI initiatives, whether that’s through her firm Lazetta & Associates or through her various media appearances. |
| [Gideon Drucker](https://druckerwealth.com/) | Managing Partner Drucker Wealth, New York, N.Y. | Drucker hosts free webinars twice per month that have reached more than 9,000 people to date, has a bi-weekly blog, and contributes to financial newsletters regularly. |
| [Liz Frazier Peck](https://lizfrazier.com) | Financial Planner & Author, Frazier Financial Consultants | Katonah, N.Y. | Peck is recognized for her dedication to children’s financial literacy, namely her book *Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance*, a step-by-step guide for parents to teach young children the fundamentals of finance. |
| [Amy Irvine](https://www.rootedpg.com/blogs) | Founder and CEO, Rooted Planning Group | Corning, N.Y. | Irvine hosts the “Wine and Dime” podcast where she and her guests break down economic headlines, simplify wealth transfer tips, and explore tax planning information. |
| [Veronica Karas](http://www.veronicakaras.com) | Senior Financial Advisor, Captrust | Lake Success, N.Y. | Karas is the author of the Money Matters book series and volunteers for the Captrust Community Foundation national financial literacy program, which brings 30-60-minute money management lessons to high school teens. |
| [Tiffany Soricelli](https://www.virtuosoassetmanagement.com) | Principal & CEO, Virtuoso Asset Management LLC | Burnt Hills, N.Y. | Soricelli is recognized in part for the financial literacy seminars her firm hosts for artists and musicians. |
| [Lawrence Sprung](https://www.mitlinfinancial.com) | Founder & Wealth Advisor, Mitlin Financial Inc | Hauppauge, N.Y. | Sprung hosts the Mitlin Money Mindset podcast, and is a frequent guest on Experian’s weekly X Credit Chats to help bring practical financial education to the masses. |
| [Sahil Vakil](https://blog.myrawealth.com/) | Founder, MyraWealth | New York, N.Y. | Vakil is recognized for founding MyraWealth and for his work through MYRA Cares, a nonprofit dedicated to providing financial literacy to immigrants. |
## North Carolina
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [George Acheampong](https://melaninmoney.com/) | CEO & Founder, Capitalwize, LLC | Charlotte, N.C. | Acheampong’s commitment to supporting Black wealth development shines with his organization Melanin Money, a financial social network committed to making education more accessible, and its programs, including the Melanin Money Awards, Black Wealth Friday, and Melanin Millionaires Social Club. |
| [Emily Casey Rassam](https://archerim.com/) | Partner & Senior Financial Planner, Archer Investment Management | Charlotte, N.C. | Rassam offers free, quarterly Zoom sessions on financial education for women in her community and visits women’s shelters to offer pro-bono financial counseling. |
## North Dakota
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Benjamin Brandt](http://www.caserta-dejongh.com) | President & Founder, Capital City Wealth Management | Bismarck, N.D. | Brandt is recognized for his all-in approach to retirement planning education, from his “Retirement Starts Today” podcast to his Retirement Income University web program. |
| [Paul Meyers](https://legacywealthfargo.com) | LPL Financial Advisor, Legacy Wealth Management | Fargo, N.D. | In addition to hosting live segments on ABC in North Dakota and leading financial education lessons on his Youtube channel, Meyers hosts free, regularly scheduled financial education seminars for the local community. |
## Oklahoma
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Autumn K. Campbell](https://styledwealth.com/) | Founder, Lead Planner, Styled Wealth | Tulsa, Okla. | Campbell has donated her time to more than 150 clients through her firm, plus she provides education to Teach For America and Pro Bono Financial Planning. |
## Pennsylvania
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Ryan Greiser](http://www.opulus.us) | Co-Founder & Financial Advisor, Opulus LLC | Doylestown, Pa. | Besides offering Master Your Money courses through his firm, Greiser volunteers at community high schools to share financial education resources and advice with young adults. |
| [Francis Walsh](http://www.opulus.us/) | Owner & Co-Founder Opulus LLC | Doylestown, Pa. | Walsh is recognized in part for his work on the Opulus podcast “Inside the Path to Success,” which supplies financial news to entrepreneurs and investors looking for advice for their own journeys. |
## Tennessee
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Jonathan Bednar](https://www.whatthewealth.com) | Certified Financial Planner Paradigm Wealth Partners | Knoxville, Tenn. | Bednar runs the blog and podcast, "What the Wealth?!," where he shares simple, bite-sized financial tips to empower people to take control of their finances. (His first book shares the same title.) |
| [Justin Goodbread](https://financiallysimple.com/) | President, WealthSource Partners, LLC | Knoxville, Tenn. | Goodbread is recognized for his ability to share complex financial concepts in simple terms, which he frequently does as an expert source for national media outlets such as CNBC. |
| [Brenton Harrison](https://www.newmoneynewproblems.com/) | Founder and Financial Advisor, New Money, New Problems | Nashville, Tenn. | Harrison is a volunteer educator for Super Money Kids POWER Youth initiative, a summer program held by the city of Nashville to provide summer internships and jobs to local high school students, and plans the annual Riverside Chapel Financial Literacy Symposium for North Nashville residents seeking credit, debt, and tax filing assistance. |
## Texas
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Josh Bannerman](https://bannermanwealth.com/) | Founder, Bannerman Wealth | Lewisville, Texas | Bannerman published 150 “Stacking Benjamins” financial planning podcast episodes last year, which reached more than 1.2 million unique listeners. |
| [Cody Garrett](https://measuretwicemoney.com/) | Financial Planner & Owner, Measure Twice Financial | Houston, Texas | Garrett is recognized in part for his multi-platform education approach to supporting DIY investors on their path to building goals- and values-based financial freedom. |
| [Yohance Harrison](https://moneyscriptwealth.com) | Founder & Behavioral Financial Advisor, Money Script Wealth Management, PLLC | Cedar Hill, Texas | Harrison is honored in part for his financial education coursework developed for teens through The Royalty Project, an enrichment program for Black youth. |
| [Dominique Henderson](https://domhendersonsr.com/) | Founder, DJH Capital Management | Dallas, Texas | Henderson is honored for his efforts to deliver actionable financial advice through his podcast "Conversations for Financial Professionals" and Youtube channel Jumpstart YOUniversity, both of which are dedicated to those looking to pursue a career in financial services. |
| [Taylor Kovar](https://www.themoneycouple.com) | Founder & CEO, Kovar Wealth Management | Lufkin, Texas | Kovar is one-half of The Money Couple and dedicated to helping unite couples over their finances with creative tools, including conversation cards and a money personality quiz. |
| [Hannah Moore](https://guidingwealth.com/) | Owner & Financial Planner, Amplified Planning & Guiding Wealth | Richardson, Texas | Moore has created several free resources to help individuals manage their money, including the “Everyday Money Workbook” and “Budgeting Blocks,” a hands-on way to visualize income and expenses without using a spreadsheet. |
| [Troy Sharpe](https://oakharvestfg.com) | CEO, Oak Harvest Investment Services | Houston, Texas | Sharpe’s YouTube channel, which focuses on comprehensive retirement and tax planning education, has garnered over 8 million views since its inception in 2019. |
## Virgina
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Jason Howell](https://www.jasonhowell.com/) | Family Wealth Advisor, Jason Howell Company | Fairfax, Va. | Howell serves as an adjunct professor at George Mason University and American University and hosts a monthly podcast, “Joy of Financial Planning,” to further educate the other first generation personal wealth managers seeking guidance they did not get growing up. |
| [Tremaine Wills](https://www.mindovermoney.net) | Financial Planner, Mind Over Money | Newport News, Va. | Wills reaches more than 40,000 consumers on her social media platforms, where she hosts free, money-focused community classes for her followers. |
## Washington
| *Name* | *Title* | *Standout Achievements* |
| --- | --- | --- |
| [Danika Waddell](https://xenafp.com/) | President & Founder, Xena Financial Planning | Seattle, Wash. | Waddell is being honored in part for her work to increase diversity, equity, and inclusion within the financial services industry, namely as a board member of the NAPFA West Region. |
## Methodology
The annual Investopedia 100 list honors independent U.S.-based financial advisors who have demonstrated top-of-the-industry skills in the following critical areas:
* **Reach**: defined as the domain authority of their personal blog or website, followers across socials (LinkedIn, X, TikTok, Instagram, and YouTube), and podcasts (including appearances or ownership of a personal podcast).
* **Commitment to financial literacy:** measured by the advisor’s participation in workshops, programs, nonprofits or collaboration with others in the community to spread financial education to those who need it most, as well as the creation of accessible content.
* **Community support:** measured through peer nominations by industry professionals outside of their own firms, as well as the advisor’s presence and engagement with others in the financial planning industry.
Each advisor CRD number was checked for validity, and each application was checked for accuracy and quality. Final scores were tabulated according to weights designated for each of the criteria above. Investopedia receives no compensation from placing advisors on our list, nor does an advisor's appearance on our list constitute an individual endorsement by Investopedia of such advisor.
|
Investopedia / Alice Morgan
The Investopedia 100 celebrates independent financial advisors who are making significant contributions to critical conversations about financial literacy, investing strategies, life-stage planning and wealth management. With more than 100,000 independent financial advisors in the U.S., the Investopedia 100 spotlights the country’s most engaged, influential, and educational advisors.
This year’s list highlights advisors who provide unique value to communities across the board, from those who represent clients in various industries—from music to dentistry—advisors who offer pro bono financial planning tips for women, to those who volunteer to educate students within their own community. It's an honor to get to highlight the work these individuals do.
Read on to learn about the 2023 class of the Investopedia 100 Top Financial Advisors. (The Top 10 are named in order, while the remaining 90 are categorized in alphabetical order by last name within each advisor's designated state.)
The Top 10 Advisors
Investopedia / Alice Morgan
1. Michael KitcesHead of Planning Strategy, Buckingham Strategic Wealth | Reston, VAFor more than two decades, Kitces has been a financial advisor and educator who helps clients and readers at all stages of life. Prior to joining Buckingham Wealth Partners, Michael founded XY Planning Network to serve 'next generation' clients who seek financial advice but don't have the assets to be served by more traditional financial advisors. XY Planning Network now has 1,700 advisors who work with underserved consumer segments.
2. Marguerita ChengFounder & CEO, Blue Ocean Global Wealth | Gaithersburg, MDCheng educates the public, policy makers, and media about the benefits of competent, ethical financial planning as a Certified Financial Planner Board of Standards Ambassador. Cheng volunteers her time through the FPA Pro Bono Program and the Foundation for Financial Planning and is a former spokesperson for the AARP Financial Freedom Campaign with a focus on serving the AANHPI community. Her firm Blue Ocean Global Wealth works with the BLX Internship program which places Black and Latino individuals at fee-only financial planning firms to obtain their first job in the financial planning profession.
3. Rebecca WalserPrincipal, Walser Wealth Management | Tampa, FLWalser is a wealth advisor and tax mitigation attorney who reaches consumers across multiple platforms and mediums including her podcast “Crashes and Taxes,” which breaks down micro- and macro-economic trends to help people better understand their finances and preserve wealth. She also wrote an Amazon best-selling personal finance education book: Wealth Unbroken: Growing Wealth Uninterrupted by Market Crashes, Taxes, and Even Death.
4. Peter LazaroffChief Investment Officer, Plancorp | St. Louis, MO When he started his career, Lazaroff created a newsletter to teach people about investing and financial planning in easy-to-understand language, which now reaches more than 10,000 subscribers. In addition to his podcast "The Long-Term Investor," Lazaroff works with Rooted, a local St. Louis initiative, to develop financial planning curriculum and financial advisor support for 50 households in his community.
5. Jamie HopkinsManaging Partner, Wealth Solutions, Carson Group | Omaha, NEHopkins founded the nonprofit FinServ Foundation, which supports the next generation of financial professionals through coaching and mentorship. At the end of 2022, Hopkins and his team at the Carson Group also created the Youtube series, "The Financial Advisor’s Guide to the SECURE 2.0 Act" to break down each major provision of the SECURE 2.0 Act and highlight important planning points for financial advisors to understand.
6. Douglas BoneparthPresident, Bone Fide Wealth, LLC | New York, NYFor over a decade, Boneparth has been educating young adults to help them meet their financial goals, and leverages YouTube, social media channels, and his newsletter “This is the Top” to keep the education accessible for all. He also offers weekly, live pre-market commentary on Public.com and co-authored a book The Millennial Money Fix.
7. Dr. Preston D. CherryFounder & President, Concurrent Financial | Green Bay, WICherry is the founder and director of the Charles Schwab Foundation Center for Financial Wellness at the University of Wisconsin, Green Bay where he provides financial literacy services to college students, community residences, and organizations through peer coaching, a podcast, and one-on-one pro bono planning. Cherry also leads the financial planning program at the University of Wisconsin, Green Bay, and publishes scholarly research about personal financial planning, household economics, and behavioral finance.
8. Stephanie McCulloughFounder & Financial Planner, Sofia Financial | Berwyn, PAMcCullough founded Sofia Financial, an independent business that aims to empower women to make wise financial decisions and reduce their money stress. She also hosts a podcast called “Take Back Retirement” where she has conversations with women who have gone through a financial situation and a subject-matter experts to provide information and motivation to help others gain financial control. McCullough also offers free financial literacy classes through Wayne, Pennsylvania-based nonprofit Women's Resource Center.
9. Mary Beth StorjohannCo-CEO, Abacus Wealth Partners | Santa Monica, CAStorjohann founded the website and podcast Workable Wealth, which offers education and empowerment to those in their 20s through 40s. She serves as a mentor and career coach to other women in the industry to amplify their voices and brands, and helps lead Abacus's pro bono financial services program. Her book, Work Your Wealth: 9 Steps to Making Smarter Choices With Your Money, breaks down jargon and complex financial topics for consumers.
10. Elaine KingFounder, Family and Money Matters Institute | Miami, FLKing is an award-winning author dedicated to elevating the available financial literacy resources for the U.S. Hispanic population. She produces content in Spanish across her social media platforms, hosts a monthly segment on Telemundo, and runs three Spanish-language online financial education courses, which currently have more than 18,000 students enrolled. King is also an external director for accounting firm Shechter & Everett, LLP, where she works with women before, during, and after marital separation to help them gain financial independence.
Tip
For additional content that highlights more of the amazing work our winners are doing in their own communities and beyond, check out the Finding a Financial Advisor content hub, here.
Alabama
Name
Title
Standout Achievements
Valerie R. Leonard
CEO & Financial Advisor, EverThrive Financial Group | Birmingham, Ala.
In addition to working with her clients to further their retirement and wealth-building plans, Leonard educates over 7,000 U.S. workers via in-person group meetings, videos, and virtual courses on her social platforms.
Arizona
Name
Title
Standout Achievements
Adam Dekker
Chief Executive & Lead Advisor, Dekker Financial Services | Chandler, Ariz.
Dekker is recognized for his passionate embrace of technology’s impact on the financial services industry, which has helped propel Dekker Financial forward.
George Grombacher
President, Financial Consulting | Scottsdale, Ariz.
Besides being a published author of two financial education books, Grombacher is the founder of financial wellness platform Money Alignment Academy.
California
Name
Title
Standout Achievements
David Bahnsen
Founder & Managing Partner & CIO, The Bahnsen Group | Newport Beach, Calif.
Bahnsen regularly publishes financial education lessons on Youtube, and more recently launched economics courses for purchase, too.
Louis Barajas
CEO & Senior Wealth Manager, International Private Wealth Advisors | Irvine, Calif.
Barajas is recognized for increasing financial education among Latino individuals, both in his client work at International Private Wealth Advisors and through his multiple published books, television appearances, and position as the first Latino on the Financial Planning Association’s National Board of Directors.
Stephanie Bucko
Chief Investment Officer, Mana Financial Life Design | Los Angeles, Calif.
Bucko is active in the advisor-focused community, XY Planning Network, and participates in a bi-weekly study group called growth-minded advisors.
Cathy Curtis
Founder, Curtis Financial Planning, LLC | Oakland, Calif.
In addition to leading Curtis Financial Planning, Cathy Curtis regularly consults with and coaches female advisors on how to build an independent RIA practice and have a balanced life.
Kimberly Foss
President & Founder, Empyrion Wealth Management Inc. | Roseville, Calif.
Kimberly Foss is recognized for her individualized strategy with her clients, which include affluent family stewards, women in transition, and thriving retirees.
Hilary Hendershott
President & Chief Advisor, Hendershott Wealth Management | San Jose, Calif.
Hilary Hendershott is recognized for her dedication to educating women on financial topics through her podcast for female entrepreneurs, Profit Boss Radio, her guest appearances in the media, and the webpage resource tool she created for working moms looking to improve their financial life.
William Huston
Founder & CIO, Bay Street Capital Holdings | Palo Alto, Calif.
William Huston leads Bay Street Capital Holdings, one of the top 10 largest Black-owned and diverse-led RIAs in the U.S., where he consistently promotes and advocates for diverse and emerging investment advisors.
Cristina Livadary
CEO Mana Financial Life Design | Los Angeles, Calif.
Livadary not only leads her financial wellness–focused program, Mana Money School, she also provides financial education and empowerment to local charitable organizations and small businesses in order to improve financial confidence beyond her client base.
Joe McLean
Chief Growth & Innovation Officer, MAI Capital | San Ramon, Calif.
In addition to his work with MAI Capital and his frequent appearances on prominent networks, McLean is recognized for his mission to connect financial advisors with one another and invest together to effect positive change in society.
Emlen Miles-Mattingly
Founder and Financial Advisor, Gen Next Wealth | Madera, Calif.
Miles-Mattingly co-founded the BLX Internship program, which places Black and Latino individuals at fee-only financial planning firms, and is also the host of Minority Money podcast, where he discusses finance, family, and education, and how all of these things affect your overall wealth.
Colin Overweg
Founder, Advize Wealth Management | Los Angeles, Calif.
Overweg is recognized for his work to educate financial advisors, specifically those who are new to this industry, which he does by hosting six virtual events per year for new advisors to network and learn with well-known leaders in the space.
Luis Rosa
Founder, Build a Better Financial Future LLC | Los Angeles, Calif.
In addition to his podcast On My Way to Wealth and speaking at industry events, Rosa promotes financial literacy through public speaking engagements, such as the National Association of Hispanic Real Estate Professionals and the Los Angeles AARP.
Taylor Schulte
Founder & CEO, Define Financial | San Diego, Calif.
In addition to publishing consumer-facing educational content on his various platforms, Taylor Schulte co-hosts Kitces Summits, a twice-a-year learning event for practicing advisors.
Gabriel Shahin
Principal & CEO, Falcon Wealth Planning | Ontario, Calif.
Besides his work with Falcon Wealth Planning, Gabriel Shahin is the founder of the Financial Community Education Foundation, where he and his team teach financial literacy courses to the local community.
Jared Tanimoto
President, Ascent Wealth Advisors | Irvine, Calif.
Jared Tanimoto is an active member of the FPA of Orange County (and was formerly the youngest president of his chapter), where he hosts free financial education webinars on a regular basis.
Mike Troxell
Founder & Financial Planner Modern Financial Planning | Oakland, Calif.
Troxell is recognized for his efforts to educate younger clients, as well as his volunteer work, which in 2023 included bringing together a group of advisors to volunteer time to help those affected by layoffs.
Shawn Tydlaska
Founder and CEO, Ballast Point Financial Planning | Burlingame, Calif.
Shawn Tydlaska is recognized for co-founding the BLX Internship Program, which places Black and Latino individuals at fee-only financial planning firms to obtain their first job in the financial planning profession.
Dasarte Yarnway
Founder & CEO, Yarnway Wealth Management | Sacramento, Calif.
Dasarte Yarnway is recognized for co-founding the ONYX Network, a membership organization that brings minority advisors together to start, scale, and sustain their financial planning practices.
Colorado
Name
Title
Standout Achievements
Prince Dykes
Private Investment Advisor, Royal Financial Investment Group | Aurora, Colo.
Dykes is president of the Global Children Financial Literacy Foundation and recognized for co-founding Wesley Learns Book Club, a national financial literacy program that incentivizes young children to become the first stockholders in their families.
Nate Hoskin
Founder and Lead Advisor, Hoskin Capital | Denver, Colo.
Hoskin is dedicated to educating Gen Z about finances and investing, and has drawn more than 200,000 followers on TikTok, where he contextualizes market headlines and offers realistic advice for young adults.
Connecticut
Name
Title
Standout Achievements
Magdalena G. Johndrow
Financial Advisor & Managing Partner, Johndrow Wealth Management LLC | West Hartford & Westport, Conn.
Johndrow is recognized for her grassroots teaching efforts, hosting workshops at Albert Einstein's College of Medicine, Miss Porter’s School, and Providence College, and volunteering with the Connecticut Money School to reach children and families below the poverty line.
Tyler Olson
Financial Planner, Olson Consulting LLC | Manchester, Conn.
Olson provides free and low-cost financial education for medical students and physician trainees via Advice Residency, a quarterly seminar program he created.
District of Columbia
Name
Title
Standout Achievements
Kevin Mahoney
Founder & CEO, Illumint | District of Columbia
Mahoney is committed to helping other Millennial parents create a financial plan to pay for their children’s college, from navigating 529 plan options to applying for merit aid.
Florida
Name
Title
Standout Achievements
Cary Carbonaro
SVP & Director of Women and Wealth, Advisors Capital Management, LLC | Winter Garden, Fla.
Carbonaro has dedicated her career to helping women build financial independence through her professional role, her book The Money Queen’s Guide: For Women Who Want to Build Wealth and Banish Fear, and her nonprofit work, including the Women’s Giving Alliance.
Carolyn McClanahan
Founder, Life Planning Partners, Inc. | Jacksonville, Fla.
McClanahan is recognized for her financial planning work, which focuses on the intersection of health and personal finance, a topic she speaks about at various events for financial advisors.
Alonso Rodriguez Segarra
CEO & Founder, Advise Financial LLC | Plantation, Fla.
Segarra is recognized for his work to bring financial education to more individuals with free Spanish-language news and financial content on his firm's website and YouTube channel.
Reshell Smith
President and CEO, AMES Financial Solutions | Ocoee, Fla.
Smith is recognized for creating an online academy, She’s So Wealthy, to help create accessible education options for women and first-generation wealth builders.
Camille York Adrien
Financial Advisor, Clark and York Wealth Partners of Raymond James | Tampa, Fla.
In addition to her work with clients navigating major life changes and milestones, Adrien hosts and supports numerous wealth workshops and seminars each year, underscoring her commitment to bring women into the financial industry.
Georgia
Name
Title
Standout Achievements
Christopher Hoffman
Founder, Hoffman Financial Group | Multiple Offices in Ga.
Hoffman is a nationally recognized fiduciary advisor and as such, hosts weekly segments on radio and television for outlets like CBS46 & WSB-TV’s Good Morning America weekend edition.
Chloé Moore
Founder, Financial Staples | Atlanta, Ga.
Moore works not only with her own firm, but also as an active community speaker, visiting middle school classrooms to share financial and career advice and joining corporate and nonprofit seminars as an expert on financial wellness and retirement planning.
Sibyl Slade
Founder & President IntegriVest Wealth Advisors, LLC | Atlanta, Ga.
Slade is recognized for her efforts to connect Black families and entrepreneurs with financial therapy and money management workshops via organizations such as Innovative Science, Technology, Engineering and Mathematics Workforce Development Project, and the HBCU Community Development Action Coalition.
Martin A. Smith
President, Wealthcare Financial Group, Inc. | Peachtree City, Ga.
In addition to his work with Wealthcare Financial Group, Inc., Martin is recognized for launching a robo-advisor that serves undergraduates, graduate students, and alumni of Black colleges and universities in an effort to close the racial wealth gap.
Illinois
Name
Title
Standout Achievements
Eric Billimoria
Vice President , WealthCare Advisors | Schaumburg, Ill.
Billimoria advocates for financial literacy and planning policies with members of Congress, serves as a financial mentor for young adults through the Foundation of Financial Planning, and provides planning services to below-average-income individuals through the San Diego Financial LIteracy Center.
Valerie Rivera
Founder and Financial Planner, FirstGen Wealth | Chicago, Ill.
Rivera is recognized for her firm’s dedication to reaching first-generation wealth builders with inclusive, shame-free advice to help young adults build a strong, stable financial foundation.
Indiana
Name
Title
Standout Achievements
Josh Bennett
Managing Partner, Vincere Wealth Management | Indianapolis, Ind.
Bennett has created several online and social learning centers to help teach others about the basics of money and wealth management, paying for college, and filing taxes.
Justin Castelli
Founder & Financial Advisor, RLS Wealth | Fisher, Ind.
Justin Castelli is the co-founder of the Advisors Growing Community (AGC)—an online community and platform for financial advisors—as well as the curator of the book, More Than Money: Real Life Stories of Financial Planning.
Thomas Kopelman
Co-Founder & Lead Financial Planner, AllStreet Wealth | Indianapolis, Ind.
Kopelman is recognized for his consistent commitment to educating millennials via his weekly blog, “The Long Game” podcast, and on X (formerly Twitter) to his more than 16,000 followers.
Michael Reynolds
Principal, Elevation Financial LLC | Westfield, Ind.
Reynolds is recognized in part for his YouTube-based webinars that provide how-to information for investors as well as budgeting advice.
Iowa
Name
Title
Standout Achievements
Stoy Hall
Founder & CEO, Black Mammoth | Ankeny, Iowa
In addition to leading his firm, Hall hosts the Money Mindset Series, a video podcast series on his YouTube channel that breaks down the basics, emotional connections, and planning philosophies of building wealth.
Kansas
Name
Title
Standout Achievements
Peter Mallouk
CEO, Creative Planning | Overland Park, Kan.
Mallouk is recognized for his program, Started Pathway Financial, which educates adults, business owners, and high school students in his community.
Kentucky
Name
Title
Standout Achievements
Jordan Patrick
Financial Advisor, Commas | Lexington, Ky.
Patrick is dedicated to bringing his goal-focused, financial planning lessons into his community by hosting seminars for school district teachers and speaking with local child caregivers.
Maryland
Name
Title
Standout Achievements
Rianka Dorsainvil
Co-Founder & Co-CEO, 2050 Wealth Partners | Upper Marlboro, Md.
Dorsainvil is recognized for her commitment to sharing personal finance tips, tax information, investment news, and more in videos and blogs on Greenwood, a Black-owned digital platform created to help Black and Latino individuals build generational wealth.
Zaneilia Harris
President, Harris & Harris Wealth Management Group | Upper Marlboro, Md.
In addition to her numerous speaking engagements for financial advisors and college students, Harris wrote Finance ‘n Stilettos: Money Matters for the Well-Heeled Woman to bring her online advice to more women seeking financial confidence.
Brad Sherman
President, Sherman Wealth Management LLC | Gaithersburg, Md.
Sherman is honored in part for his work with high school students and young entrepreneurs via hosted financial literacy workshops.
Massachusetts
Name
Title
Standout Achievements
Sammy Azzouz
President & CEO, Heritage Financial Services, LLC | Westwood, Mass.
Author of the book Beyond The Basics, Maximizing, Allocating and Protecting Your Capital, Azzouz also created The Boston Advisor platform to distribute advice, reading lists, and financial wellness insights via blog posts and weekly newsletters to help investors build long-term wealth and make smart money decisions.
Kirk Chisholm
Wealth Manager, Innovative Advisory Group | Lexington, Mass.
In addition to his podcast, “Money Tree Investing,” where he offers advice for how to build a personalized investment strategy, Chisholm mentors fellow financial advisors.
Justin Green
Founder & Financial Planner Assist Financial Planning | Marlborough, Mass.
Green is dedicated to supporting online fitness coaches with his podcast “Dollars & Dumbbells,” which covers personal finance tips and business development strategies.
Michigan
Name
Title
Standout Achievements
Connor Bauserman
Financial Advisor, Preferred Financial Group | Battle Creek, Mich.
Bauserman is the host of Preferred Financial Group’s financial education podcast, The Wealthy HOMES.
Lynn Chen-Zhang
CEO, Chief Compliance Officer Zhang Financial | Portage, Mich.
Chen-Zhang established the Zhang Career Center at Western Michigan University to give students financial and career planning support and has developed a financial literacy seminar series for seniors in her community.
Sam Huszczo
Founder, SGH Wealth Management | Lathrup Village, Mich.
Huszczo is recognized for his work with Michigan universities to establish and award more than 25 annual Charter Financial Analyst (CFA) scholarships each year.
Melissa Joy
Founder, Pearl Planning | Dexter, Mich.
Joy is recognized for her effort to increase financial literacy for women through not only client work, but also by hosting the podcast “52 Pearls: Weekly Money Wisdom” and by volunteering her time to the Women’s Leadership Alliance mentorship program for female financial advisors.
Minnesota
Name
Title
Standout Achievements
Kathy Longo
President & Founder Flourish Wealth Management | Edina, Minn.
Longo is an active board member for Moneyweave Academy, a nonprofit providing financial planning education to women with a focus on sound decision-making, purposeful action, and philanthropy.
Missouri
Name
Title
Standout Achievements
Treyton DeVore
Co-Founder, AllStreet Wealth | Kansas City, Mo.
DeVore is recognized for his efforts to support self-employed individuals with accessible wealth management resources, including an online money management tool, free book (Freelance Finances Made Simple), and weekly newsletter for self-employed creatives.
Jacob Turner
Founder & Partner, Moment Private Wealth | Saint Louis, Mo.
Turner is a former Major League Baseball player turned financial advisor who offers wealth management, business, and tax planning advice to professional athletes.
Mike Zung
Principal, Java Wealth Planning | Lees Summit, Mo.
Zung hosts the Java Wealth YouTube channel, a content and live stream platform for tech professionals seeking equity compensation and wealth-building advice.
Montana
Name
Title
Standout Achievements
Tim Bauer
Founder & Financial Planner, Evergreen Financial Group | Billings, Mont.
Bauer is recognized for his community outreach efforts, including bi-weekly pro-bono financial education courses, high school seminars, and advocating with state senators for additional CFP education to better support consumers planning for retirement.
New Jersey
Name
Title
Standout Achievements
Dr. Nicole B. Simpson
CEO, Harvest Wealth Financial | Piscataway, N.J.
Dr. Simpson is recognized for her programs hosted through the Dare 2 Dream Institute, including “You Are a Business” internship, “Financially Fit Bootcamp,” and “Wealth and Protection Masterclass for Entrepreneurs.”
Andrew Wang
Managing Partner, Runnymede Capital Management, Inc. | Morristown, N.J.
Wang hosts the “Inspired Money Podcast,” which explores positive money stories from people of all backgrounds to encourage a positive outlook on money and goal setting.
New York
Name
Title
Standout Achievements
Michelle Arpin Begina
Senior Partner & Financial Advisor, Snowden Lane Partners | New York, N.Y.
In addition to disseminating financial education through the TEDx network, Begina has successfully lobbied for financial psychology education with the New Jersey Department of Education.
Lazetta Braxton
Founder & CEO, Lazetta & Associates | New York, N.Y.
Braxton is recognized for her consistent efforts to make the financial services industry inclusive and increase DEI initiatives, whether that’s through her firm Lazetta & Associates or through her various media appearances.
Gideon Drucker
Managing Partner Drucker Wealth, New York, N.Y.
Drucker hosts free webinars twice per month that have reached more than 9,000 people to date, has a bi-weekly blog, and contributes to financial newsletters regularly.
Liz Frazier Peck
Financial Planner & Author, Frazier Financial Consultants | Katonah, N.Y.
Peck is recognized for her dedication to children’s financial literacy, namely her book Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance, a step-by-step guide for parents to teach young children the fundamentals of finance.
Amy Irvine
Founder and CEO, Rooted Planning Group | Corning, N.Y.
Irvine hosts the “Wine and Dime” podcast where she and her guests break down economic headlines, simplify wealth transfer tips, and explore tax planning information.
Veronica Karas
Senior Financial Advisor, Captrust | Lake Success, N.Y.
Karas is the author of the Money Matters book series and volunteers for the Captrust Community Foundation national financial literacy program, which brings 30-60-minute money management lessons to high school teens.
Tiffany Soricelli
Principal & CEO, Virtuoso Asset Management LLC | Burnt Hills, N.Y.
Soricelli is recognized in part for the financial literacy seminars her firm hosts for artists and musicians.
Lawrence Sprung
Founder & Wealth Advisor, Mitlin Financial Inc | Hauppauge, N.Y.
Sprung hosts the Mitlin Money Mindset podcast, and is a frequent guest on Experian’s weekly X Credit Chats to help bring practical financial education to the masses.
Sahil Vakil
Founder, MyraWealth | New York, N.Y.
Vakil is recognized for founding MyraWealth and for his work through MYRA Cares, a nonprofit dedicated to providing financial literacy to immigrants.
North Carolina
Name
Title
Standout Achievements
George Acheampong
CEO & Founder, Capitalwize, LLC | Charlotte, N.C.
Acheampong’s commitment to supporting Black wealth development shines with his organization Melanin Money, a financial social network committed to making education more accessible, and its programs, including the Melanin Money Awards, Black Wealth Friday, and Melanin Millionaires Social Club.
Emily Casey Rassam
Partner & Senior Financial Planner, Archer Investment Management | Charlotte, N.C.
Rassam offers free, quarterly Zoom sessions on financial education for women in her community and visits women’s shelters to offer pro-bono financial counseling.
North Dakota
Name
Title
Standout Achievements
Benjamin Brandt
President & Founder, Capital City Wealth Management | Bismarck, N.D.
Brandt is recognized for his all-in approach to retirement planning education, from his “Retirement Starts Today” podcast to his Retirement Income University web program.
Paul Meyers
LPL Financial Advisor, Legacy Wealth Management | Fargo, N.D.
In addition to hosting live segments on ABC in North Dakota and leading financial education lessons on his Youtube channel, Meyers hosts free, regularly scheduled financial education seminars for the local community.
Oklahoma
Name
Title
Standout Achievements
Autumn K. Campbell
Founder, Lead Planner, Styled Wealth | Tulsa, Okla.
Campbell has donated her time to more than 150 clients through her firm, plus she provides education to Teach For America and Pro Bono Financial Planning.
Pennsylvania
Name
Title
Standout Achievements
Ryan Greiser
Co-Founder & Financial Advisor, Opulus LLC | Doylestown, Pa.
Besides offering Master Your Money courses through his firm, Greiser volunteers at community high schools to share financial education resources and advice with young adults.
Francis Walsh
Owner & Co-Founder Opulus LLC | Doylestown, Pa.
Walsh is recognized in part for his work on the Opulus podcast “Inside the Path to Success,” which supplies financial news to entrepreneurs and investors looking for advice for their own journeys.
Tennessee
Name
Title
Standout Achievements
Jonathan Bednar
Certified Financial Planner Paradigm Wealth Partners | Knoxville, Tenn.
Bednar runs the blog and podcast, "What the Wealth?!," where he shares simple, bite-sized financial tips to empower people to take control of their finances. (His first book shares the same title.)
Justin Goodbread
President, WealthSource Partners, LLC | Knoxville, Tenn.
Goodbread is recognized for his ability to share complex financial concepts in simple terms, which he frequently does as an expert source for national media outlets such as CNBC.
Brenton Harrison
Founder and Financial Advisor, New Money, New Problems | Nashville, Tenn.
Harrison is a volunteer educator for Super Money Kids POWER Youth initiative, a summer program held by the city of Nashville to provide summer internships and jobs to local high school students, and plans the annual Riverside Chapel Financial Literacy Symposium for North Nashville residents seeking credit, debt, and tax filing assistance.
Texas
Name
Title
Standout Achievements
Josh Bannerman
Founder, Bannerman Wealth | Lewisville, Texas
Bannerman published 150 “Stacking Benjamins” financial planning podcast episodes last year, which reached more than 1.2 million unique listeners.
Cody Garrett
Financial Planner & Owner, Measure Twice Financial | Houston, Texas
Garrett is recognized in part for his multi-platform education approach to supporting DIY investors on their path to building goals- and values-based financial freedom.
Yohance Harrison
Founder & Behavioral Financial Advisor, Money Script Wealth Management, PLLC | Cedar Hill, Texas
Harrison is honored in part for his financial education coursework developed for teens through The Royalty Project, an enrichment program for Black youth.
Dominique Henderson
Founder, DJH Capital Management | Dallas, Texas
Henderson is honored for his efforts to deliver actionable financial advice through his podcast "Conversations for Financial Professionals" and Youtube channel Jumpstart YOUniversity, both of which are dedicated to those looking to pursue a career in financial services.
Taylor Kovar
Founder & CEO, Kovar Wealth Management | Lufkin, Texas
Kovar is one-half of The Money Couple and dedicated to helping unite couples over their finances with creative tools, including conversation cards and a money personality quiz.
Hannah Moore
Owner & Financial Planner, Amplified Planning & Guiding Wealth | Richardson, Texas
Moore has created several free resources to help individuals manage their money, including the “Everyday Money Workbook” and “Budgeting Blocks,” a hands-on way to visualize income and expenses without using a spreadsheet.
Troy Sharpe
CEO, Oak Harvest Investment Services | Houston, Texas
Sharpe’s YouTube channel, which focuses on comprehensive retirement and tax planning education, has garnered over 8 million views since its inception in 2019.
Virgina
Name
Title
Standout Achievements
Jason Howell
Family Wealth Advisor, Jason Howell Company | Fairfax, Va.
Howell serves as an adjunct professor at George Mason University and American University and hosts a monthly podcast, “Joy of Financial Planning,” to further educate the other first generation personal wealth managers seeking guidance they did not get growing up.
Tremaine Wills
Financial Planner, Mind Over Money | Newport News, Va.
Wills reaches more than 40,000 consumers on her social media platforms, where she hosts free, money-focused community classes for her followers.
Washington
Name
Title
Standout Achievements
Danika Waddell
President & Founder, Xena Financial Planning | Seattle, Wash.
Waddell is being honored in part for her work to increase diversity, equity, and inclusion within the financial services industry, namely as a board member of the NAPFA West Region.
Methodology
The annual Investopedia 100 list honors independent U.S.-based financial advisors who have demonstrated top-of-the-industry skills in the following critical areas:
Reach: defined as the domain authority of their personal blog or website, followers across socials (LinkedIn, X, TikTok, Instagram, and YouTube), and podcasts (including appearances or ownership of a personal podcast).Commitment to financial literacy: measured by the advisor’s participation in workshops, programs, nonprofits or collaboration with others in the community to spread financial education to those who need it most, as well as the creation of accessible content. Community support: measured through peer nominations by industry professionals outside of their own firms, as well as the advisor’s presence and engagement with others in the financial planning industry.
Each advisor CRD number was checked for validity, and each application was checked for accuracy and quality. Final scores were tabulated according to weights designated for each of the criteria above. Investopedia receives no compensation from placing advisors on our list, nor does an advisor's appearance on our list constitute an individual endorsement by Investopedia of such advisor.
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https://www.investopedia.com/top-10-asian-american-owned-banks-5079644 | Top 10 Asian American-Owned Banks | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Of all the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/minority-deposit-institution-mdi-definition-5072268">minority depository institutions (MDIs)</a> in the United States, the largest single group is composed of the 71 Asian or Pacific Islander American-owned banks. Collectively, these commercial banks and savings institutions amount to almost as many as all the other MDIs combined.<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"> The size and success of these banks say a lot about the growth of the Asian American community. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/legendary-asian-american-ceos-5225253">Asian Americans</a> are the fastest-growing racial group in the U.S. and are expected to be the largest immigrant group in 50 years' time.<span class="ql-inline-citation" data-cite="80"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The nation's 71 Asian or Pacific Islander American-owned banks are the largest single group of minority depository institutions (MDIs) by race.</li><li>Fifty-one percent of the voting stock of six of the top 10 banks is owned by Asian and/or Pacific Islander American individuals.</li><li>Four of the largest banks have a majority of Asian and/or Pacific Islander American directors on their boards and serve communities that are predominantly Asian and/or Pacific Islander American.</li><li>For the 73 banks as a whole, the division is similar but more extreme: 61 in the majority-voting-stock group and the rest in the majority-of-directors group.</li><li>East West Bank is the largest Asian American–owned bank in the U.S., with $60.8 billion in total assets.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-a-minority-depository-institution"></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 Minority Depository Institution? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> As of the fourth quarter of 2023, there were 4,587 commercial banks and savings institutions insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a> in the United States.<span class="ql-inline-citation" data-cite="103"></span> For the FDIC to classify one of them as an MDI, it must be "...a federal insured depository institution for which (1) 51% or more of the voting stock is owned by minority individuals; or (2) a majority of the board of directors is a minority and the community that the institution serves is predominantly <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/hispanic-american-owned-banks-by-state-5094619">minority</a>. Ownership must be by U.S. citizens or permanent legal U.S. residents to be counted in determining minority ownership." In 2021, the Fed expanded this definition to include <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/women-owned-banks-by-state-5115603">women-owned financial institutions</a>.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="101"></span><span class="ql-inline-citation" data-cite="83"></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"> Of the 71 Asian or Pacific Islander American-owned banks, 59 fall into the first category and the rest into the second. Among the top 10 banks, six are category one institutions; Bank of Hope, Hanmi Bank, CTBC Bank Corp. (USA), and Royal Business Bank are category two.<span class="ql-inline-citation" data-cite="1"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For the purposes of this article—due to the already significant number of active banks—Asian American–owned and –managed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit unions</a> that serve the community have been excluded. Our list focuses on the 10 most successful Asian American–owned banks currently operating. The article uses the term "Asian American–owned" in a broad sense, recognizing that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp">stockholders</a> own for-profit banks.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_14-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/RA1mQ/4/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Asian American–Owned Banks by State"></iframe></div>
<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-why-asian-american-owned-banks-are-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 Asian American-Owned Banks Are Important </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Banks play a crucial role in most people's financial lives. They offer checking and savings accounts for safely storing money, loans for both individual and business purposes, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-guide/how-to-choose-best-mortgage/">mortgages</a> for real estate purchases, and credit cards. In short, banks provide essential tools for pursuing a career or just being able to function.
</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"> As already noted, Asian Americans are the fastest-growing racial group. Financial institutions that work with, are operated by, and understand the unique economic situations of both native and foreign-born Asian Americans will naturally grow with them.<span class="ql-inline-citation" data-cite="80"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The Asian American population is diverse, with a range of personal and business needs. Asian workers have a higher weekly median income than White, Black, and Latin individuals, according to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bls.asp">Bureau of Labor Statistics</a> data for Q1 of 2024.<span class="ql-inline-citation" data-cite="75"></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"> But at the same time, income inequality is actually greatest among Asian American groups. According to the Pew Research Center, while income increased the most for higher-income Asian Americans between 1970 and 2016, it also increased the least for lower-income Asian Americans. All this provides a wide range of opportunities to serve banking requirements across the economic spectrum.<span class="ql-inline-citation" data-cite="77"></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"> Below is our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-research-data-hub-5192040">analysis</a> of the banks that are doing the best.
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<span class="heading-toc" id="toc-top-10-asian-americanowned-banks"></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"> Top 10 Asian American–Owned Banks </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The top 10 Asian American–owned banks serve a variety of regions, many overlapping in their areas of service. The list below is organized according to total assets.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_30-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/z0jMY/6/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Top 10 Asian American–Owned Banks by State "></iframe></div>
<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"> 1. East West Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> East West Bancorp is the publicly traded holding company of East West Bank, which is one of the biggest independent financial institutions based in Southern California. Founded in 1973, East West Bank was the first federally chartered savings institution to meet the financial needs of Chinese Americans in Los Angeles.<span class="ql-inline-citation" data-cite="57"></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"> In addition to having several branches throughout the United States, East West Bank also operates in Beijing, Chongqing, Guangzhou, Hong Kong, Shanghai, Shantou, Shenzhen, and Xiamen. Since its inception, East West Bank has established partnerships with multiple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/non-profitorganization.asp">nonprofit</a> and community-based organizations in order to better aid underserved local communities.<span class="ql-inline-citation" data-cite="57"></span><span class="ql-inline-citation" data-cite="58"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <li><strong>Branches: </strong>Over<strong> </strong>120 locations worldwide<span class="ql-inline-citation" data-cite="57"></span></li><li><strong>ATMs: </strong>Any ATMs in the East West Bank, Allpoint, and MoneyPass networks<span class="ql-inline-citation" data-cite="5"></span></li><li><strong>States: </strong>California, Georgia, Massachusetts, Nevada, New York, Texas, and Washington<span class="ql-inline-citation" data-cite="57"></span></li><li><strong>Services: </strong>Personal (checking, savings, etc.), business (collections and deposits, SBA loans, etc.), commercial (loans and lines of credit, commercial real estate, and industry expertise), and international banking (personal international banking, business international trade, and business international banking), in addition to wealth management services (investment services, future planning, and business planning)<span class="ql-inline-citation" data-cite="10"></span></li><li><strong>Assets: </strong>$69.5 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> 2. Cathay Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Originally formed in 1962, Cathay Bank is the oldest operating U.S. bank founded by Chinese Americans. A subsidiary of Cathay General Bancorp, Cathay Bank first stepped outside of California with a representative office in Hong Kong in 1985 (which later became a branch) and a New York branch in 1999. Cathay Bank has since further expanded to seven other states as well as Beijing, Shanghai, and Taipei.<span class="ql-inline-citation" data-cite="89"></span>
</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"> Cathay Bank has been named one of the top 20 "Best Banks in America" by <em>Forbes </em>since 2016, was among the 100 biggest financial companies listed on the Nasdaq (based on market capitalization) in 2000, and the Cathay Bank Annual Charity Golf Tournament has raised over $1.7 million for nonprofits in Southern California since 1977.<span class="ql-inline-citation" data-cite="89"></span><span class="ql-inline-citation" data-cite="61"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> <li><strong>Branches: </strong>Over<strong> </strong>60 locations worldwide<span class="ql-inline-citation" data-cite="59"></span></li><li><strong>ATMs: </strong>53 ATMs, in addition to any ATMs in the PULSE Select and MoneyPass networks<span class="ql-inline-citation" data-cite="12"></span></li><li><strong>States: </strong>California, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New York, Texas, and Washington<span class="ql-inline-citation" data-cite="12"></span></li><li><strong>Services: </strong>Personal (checking, savings, etc.), business (lending, credit cards, etc.), and international banking (foreign exchange services, foreign exchange market update, etc.), in addition to wealth management services (insurance, annuities, etc.)<span class="ql-inline-citation" data-cite="13"></span> <span class="ql-inline-citation" data-cite="14"></span> <span class="ql-inline-citation" data-cite="15"></span> <span class="ql-inline-citation" data-cite="16"></span></li><li><strong>Assets: </strong>$23.1 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> 3. Bank of Hope </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> A subsidiary of Hope Bancorp, Bank of Hope is both the first and currently the only super-regional Korean American bank in the U.S. Bank of Hope was originally founded in Los Angeles, enabling it to provide financial services to the largest Korean American community in the nation. Additionally, Bank of Hope has distributed millions of dollars to students through its Hope Scholarship Foundation.<span class="ql-inline-citation" data-cite="18"></span><span class="ql-inline-citation" data-cite="63"></span>
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> <li><strong>Branches: </strong>54 full-service branches.<span class="ql-inline-citation" data-cite="104"></span><span class="ql-inline-citation" data-cite="62"></span></li><li><strong>ATMs: </strong>Any ATMs in the Bank of Hope, MoneyPass, and Allpoint networks<span class="ql-inline-citation" data-cite="19"></span></li><li><strong>States: </strong>Alabama, California, Georgia, Illinois, New Jersey, New York, Oregon, Texas, Virginia, and Washington<span class="ql-inline-citation" data-cite="18"></span></li><li><strong>Services: </strong>Personal (checking, savings and money market accounts, etc.) and business banking (certificates of deposits, business lending, etc.), in addition to wealth management services (financial planning, retirement planning, etc.)<span class="ql-inline-citation" data-cite="21"></span> <span class="ql-inline-citation" data-cite="22"></span> <span class="ql-inline-citation" data-cite="23"></span></li><li><strong>Assets: </strong>$19.1 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-subheading__text"> 4. Hanmi Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Formed in Los Angeles in 1982, granting it the distinction of being the first Korean American bank, Hanmi Bank was founded to help Koreatown's underserved <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/banking-rights-for-immigrants-5218043">immigrant community</a>. Hanmi Bank offers a first-of-its-kind <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corp-social-responsibility.asp">corporate social responsibility</a> (CSR) program for its employees, known as the Hanmi Neighbor Volunteer Service Program, which is driven by individual work participation instead of corporate-organized events. Additionally, the bank's Hanmi Dream Scholarship for At-Risk Youth Program offers educational support to students; primarily foster children and those from homes affected by domestic violence (though it is available for other at-risk youths, as well).<span class="ql-inline-citation" data-cite="64"></span><span class="ql-inline-citation" data-cite="65"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> <li><strong>Branches: </strong>35 branches and nine loan production offices across the U.S.<span class="ql-inline-citation" data-cite="64"></span><span class="ql-inline-citation" data-cite="24"></span></li><li><strong>ATMs: </strong>Any ATM in the MoneyPass network<span class="ql-inline-citation" data-cite="24"></span></li><li><strong>States: </strong>California, Colorado, Georgia, Illinois, New Jersey, New York, Texas, and Virginia<span class="ql-inline-citation" data-cite="24"></span></li><li><strong>Services: </strong>Personal (checking, money market, and savings, etc.) and business banking (certificate of deposit, treasury management, etc.), in addition to loans (home loans, commercial lending, etc.)<span class="ql-inline-citation" data-cite="37"></span></li><li><strong>Assets: </strong>$7.5 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-subheading__text"> 5. Preferred Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Preferred Bank was founded in 1991; the bank's initial offering was oversubscribed at $20.18 million, which was likely the largest formation of a state-chartered bank in California's history. What distinguishes Preferred Bank from much of its competition is its specialization in servicing multiple market niches, such as middle-market businesses (manufacturing, service, and distribution companies) and international market businesses (importers and exporters).<span class="ql-inline-citation" data-cite="66"></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>Branches:</strong> California, New York, and Texas<span class="ql-inline-citation" data-cite="90"></span><span class="ql-inline-citation" data-cite="28"></span><span class="ql-inline-citation" data-cite="29"></span><span class="ql-inline-citation" data-cite="30"></span></li><li><strong>ATMs: </strong>N/A</li><li><strong>States: </strong>California, New York, and Texas<span class="ql-inline-citation" data-cite="27"></span></li><li><strong>Services: </strong>Personal (checking, savings, and CDs, etc.), business (real estate and construction loans, trade finance loans and services), and commercial banking (cash vault services, ACH origination, etc.)<span class="ql-inline-citation" data-cite="32"></span></li><li><strong>Assets: </strong>$6.7 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<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"> 6. CTBC Bank Corp. (USA) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> CTBC Bank was founded as China Trust Bank of New York (CTBNY) in 1989. The parent company, China Trust Holdings Corp. (now CTBC Financial Holding), acquired the Californian Trans National Bank in 1995 and renamed it the China Trust Bank of California (CTBCA), making it one of the first Asian American banks to operate on both the east and west coasts.<span class="ql-inline-citation" data-cite="92"></span><span class="ql-inline-citation" data-cite="91"></span><span class="ql-inline-citation" data-cite="33"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> In 2014, CTBC Bank merged with Tokyo Star Bank, marking the first merger of a Japanese bank with a foreign-owned one. The holding company of CTBC bank also acquired Taiwan Life Insurance Co. in 2015.<span class="ql-inline-citation" data-cite="33"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> <li><strong>Branches: </strong>150 domestic branches and 110 overseas outlets<span class="ql-inline-citation" data-cite="33"></span></li><li><strong>ATMs: </strong>Any ATMs in the CTBC Bank and Allpoint networks</li><li><strong>States: </strong>California, New Jersey, and New York<span class="ql-inline-citation" data-cite="33"></span></li><li><strong>Services: </strong>Personal (deposits, consumer loans & lines, and wealth management) and business banking (commercial real estate financing, small business financing, etc.)<span class="ql-inline-citation" data-cite="38"></span><span class="ql-inline-citation" data-cite="33"></span></li><li><strong>Assets: </strong>$5.3 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<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"> 7. Royal Business Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Having first opened in Los Angeles in 2008, Royal Business Bank is the youngest financial institution on this list. Over the years, Royal Business Bank has acquired multiple additional branches and earned several accolades, including a "Super Premier" status from Findley Reports in 2014, the Giraffe Award from the National Asian American Coalition, as well as placing third in S&P Global Market Intelligence's ranking of top-performing community banks with assets between $1 billion and $10 billion in 2016, and placing second in the same <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp.asp">S&P</a> Global Market Intelligence ranking the following year. Also in 2016, parent company RBB Bancorp listed its common stock on the NASDAQ.<span class="ql-inline-citation" data-cite="69"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> <li><strong>Branches: </strong>13 branches across California and Nevada.<span class="ql-inline-citation" data-cite="105"></span><span class="ql-inline-citation" data-cite="40"></span></li><li><strong>ATMs: </strong>"All Royal Business Bank ATMs, AllPoint Network and at Citibank ATMs throughout the United States"<span class="ql-inline-citation" data-cite="41"></span></li><li><strong>States: </strong>California, Hawaii, Illinois, Nevada, New Jersey, and New York<span class="ql-inline-citation" data-cite="40"></span></li><li><strong>Services: </strong>Personal (personal loans and deposits), business (business loans and deposits), and international banking, in addition to cash management services<span class="ql-inline-citation" data-cite="43"></span></li><li><strong>Assets: </strong>$4 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<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"> 8. Bank of Guam </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Founded in 1972, the history of "The People's Bank" is filled with humanitarian work; the earliest example of which, when Typhoon Pamela hit in 1976, the bank provided emergency loans for home repairs, more than $5 million in disaster food stamps, and a $5 million loan to the Government of Guam to assist in typhoon relief. By 1980, the Bank of Guam had grown into one of the major financial institutions in the Western Pacific.<span class="ql-inline-citation" data-cite="70"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> In 2000, the Bank of Guam became the first local company to be listed on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pacificexchange.asp">Pacific Stock Exchange</a>. Bank of Guam has also earned several awards; most notably, between 2006–08, it was inducted into the Chamber of Commerce Hall of Fame and received three American Bankers Association Financial Marketing Awards. BankGuam Holding, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/parentcompany.asp">parent company</a>, was formed in 2011.<span class="ql-inline-citation" data-cite="70"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> <li><strong>Branches: </strong>24 branches in the Western Pacific.<span class="ql-inline-citation" data-cite="44"></span><span class="ql-inline-citation" data-cite="106"></span></li><li><strong>ATMs: </strong>More than 80 ATMs throughout the Western Pacific<span class="ql-inline-citation" data-cite="106"></span><span class="ql-inline-citation" data-cite="44"></span></li><li><strong>States: </strong>N/A<span class="ql-inline-citation" data-cite="44"></span></li><li><strong>Services: </strong>Personal (checking, savings, and CDs, etc.) and business (loans and credit cards, merchant services, etc.) banking, in addition to insurance and investments services<span class="ql-inline-citation" data-cite="93"></span></li><li><strong>Assets: </strong>$2.5 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_80-0"> <span class="mntl-sc-block-subheading__text"> 9. Leader Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Having first opened its doors in 2002, Leader Bank has become a major community financial institution in the greater Boston area. Sushil K. Tuli, the current chair, founded the bank in May, starting with a single branch in East Arlington, seven employees, and $6.5 million in assets. Leader Bank was ranked as the top bank in regards to return on assets that is headquartered in Massachusetts for the third quarter of 2021.<span class="ql-inline-citation" data-cite="99"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> <li><strong>Branches: </strong>6 bank branches<span class="ql-inline-citation" data-cite="84"></span></li><li><strong>ATMs: </strong>7 locations<span class="ql-inline-citation" data-cite="84"></span></li><li><strong>States: </strong>Connecticut and Massachusetts<span class="ql-inline-citation" data-cite="84"></span></li><li><strong>Services: </strong>Personal (checking, savings, etc.) and business (accounts, commercial lending, etc.) banking as well as mortgages<span class="ql-inline-citation" data-cite="100"></span></li><li><strong>Assets: </strong>$4.4 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_85-0"> <span class="mntl-sc-block-subheading__text"> 10. PCB Bank </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> PCB Bank, once called Pacific City Bank, was founded in 2003 in California. The bank started out of a community need for banking and focuses on building up the communities in which it operates. The bank is involved in a variety of community programs, such as LA Saves, Volunteer Income Tax Assistance, and the PCB Scholarship.<span class="ql-inline-citation" data-cite="95"></span><span class="ql-inline-citation" data-cite="94"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> <li><strong>Branches: </strong>16 branches<span class="ql-inline-citation" data-cite="97"></span></li><li><strong>ATMs: </strong>California, New Jersey, and New York</li><li><strong>States: </strong>California, New Jersey, New York, and Texas<span class="ql-inline-citation" data-cite="97"></span></li><li><strong>Services: </strong>Personal (checking, savings, and CDs), business (checking, savings, business CDs, cash management), and loans<span class="ql-inline-citation" data-cite="98"></span></li><li><strong>Assets: </strong>$2.8 billion<span class="ql-inline-citation" data-cite="1"></span></li><li><strong>Availability: </strong>Online and brick-and-mortar<br/></li>
</ul>
<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-many-asian-american-owned-banks-are-there-in-the-united-states"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Asian American-Owned Banks Are There in the United States?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As of the fourth quarter of 2023, there are 71 Asian American–owned banks in the United States. These banks are spread across the nation with concentrations in the largest financial centers.<span class="ql-inline-citation" data-cite="1"></span></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_92-0"><span class="heading-toc" id="toc-is-bank-of-america-partly-owned-by-china"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Bank of America Partly Owned by China?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No, Bank of America is not partly owned by China. It is an American bank. The bank did have a partnership with China Construction Bank and owned a stake in the Chinese entity, which it has since sold and no longer owns.</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-what-is-chinas-biggest-bank"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is China's Biggest Bank?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>China's biggest bank in terms of total assets is the Industrial and Commercial Bank of China (ICBC). China Construction Bank is the next largest.<span class="ql-inline-citation" data-cite="102"></span></p></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-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"> As noted above, financial institutions that work with, are operated by, and understand the economic needs of both native and foreign-born Asian Americans will naturally grow with them. These 10 top Asian American–owned banks succeed in large party by serving their customers well.<br/>
</p></div> | Of all the [minority depository institutions (MDIs)](https://www.investopedia.com/minority-deposit-institution-mdi-definition-5072268) in the United States, the largest single group is composed of the 71 Asian or Pacific Islander American-owned banks. Collectively, these commercial banks and savings institutions amount to almost as many as all the other MDIs combined.
The size and success of these banks say a lot about the growth of the Asian American community. [Asian Americans](https://www.investopedia.com/legendary-asian-american-ceos-5225253) are the fastest-growing racial group in the U.S. and are expected to be the largest immigrant group in 50 years' time.
### Key Takeaways
* The nation's 71 Asian or Pacific Islander American-owned banks are the largest single group of minority depository institutions (MDIs) by race.
* Fifty-one percent of the voting stock of six of the top 10 banks is owned by Asian and/or Pacific Islander American individuals.
* Four of the largest banks have a majority of Asian and/or Pacific Islander American directors on their boards and serve communities that are predominantly Asian and/or Pacific Islander American.
* For the 73 banks as a whole, the division is similar but more extreme: 61 in the majority-voting-stock group and the rest in the majority-of-directors group.
* East West Bank is the largest Asian American–owned bank in the U.S., with $60.8 billion in total assets.
## What Is a Minority Depository Institution?
As of the fourth quarter of 2023, there were 4,587 commercial banks and savings institutions insured by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) in the United States. For the FDIC to classify one of them as an MDI, it must be "...a federal insured depository institution for which (1) 51% or more of the voting stock is owned by minority individuals; or (2) a majority of the board of directors is a minority and the community that the institution serves is predominantly [minority](https://www.investopedia.com/hispanic-american-owned-banks-by-state-5094619). Ownership must be by U.S. citizens or permanent legal U.S. residents to be counted in determining minority ownership." In 2021, the Fed expanded this definition to include [women-owned financial institutions](https://www.investopedia.com/women-owned-banks-by-state-5115603).
Of the 71 Asian or Pacific Islander American-owned banks, 59 fall into the first category and the rest into the second. Among the top 10 banks, six are category one institutions; Bank of Hope, Hanmi Bank, CTBC Bank Corp. (USA), and Royal Business Bank are category two.
For the purposes of this article—due to the already significant number of active banks—Asian American–owned and –managed [credit unions](https://www.investopedia.com/terms/c/creditunion.asp) that serve the community have been excluded. Our list focuses on the 10 most successful Asian American–owned banks currently operating. The article uses the term "Asian American–owned" in a broad sense, recognizing that [stockholders](https://www.investopedia.com/terms/s/shareholder.asp) own for-profit banks.
## Why Asian American-Owned Banks Are Important
Banks play a crucial role in most people's financial lives. They offer checking and savings accounts for safely storing money, loans for both individual and business purposes, [mortgages](https://www.investopedia.com/mortgage/mortgage-guide/how-to-choose-best-mortgage/) for real estate purchases, and credit cards. In short, banks provide essential tools for pursuing a career or just being able to function.
As already noted, Asian Americans are the fastest-growing racial group. Financial institutions that work with, are operated by, and understand the unique economic situations of both native and foreign-born Asian Americans will naturally grow with them.
The Asian American population is diverse, with a range of personal and business needs. Asian workers have a higher weekly median income than White, Black, and Latin individuals, according to the [Bureau of Labor Statistics](https://www.investopedia.com/terms/b/bls.asp) data for Q1 of 2024.
But at the same time, income inequality is actually greatest among Asian American groups. According to the Pew Research Center, while income increased the most for higher-income Asian Americans between 1970 and 2016, it also increased the least for lower-income Asian Americans. All this provides a wide range of opportunities to serve banking requirements across the economic spectrum.
Below is our [analysis](https://www.investopedia.com/financial-research-data-hub-5192040) of the banks that are doing the best.
## Top 10 Asian American–Owned Banks
The top 10 Asian American–owned banks serve a variety of regions, many overlapping in their areas of service. The list below is organized according to total assets.
### 1. East West Bank
East West Bancorp is the publicly traded holding company of East West Bank, which is one of the biggest independent financial institutions based in Southern California. Founded in 1973, East West Bank was the first federally chartered savings institution to meet the financial needs of Chinese Americans in Los Angeles.
In addition to having several branches throughout the United States, East West Bank also operates in Beijing, Chongqing, Guangzhou, Hong Kong, Shanghai, Shantou, Shenzhen, and Xiamen. Since its inception, East West Bank has established partnerships with multiple [nonprofit](https://www.investopedia.com/terms/n/non-profitorganization.asp) and community-based organizations in order to better aid underserved local communities.
* **Branches:** Over120 locations worldwide
* **ATMs:** Any ATMs in the East West Bank, Allpoint, and MoneyPass networks
* **States:** California, Georgia, Massachusetts, Nevada, New York, Texas, and Washington
* **Services:** Personal (checking, savings, etc.), business (collections and deposits, SBA loans, etc.), commercial (loans and lines of credit, commercial real estate, and industry expertise), and international banking (personal international banking, business international trade, and business international banking), in addition to wealth management services (investment services, future planning, and business planning)
* **Assets:** $69.5 billion
* **Availability:** Online and brick-and-mortar
### 2. Cathay Bank
Originally formed in 1962, Cathay Bank is the oldest operating U.S. bank founded by Chinese Americans. A subsidiary of Cathay General Bancorp, Cathay Bank first stepped outside of California with a representative office in Hong Kong in 1985 (which later became a branch) and a New York branch in 1999. Cathay Bank has since further expanded to seven other states as well as Beijing, Shanghai, and Taipei.
Cathay Bank has been named one of the top 20 "Best Banks in America" by *Forbes* since 2016, was among the 100 biggest financial companies listed on the Nasdaq (based on market capitalization) in 2000, and the Cathay Bank Annual Charity Golf Tournament has raised over $1.7 million for nonprofits in Southern California since 1977.
* **Branches:** Over60 locations worldwide
* **ATMs:** 53 ATMs, in addition to any ATMs in the PULSE Select and MoneyPass networks
* **States:** California, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New York, Texas, and Washington
* **Services:** Personal (checking, savings, etc.), business (lending, credit cards, etc.), and international banking (foreign exchange services, foreign exchange market update, etc.), in addition to wealth management services (insurance, annuities, etc.)
* **Assets:** $23.1 billion
* **Availability:** Online and brick-and-mortar
### 3. Bank of Hope
A subsidiary of Hope Bancorp, Bank of Hope is both the first and currently the only super-regional Korean American bank in the U.S. Bank of Hope was originally founded in Los Angeles, enabling it to provide financial services to the largest Korean American community in the nation. Additionally, Bank of Hope has distributed millions of dollars to students through its Hope Scholarship Foundation.
* **Branches:** 54 full-service branches.
* **ATMs:** Any ATMs in the Bank of Hope, MoneyPass, and Allpoint networks
* **States:** Alabama, California, Georgia, Illinois, New Jersey, New York, Oregon, Texas, Virginia, and Washington
* **Services:** Personal (checking, savings and money market accounts, etc.) and business banking (certificates of deposits, business lending, etc.), in addition to wealth management services (financial planning, retirement planning, etc.)
* **Assets:** $19.1 billion
* **Availability:** Online and brick-and-mortar
### 4. Hanmi Bank
Formed in Los Angeles in 1982, granting it the distinction of being the first Korean American bank, Hanmi Bank was founded to help Koreatown's underserved [immigrant community](https://www.investopedia.com/banking-rights-for-immigrants-5218043). Hanmi Bank offers a first-of-its-kind [corporate social responsibility](https://www.investopedia.com/terms/c/corp-social-responsibility.asp) (CSR) program for its employees, known as the Hanmi Neighbor Volunteer Service Program, which is driven by individual work participation instead of corporate-organized events. Additionally, the bank's Hanmi Dream Scholarship for At-Risk Youth Program offers educational support to students; primarily foster children and those from homes affected by domestic violence (though it is available for other at-risk youths, as well).
* **Branches:** 35 branches and nine loan production offices across the U.S.
* **ATMs:** Any ATM in the MoneyPass network
* **States:** California, Colorado, Georgia, Illinois, New Jersey, New York, Texas, and Virginia
* **Services:** Personal (checking, money market, and savings, etc.) and business banking (certificate of deposit, treasury management, etc.), in addition to loans (home loans, commercial lending, etc.)
* **Assets:** $7.5 billion
* **Availability:** Online and brick-and-mortar
### 5. Preferred Bank
Preferred Bank was founded in 1991; the bank's initial offering was oversubscribed at $20.18 million, which was likely the largest formation of a state-chartered bank in California's history. What distinguishes Preferred Bank from much of its competition is its specialization in servicing multiple market niches, such as middle-market businesses (manufacturing, service, and distribution companies) and international market businesses (importers and exporters).
* **Branches:** California, New York, and Texas
* **ATMs:** N/A
* **States:** California, New York, and Texas
* **Services:** Personal (checking, savings, and CDs, etc.), business (real estate and construction loans, trade finance loans and services), and commercial banking (cash vault services, ACH origination, etc.)
* **Assets:** $6.7 billion
* **Availability:** Online and brick-and-mortar
### 6. CTBC Bank Corp. (USA)
CTBC Bank was founded as China Trust Bank of New York (CTBNY) in 1989. The parent company, China Trust Holdings Corp. (now CTBC Financial Holding), acquired the Californian Trans National Bank in 1995 and renamed it the China Trust Bank of California (CTBCA), making it one of the first Asian American banks to operate on both the east and west coasts.
In 2014, CTBC Bank merged with Tokyo Star Bank, marking the first merger of a Japanese bank with a foreign-owned one. The holding company of CTBC bank also acquired Taiwan Life Insurance Co. in 2015.
* **Branches:** 150 domestic branches and 110 overseas outlets
* **ATMs:** Any ATMs in the CTBC Bank and Allpoint networks
* **States:** California, New Jersey, and New York
* **Services:** Personal (deposits, consumer loans & lines, and wealth management) and business banking (commercial real estate financing, small business financing, etc.)
* **Assets:** $5.3 billion
* **Availability:** Online and brick-and-mortar
### 7. Royal Business Bank
Having first opened in Los Angeles in 2008, Royal Business Bank is the youngest financial institution on this list. Over the years, Royal Business Bank has acquired multiple additional branches and earned several accolades, including a "Super Premier" status from Findley Reports in 2014, the Giraffe Award from the National Asian American Coalition, as well as placing third in S&P Global Market Intelligence's ranking of top-performing community banks with assets between $1 billion and $10 billion in 2016, and placing second in the same [S&P](https://www.investopedia.com/terms/s/sp.asp) Global Market Intelligence ranking the following year. Also in 2016, parent company RBB Bancorp listed its common stock on the NASDAQ.
* **Branches:** 13 branches across California and Nevada.
* **ATMs:** "All Royal Business Bank ATMs, AllPoint Network and at Citibank ATMs throughout the United States"
* **States:** California, Hawaii, Illinois, Nevada, New Jersey, and New York
* **Services:** Personal (personal loans and deposits), business (business loans and deposits), and international banking, in addition to cash management services
* **Assets:** $4 billion
* **Availability:** Online and brick-and-mortar
### 8. Bank of Guam
Founded in 1972, the history of "The People's Bank" is filled with humanitarian work; the earliest example of which, when Typhoon Pamela hit in 1976, the bank provided emergency loans for home repairs, more than $5 million in disaster food stamps, and a $5 million loan to the Government of Guam to assist in typhoon relief. By 1980, the Bank of Guam had grown into one of the major financial institutions in the Western Pacific.
In 2000, the Bank of Guam became the first local company to be listed on the [Pacific Stock Exchange](https://www.investopedia.com/terms/p/pacificexchange.asp). Bank of Guam has also earned several awards; most notably, between 2006–08, it was inducted into the Chamber of Commerce Hall of Fame and received three American Bankers Association Financial Marketing Awards. BankGuam Holding, the [parent company](https://www.investopedia.com/terms/p/parentcompany.asp), was formed in 2011.
* **Branches:** 24 branches in the Western Pacific.
* **ATMs:** More than 80 ATMs throughout the Western Pacific
* **States:** N/A
* **Services:** Personal (checking, savings, and CDs, etc.) and business (loans and credit cards, merchant services, etc.) banking, in addition to insurance and investments services
* **Assets:** $2.5 billion
* **Availability:** Online and brick-and-mortar
### 9. Leader Bank
Having first opened its doors in 2002, Leader Bank has become a major community financial institution in the greater Boston area. Sushil K. Tuli, the current chair, founded the bank in May, starting with a single branch in East Arlington, seven employees, and $6.5 million in assets. Leader Bank was ranked as the top bank in regards to return on assets that is headquartered in Massachusetts for the third quarter of 2021.
* **Branches:** 6 bank branches
* **ATMs:** 7 locations
* **States:** Connecticut and Massachusetts
* **Services:** Personal (checking, savings, etc.) and business (accounts, commercial lending, etc.) banking as well as mortgages
* **Assets:** $4.4 billion
* **Availability:** Online and brick-and-mortar
### 10. PCB Bank
PCB Bank, once called Pacific City Bank, was founded in 2003 in California. The bank started out of a community need for banking and focuses on building up the communities in which it operates. The bank is involved in a variety of community programs, such as LA Saves, Volunteer Income Tax Assistance, and the PCB Scholarship.
* **Branches:** 16 branches
* **ATMs:** California, New Jersey, and New York
* **States:** California, New Jersey, New York, and Texas
* **Services:** Personal (checking, savings, and CDs), business (checking, savings, business CDs, cash management), and loans
* **Assets:** $2.8 billion
* **Availability:** Online and brick-and-mortar
## How Many Asian American-Owned Banks Are There in the United States?
As of the fourth quarter of 2023, there are 71 Asian American–owned banks in the United States. These banks are spread across the nation with concentrations in the largest financial centers.
## Is Bank of America Partly Owned by China?
No, Bank of America is not partly owned by China. It is an American bank. The bank did have a partnership with China Construction Bank and owned a stake in the Chinese entity, which it has since sold and no longer owns.
## What Is China's Biggest Bank?
China's biggest bank in terms of total assets is the Industrial and Commercial Bank of China (ICBC). China Construction Bank is the next largest.
![What to Know About Asian American-Owned Banks]()
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Investopedia / Jake Shi
## The Bottom Line
As noted above, financial institutions that work with, are operated by, and understand the economic needs of both native and foreign-born Asian Americans will naturally grow with them. These 10 top Asian American–owned banks succeed in large party by serving their customers well.
| Of all the minority depository institutions (MDIs) in the United States, the largest single group is composed of the 71 Asian or Pacific Islander American-owned banks. Collectively, these commercial banks and savings institutions amount to almost as many as all the other MDIs combined.
The size and success of these banks say a lot about the growth of the Asian American community. Asian Americans are the fastest-growing racial group in the U.S. and are expected to be the largest immigrant group in 50 years' time.
Key Takeaways
The nation's 71 Asian or Pacific Islander American-owned banks are the largest single group of minority depository institutions (MDIs) by race.Fifty-one percent of the voting stock of six of the top 10 banks is owned by Asian and/or Pacific Islander American individuals.Four of the largest banks have a majority of Asian and/or Pacific Islander American directors on their boards and serve communities that are predominantly Asian and/or Pacific Islander American.For the 73 banks as a whole, the division is similar but more extreme: 61 in the majority-voting-stock group and the rest in the majority-of-directors group.East West Bank is the largest Asian American–owned bank in the U.S., with $60.8 billion in total assets.
What Is a Minority Depository Institution?
As of the fourth quarter of 2023, there were 4,587 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) in the United States. For the FDIC to classify one of them as an MDI, it must be "...a federal insured depository institution for which (1) 51% or more of the voting stock is owned by minority individuals; or (2) a majority of the board of directors is a minority and the community that the institution serves is predominantly minority. Ownership must be by U.S. citizens or permanent legal U.S. residents to be counted in determining minority ownership." In 2021, the Fed expanded this definition to include women-owned financial institutions.
Of the 71 Asian or Pacific Islander American-owned banks, 59 fall into the first category and the rest into the second. Among the top 10 banks, six are category one institutions; Bank of Hope, Hanmi Bank, CTBC Bank Corp. (USA), and Royal Business Bank are category two.
For the purposes of this article—due to the already significant number of active banks—Asian American–owned and –managed credit unions that serve the community have been excluded. Our list focuses on the 10 most successful Asian American–owned banks currently operating. The article uses the term "Asian American–owned" in a broad sense, recognizing that stockholders own for-profit banks.
Why Asian American-Owned Banks Are Important
Banks play a crucial role in most people's financial lives. They offer checking and savings accounts for safely storing money, loans for both individual and business purposes, mortgages for real estate purchases, and credit cards. In short, banks provide essential tools for pursuing a career or just being able to function.
As already noted, Asian Americans are the fastest-growing racial group. Financial institutions that work with, are operated by, and understand the unique economic situations of both native and foreign-born Asian Americans will naturally grow with them.
The Asian American population is diverse, with a range of personal and business needs. Asian workers have a higher weekly median income than White, Black, and Latin individuals, according to the Bureau of Labor Statistics data for Q1 of 2024.
But at the same time, income inequality is actually greatest among Asian American groups. According to the Pew Research Center, while income increased the most for higher-income Asian Americans between 1970 and 2016, it also increased the least for lower-income Asian Americans. All this provides a wide range of opportunities to serve banking requirements across the economic spectrum.
Below is our analysis of the banks that are doing the best.
Top 10 Asian American–Owned Banks
The top 10 Asian American–owned banks serve a variety of regions, many overlapping in their areas of service. The list below is organized according to total assets.
1. East West Bank
East West Bancorp is the publicly traded holding company of East West Bank, which is one of the biggest independent financial institutions based in Southern California. Founded in 1973, East West Bank was the first federally chartered savings institution to meet the financial needs of Chinese Americans in Los Angeles.
In addition to having several branches throughout the United States, East West Bank also operates in Beijing, Chongqing, Guangzhou, Hong Kong, Shanghai, Shantou, Shenzhen, and Xiamen. Since its inception, East West Bank has established partnerships with multiple nonprofit and community-based organizations in order to better aid underserved local communities.
Branches: Over 120 locations worldwideATMs: Any ATMs in the East West Bank, Allpoint, and MoneyPass networksStates: California, Georgia, Massachusetts, Nevada, New York, Texas, and WashingtonServices: Personal (checking, savings, etc.), business (collections and deposits, SBA loans, etc.), commercial (loans and lines of credit, commercial real estate, and industry expertise), and international banking (personal international banking, business international trade, and business international banking), in addition to wealth management services (investment services, future planning, and business planning)Assets: $69.5 billionAvailability: Online and brick-and-mortar
2. Cathay Bank
Originally formed in 1962, Cathay Bank is the oldest operating U.S. bank founded by Chinese Americans. A subsidiary of Cathay General Bancorp, Cathay Bank first stepped outside of California with a representative office in Hong Kong in 1985 (which later became a branch) and a New York branch in 1999. Cathay Bank has since further expanded to seven other states as well as Beijing, Shanghai, and Taipei.
Cathay Bank has been named one of the top 20 "Best Banks in America" by Forbes since 2016, was among the 100 biggest financial companies listed on the Nasdaq (based on market capitalization) in 2000, and the Cathay Bank Annual Charity Golf Tournament has raised over $1.7 million for nonprofits in Southern California since 1977.
Branches: Over 60 locations worldwideATMs: 53 ATMs, in addition to any ATMs in the PULSE Select and MoneyPass networksStates: California, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New York, Texas, and WashingtonServices: Personal (checking, savings, etc.), business (lending, credit cards, etc.), and international banking (foreign exchange services, foreign exchange market update, etc.), in addition to wealth management services (insurance, annuities, etc.) Assets: $23.1 billionAvailability: Online and brick-and-mortar
3. Bank of Hope
A subsidiary of Hope Bancorp, Bank of Hope is both the first and currently the only super-regional Korean American bank in the U.S. Bank of Hope was originally founded in Los Angeles, enabling it to provide financial services to the largest Korean American community in the nation. Additionally, Bank of Hope has distributed millions of dollars to students through its Hope Scholarship Foundation.
Branches: 54 full-service branches.ATMs: Any ATMs in the Bank of Hope, MoneyPass, and Allpoint networksStates: Alabama, California, Georgia, Illinois, New Jersey, New York, Oregon, Texas, Virginia, and WashingtonServices: Personal (checking, savings and money market accounts, etc.) and business banking (certificates of deposits, business lending, etc.), in addition to wealth management services (financial planning, retirement planning, etc.) Assets: $19.1 billionAvailability: Online and brick-and-mortar
4. Hanmi Bank
Formed in Los Angeles in 1982, granting it the distinction of being the first Korean American bank, Hanmi Bank was founded to help Koreatown's underserved immigrant community. Hanmi Bank offers a first-of-its-kind corporate social responsibility (CSR) program for its employees, known as the Hanmi Neighbor Volunteer Service Program, which is driven by individual work participation instead of corporate-organized events. Additionally, the bank's Hanmi Dream Scholarship for At-Risk Youth Program offers educational support to students; primarily foster children and those from homes affected by domestic violence (though it is available for other at-risk youths, as well).
Branches: 35 branches and nine loan production offices across the U.S.ATMs: Any ATM in the MoneyPass networkStates: California, Colorado, Georgia, Illinois, New Jersey, New York, Texas, and VirginiaServices: Personal (checking, money market, and savings, etc.) and business banking (certificate of deposit, treasury management, etc.), in addition to loans (home loans, commercial lending, etc.)Assets: $7.5 billionAvailability: Online and brick-and-mortar
5. Preferred Bank
Preferred Bank was founded in 1991; the bank's initial offering was oversubscribed at $20.18 million, which was likely the largest formation of a state-chartered bank in California's history. What distinguishes Preferred Bank from much of its competition is its specialization in servicing multiple market niches, such as middle-market businesses (manufacturing, service, and distribution companies) and international market businesses (importers and exporters).
Branches: California, New York, and TexasATMs: N/AStates: California, New York, and TexasServices: Personal (checking, savings, and CDs, etc.), business (real estate and construction loans, trade finance loans and services), and commercial banking (cash vault services, ACH origination, etc.)Assets: $6.7 billionAvailability: Online and brick-and-mortar
6. CTBC Bank Corp. (USA)
CTBC Bank was founded as China Trust Bank of New York (CTBNY) in 1989. The parent company, China Trust Holdings Corp. (now CTBC Financial Holding), acquired the Californian Trans National Bank in 1995 and renamed it the China Trust Bank of California (CTBCA), making it one of the first Asian American banks to operate on both the east and west coasts.
In 2014, CTBC Bank merged with Tokyo Star Bank, marking the first merger of a Japanese bank with a foreign-owned one. The holding company of CTBC bank also acquired Taiwan Life Insurance Co. in 2015.
Branches: 150 domestic branches and 110 overseas outletsATMs: Any ATMs in the CTBC Bank and Allpoint networksStates: California, New Jersey, and New YorkServices: Personal (deposits, consumer loans & lines, and wealth management) and business banking (commercial real estate financing, small business financing, etc.)Assets: $5.3 billionAvailability: Online and brick-and-mortar
7. Royal Business Bank
Having first opened in Los Angeles in 2008, Royal Business Bank is the youngest financial institution on this list. Over the years, Royal Business Bank has acquired multiple additional branches and earned several accolades, including a "Super Premier" status from Findley Reports in 2014, the Giraffe Award from the National Asian American Coalition, as well as placing third in S&P Global Market Intelligence's ranking of top-performing community banks with assets between $1 billion and $10 billion in 2016, and placing second in the same S&P Global Market Intelligence ranking the following year. Also in 2016, parent company RBB Bancorp listed its common stock on the NASDAQ.
Branches: 13 branches across California and Nevada.ATMs: "All Royal Business Bank ATMs, AllPoint Network and at Citibank ATMs throughout the United States"States: California, Hawaii, Illinois, Nevada, New Jersey, and New YorkServices: Personal (personal loans and deposits), business (business loans and deposits), and international banking, in addition to cash management servicesAssets: $4 billionAvailability: Online and brick-and-mortar
8. Bank of Guam
Founded in 1972, the history of "The People's Bank" is filled with humanitarian work; the earliest example of which, when Typhoon Pamela hit in 1976, the bank provided emergency loans for home repairs, more than $5 million in disaster food stamps, and a $5 million loan to the Government of Guam to assist in typhoon relief. By 1980, the Bank of Guam had grown into one of the major financial institutions in the Western Pacific.
In 2000, the Bank of Guam became the first local company to be listed on the Pacific Stock Exchange. Bank of Guam has also earned several awards; most notably, between 2006–08, it was inducted into the Chamber of Commerce Hall of Fame and received three American Bankers Association Financial Marketing Awards. BankGuam Holding, the parent company, was formed in 2011.
Branches: 24 branches in the Western Pacific.ATMs: More than 80 ATMs throughout the Western PacificStates: N/AServices: Personal (checking, savings, and CDs, etc.) and business (loans and credit cards, merchant services, etc.) banking, in addition to insurance and investments servicesAssets: $2.5 billionAvailability: Online and brick-and-mortar
9. Leader Bank
Having first opened its doors in 2002, Leader Bank has become a major community financial institution in the greater Boston area. Sushil K. Tuli, the current chair, founded the bank in May, starting with a single branch in East Arlington, seven employees, and $6.5 million in assets. Leader Bank was ranked as the top bank in regards to return on assets that is headquartered in Massachusetts for the third quarter of 2021.
Branches: 6 bank branchesATMs: 7 locationsStates: Connecticut and MassachusettsServices: Personal (checking, savings, etc.) and business (accounts, commercial lending, etc.) banking as well as mortgagesAssets: $4.4 billionAvailability: Online and brick-and-mortar
10. PCB Bank
PCB Bank, once called Pacific City Bank, was founded in 2003 in California. The bank started out of a community need for banking and focuses on building up the communities in which it operates. The bank is involved in a variety of community programs, such as LA Saves, Volunteer Income Tax Assistance, and the PCB Scholarship.
Branches: 16 branchesATMs: California, New Jersey, and New YorkStates: California, New Jersey, New York, and TexasServices: Personal (checking, savings, and CDs), business (checking, savings, business CDs, cash management), and loansAssets: $2.8 billionAvailability: Online and brick-and-mortar
How Many Asian American-Owned Banks Are There in the United States?
As of the fourth quarter of 2023, there are 71 Asian American–owned banks in the United States. These banks are spread across the nation with concentrations in the largest financial centers.
Is Bank of America Partly Owned by China?
No, Bank of America is not partly owned by China. It is an American bank. The bank did have a partnership with China Construction Bank and owned a stake in the Chinese entity, which it has since sold and no longer owns.
What Is China's Biggest Bank?
China's biggest bank in terms of total assets is the Industrial and Commercial Bank of China (ICBC). China Construction Bank is the next largest.
Investopedia / Jake Shi
The Bottom Line
As noted above, financial institutions that work with, are operated by, and understand the economic needs of both native and foreign-born Asian Americans will naturally grow with them. These 10 top Asian American–owned banks succeed in large party by serving their customers well.
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https://www.investopedia.com/terms/q/quantum-computing.asp | Quantum Computing: Definition, How It's Used, and Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-quantum-computing"></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 Quantum Computing? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Quantum computing is an area of computer science that uses the principles of quantum theory. Quantum theory explains the behavior of energy and material on the atomic and subatomic levels.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Quantum computing uses subatomic particles, such as electrons or photons. Quantum bits, or qubits, allow these particles to exist in more than one state (i.e., 1 and 0) at the same time.
</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"> Theoretically, linked qubits can "exploit the interference between their wave-like quantum states to perform calculations that might otherwise take millions of years."<span class="ql-inline-citation" data-cite="13"></span>
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<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"> Classical computers today employ a stream of electrical impulses (1 and 0) in a binary manner to encode information in bits. This restricts their processing ability, compared to quantum computing.
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Quantum computing uses phenomena in quantum physics to create new ways of computing.</li><li>Quantum computing involves qubits. </li><li>Unlike a normal computer bit, which can be either 0 or 1, a qubit can exist in a multidimensional state.</li><li>The power of quantum computers grows exponentially with more qubits.</li><li>Classical computers that add more bits can increase power only linearly.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-quantum-computing"></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"> Understanding Quantum Computing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The field of quantum computing emerged in the 1980s. It was discovered that certain computational problems could be tackled more efficiently with quantum algorithms than with their classical counterparts.<span class="ql-inline-citation" data-cite="8"></span><br/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Quantum computing has the capability to sift through huge numbers of possibilities and extract potential solutions to complex problems and challenges. Where classical computers store information as bits with either 0s or 1s, quantum computers use qubits. Qubits carry information in a quantum state that engages 0 and 1 in a multidimensional way.<span class="ql-inline-citation" data-cite="13"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Such massive computing potential and the projected market size for its use have attracted the attention of some of the most prominent companies.<span class="ql-inline-citation" data-cite="22"></span> These include IBM, Microsoft, Google, D-Waves Systems, Alibaba, Nokia, Intel, Airbus, HP, Toshiba, Mitsubishi, SK Telecom, NEC, Raytheon, Lockheed Martin, Rigetti, Biogen, Volkswagen, and Amgen.
</p>
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<span class="heading-toc" id="toc-uses-and-benefits-of-quantum-computing"></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"> Uses and Benefits of Quantum Computing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Quantum computing could contribute greatly to the fields of security, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/finance.asp">finance</a>, military affairs and intelligence, drug design and discovery, aerospace designing, utilities (nuclear fusion), polymer design, <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</a>, artificial intelligence (AI), <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/big-data.asp">Big Data</a> search, and digital manufacturing.
</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"> Quantum computers could be used to improve the secure sharing of information. Or to improve radars and their ability to detect missiles and aircraft. Another area where quantum computing is expected to help is the environment and keeping water clean with chemical sensors.<span class="ql-inline-citation" data-cite="10"></span><br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Here are some potential benefits of quantum computing:<span class="ql-inline-citation" data-cite="14"></span>
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <li>Financial institutions may be able to use quantum computing to design more effective and efficient investment portfolios for retail and institutional clients. They could focus on creating better trading simulators and improve fraud detection.</li><li>The healthcare industry could use quantum computing to develop new drugs and genetically-targeted medical care. It could also power more advanced DNA research.</li><li>For stronger online security, quantum computing can help design better data encryption and ways to use light signals to detect intruders in the system.</li><li>Quantum computing can be used to design more efficient, safer aircraft and traffic planning systems.<br/></li>
</ul>
<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_2-0">40%</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p><br/></p><p>Percentage of large companies planing to create initiatives around quantum computing by 2025, according to research by Gartner.<span class="ql-inline-citation" data-cite="18"></span></p></div></div></div>
<span class="heading-toc" id="toc-features-of-quantum-computing"></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"> Features of Quantum Computing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Superposition and entanglement are two features of quantum physics on which quantum computing is based. They empower quantum computers to handle operations at speeds exponentially higher than conventional computers and with much less energy consumption.
</p>
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<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"> Superposition </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> According to IBM, it's what a qubit can do rather than what it is that's remarkable. A qubit places the quantum information that it contains into a state of superposition. This refers to a combination of all possible configurations of the qubit. "Groups of qubits in superposition can create complex, multidimensional computational spaces. Complex problems can be represented in new ways in these spaces."<span class="ql-inline-citation" data-cite="15"></span>
</p>
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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"> Entanglement </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Entanglement is integral to quantum computing power. Pairs of qubits can be made to become entangled. This means that the two qubits then exist in a single state. In such a state, changing one qubit directly affects the other in a manner that's predictable.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Quantum algorithms are designed to take advantage of this relationship to solve complex problems. While doubling the number of bits in a classical computer doubles its processing power, adding qubits results in an exponential upswing in computing power and ability.<span class="ql-inline-citation" data-cite="16"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Decoherence </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Decoherence occurs when the quantum behavior of qubits decays. The quantum state can be disturbed instantly by vibrations or temperature changes. This can cause qubits to fall out of superposition and cause errors to appear in computing. It's important that qubits be protected from such interference by, for instance, supercooled refridgerators, insulation, and vacuum chambers.<span class="ql-inline-citation" data-cite="16"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<span class="heading-toc" id="toc-limitations-of-quantum-computing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-heading__text"> Limitations of Quantum Computing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Quantum computing offers enormous potential for developments and problem-solving in many industries. However, currently, it has its limitations.
</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>Decoherence, or decay, can be caused by the slightest disturbance in the qubit environment. This results in the collapse of computations or errors to them. As noted above, a quantum computer must be protected from all external interference during the computing stage.</li><li>Error correction during the computing stage hasn't been perfected. That makes computations potentially unreliable. Since qubits aren't digital bits of data, they can't benefit from conventional error correction solutions used by classical computers.</li><li>Retrieving computational results can corrupt the data. Developments such as a particular database search algorithm that ensures that the act of measurement will cause the quantum state to decohere into the correct answer hold promise.<span class="ql-inline-citation" data-cite="17"></span></li><li>Security and quantum cryptography is not yet fully developed.</li><li>A lack of qubits prevents quantum computers from living up to their potential for impactful use. Researchers have yet to produce more than 128, as of 2019.<span class="ql-inline-citation" data-cite="16"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> According to global energy leader Iberdola, "quantum computers must have almost no atmospheric pressure, an ambient temperature close to absolute zero (-273°C) and insulation from the earth's magnetic field to prevent the atoms from moving, colliding with each other, or interacting with the environment."
</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 addition, these systems only operate for very short intervals of time, so that the information becomes damaged and cannot be stored, making it even more difficult to recover the data."<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_52-0"></div>
<span class="heading-toc" id="toc-quantum-computer-vs-classical-computer"></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"> Quantum Computer vs. Classical Computer </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Quantum computers have a more basic structure than classical computers. They have no memory or processor. All a quantum computer uses is a set of superconducting qubits.<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_55-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Quantum computers and classical computers process information differently. A quantum computer uses qubits to run multidimensional quantum algorithms. Their processing power increases exponentially as qubits are added. A classical processor uses bits to operate various programs. Their power increases linearly as more bits are added. Classical computers have much less computing power.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Classical computers are best for everyday tasks and have low error rates. Quantum computers are ideal for a higher level of task, e.g., running simulations, analyzing data (such as for chemical or drug trials), creating energy-efficient batteries. They can also have high error rates.
</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"> Classical computers don't need extra-special care. They may use a basic internal fan to keep from overheating. Quantum processors need to be protected from the slightest vibrations and must be kept extremely cold. Super-cooled superfluids must be used for that purpose.<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_61-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Quantum computers are more expensive and difficult to build than classical computers.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_64-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_65-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>In 2019, Google demonstrated a quantum computer that can solve a problem in minutes that would take a classical computer 10,000 years.<span class="ql-inline-citation" data-cite="13"></span></p></div></div></div>
<span class="heading-toc" id="toc-quantum-computers-in-development"></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"> Quantum Computers In Development </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-subheading__text"> Google </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Google is spending billions of dollars to build its quantum computer by 2029. The company opened a campus in California called Google AI to help it meet this goal. Once developed, Google could launch a quantum computing service via the cloud.<span class="ql-inline-citation" data-cite="7"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> IBM </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> IBM plans to have a 1,000-qubit quantum computer in place by 2023. For now, IBM allows access to its machines for those research organizations, universities, and laboratories that are part of its Quantum Network.<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_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"> Microsoft </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Microsoft offers companies access to quantum technology via the Azure Quantum platform.<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_75-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-subheading__text"> Others </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> There’s interest in quantum computing and its technology from financial services firms such as JPMorgan Chase and Visa.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="21"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-what-is-quantum-computing-in-simplest-terms"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Quantum Computing in Simplest Terms?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Quantum computing relates to computing made by a quantum computer. Compared to traditional computing done by a classical computer, a quantum computer should be able to store much more information and operate with more efficient algorithms. This translates to solving extremely complex tasks faster.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-how-hard-is-it-to-build-a-quantum-computer"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Hard Is It to Build a Quantum Computer?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Building a quantum computer takes a long time and is vastly expensive. Google has been working on building a quantum computer for years and has spent billions of dollars. It expects to have its quantum computer ready by 2029.<span class="ql-inline-citation" data-cite="7"></span> In November 2022, Google announced a 433-qubit system, followed a year later by IBM announcing its Condor, a 1,121 superconducting qubit quantum processor. At that time, IBM put out its 2033 roadmap, saying it was aiming at Blue Jay, a system capable of executing one billion gates across 2,000 qubits by 2033.<span class="ql-inline-citation" data-cite="24"></span><span class="ql-inline-citation" data-cite="23"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-does-a-quantum-computer-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does a Quantum Computer Cost?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A quantum computer cost billions to build. However, in 2020, China-based Shenzhen SpinQ Technology planned to sell a $5,000 desktop quantum computer to consumers for schools and colleges. The previous year, it had began selling a quantum computer for $50,000.<span class="ql-inline-citation" data-cite="3"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-how-fast-is-a-quantum-computer"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Fast Is a Quantum Computer?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A quantum computer is many times faster than a classical computer or a supercomputer. Google’s quantum computer in development, Sycamore, is said to have performed a calculation in 200 seconds, compared to the 10,000 years that one of the world’s fastest computers, IBM's Summit, would take to solve it.<span class="ql-inline-citation" data-cite="4"></span> IBM disputed Google's claim, saying its supercomputer could solve the calculation in 2.5 days. Even so, that's 1,000 times slower than Google's quantum machine.<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_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"> Quantum computing is very different from classical computing. It uses qubits, which can be 1 or 0 at the same time. Classical computers use bits, which can only be 1 or 0.
</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"> As a result, quantum computing is much faster and more powerful. It is expected to be used to solve a variety of extremely complex, worthwhile tasks.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> While it has its limitations at this time, it is poised to be put to work by many high-powered companies in myriad industries.
</p></div> | ## What Is Quantum Computing?
Quantum computing is an area of computer science that uses the principles of quantum theory. Quantum theory explains the behavior of energy and material on the atomic and subatomic levels.
Quantum computing uses subatomic particles, such as electrons or photons. Quantum bits, or qubits, allow these particles to exist in more than one state (i.e., 1 and 0) at the same time.
Theoretically, linked qubits can "exploit the interference between their wave-like quantum states to perform calculations that might otherwise take millions of years."
Classical computers today employ a stream of electrical impulses (1 and 0) in a binary manner to encode information in bits. This restricts their processing ability, compared to quantum computing.
### Key Takeaways
* Quantum computing uses phenomena in quantum physics to create new ways of computing.
* Quantum computing involves qubits.
* Unlike a normal computer bit, which can be either 0 or 1, a qubit can exist in a multidimensional state.
* The power of quantum computers grows exponentially with more qubits.
* Classical computers that add more bits can increase power only linearly.
## Understanding Quantum Computing
The field of quantum computing emerged in the 1980s. It was discovered that certain computational problems could be tackled more efficiently with quantum algorithms than with their classical counterparts.
Quantum computing has the capability to sift through huge numbers of possibilities and extract potential solutions to complex problems and challenges. Where classical computers store information as bits with either 0s or 1s, quantum computers use qubits. Qubits carry information in a quantum state that engages 0 and 1 in a multidimensional way.
Such massive computing potential and the projected market size for its use have attracted the attention of some of the most prominent companies. These include IBM, Microsoft, Google, D-Waves Systems, Alibaba, Nokia, Intel, Airbus, HP, Toshiba, Mitsubishi, SK Telecom, NEC, Raytheon, Lockheed Martin, Rigetti, Biogen, Volkswagen, and Amgen.
## Uses and Benefits of Quantum Computing
Quantum computing could contribute greatly to the fields of security, [finance](https://www.investopedia.com/terms/f/finance.asp), military affairs and intelligence, drug design and discovery, aerospace designing, utilities (nuclear fusion), polymer design, [machine learning](https://www.investopedia.com/terms/m/machine-learning.asp), artificial intelligence (AI), [Big Data](https://www.investopedia.com/terms/b/big-data.asp) search, and digital manufacturing.
Quantum computers could be used to improve the secure sharing of information. Or to improve radars and their ability to detect missiles and aircraft. Another area where quantum computing is expected to help is the environment and keeping water clean with chemical sensors.
Here are some potential benefits of quantum computing:
* Financial institutions may be able to use quantum computing to design more effective and efficient investment portfolios for retail and institutional clients. They could focus on creating better trading simulators and improve fraud detection.
* The healthcare industry could use quantum computing to develop new drugs and genetically-targeted medical care. It could also power more advanced DNA research.
* For stronger online security, quantum computing can help design better data encryption and ways to use light signals to detect intruders in the system.
* Quantum computing can be used to design more efficient, safer aircraft and traffic planning systems.
### 40%
Percentage of large companies planing to create initiatives around quantum computing by 2025, according to research by Gartner.
## Features of Quantum Computing
Superposition and entanglement are two features of quantum physics on which quantum computing is based. They empower quantum computers to handle operations at speeds exponentially higher than conventional computers and with much less energy consumption.
### Superposition
According to IBM, it's what a qubit can do rather than what it is that's remarkable. A qubit places the quantum information that it contains into a state of superposition. This refers to a combination of all possible configurations of the qubit. "Groups of qubits in superposition can create complex, multidimensional computational spaces. Complex problems can be represented in new ways in these spaces."
### Entanglement
Entanglement is integral to quantum computing power. Pairs of qubits can be made to become entangled. This means that the two qubits then exist in a single state. In such a state, changing one qubit directly affects the other in a manner that's predictable.
Quantum algorithms are designed to take advantage of this relationship to solve complex problems. While doubling the number of bits in a classical computer doubles its processing power, adding qubits results in an exponential upswing in computing power and ability.
### Decoherence
Decoherence occurs when the quantum behavior of qubits decays. The quantum state can be disturbed instantly by vibrations or temperature changes. This can cause qubits to fall out of superposition and cause errors to appear in computing. It's important that qubits be protected from such interference by, for instance, supercooled refridgerators, insulation, and vacuum chambers.
## Limitations of Quantum Computing
Quantum computing offers enormous potential for developments and problem-solving in many industries. However, currently, it has its limitations.
* Decoherence, or decay, can be caused by the slightest disturbance in the qubit environment. This results in the collapse of computations or errors to them. As noted above, a quantum computer must be protected from all external interference during the computing stage.
* Error correction during the computing stage hasn't been perfected. That makes computations potentially unreliable. Since qubits aren't digital bits of data, they can't benefit from conventional error correction solutions used by classical computers.
* Retrieving computational results can corrupt the data. Developments such as a particular database search algorithm that ensures that the act of measurement will cause the quantum state to decohere into the correct answer hold promise.
* Security and quantum cryptography is not yet fully developed.
* A lack of qubits prevents quantum computers from living up to their potential for impactful use. Researchers have yet to produce more than 128, as of 2019.
According to global energy leader Iberdola, "quantum computers must have almost no atmospheric pressure, an ambient temperature close to absolute zero (-273°C) and insulation from the earth's magnetic field to prevent the atoms from moving, colliding with each other, or interacting with the environment."
"In addition, these systems only operate for very short intervals of time, so that the information becomes damaged and cannot be stored, making it even more difficult to recover the data."
## Quantum Computer vs. Classical Computer
Quantum computers have a more basic structure than classical computers. They have no memory or processor. All a quantum computer uses is a set of superconducting qubits.
Quantum computers and classical computers process information differently. A quantum computer uses qubits to run multidimensional quantum algorithms. Their processing power increases exponentially as qubits are added. A classical processor uses bits to operate various programs. Their power increases linearly as more bits are added. Classical computers have much less computing power.
Classical computers are best for everyday tasks and have low error rates. Quantum computers are ideal for a higher level of task, e.g., running simulations, analyzing data (such as for chemical or drug trials), creating energy-efficient batteries. They can also have high error rates.
Classical computers don't need extra-special care. They may use a basic internal fan to keep from overheating. Quantum processors need to be protected from the slightest vibrations and must be kept extremely cold. Super-cooled superfluids must be used for that purpose.
Quantum computers are more expensive and difficult to build than classical computers.
###
In 2019, Google demonstrated a quantum computer that can solve a problem in minutes that would take a classical computer 10,000 years.
## Quantum Computers In Development
### Google
Google is spending billions of dollars to build its quantum computer by 2029. The company opened a campus in California called Google AI to help it meet this goal. Once developed, Google could launch a quantum computing service via the cloud.
### IBM
IBM plans to have a 1,000-qubit quantum computer in place by 2023. For now, IBM allows access to its machines for those research organizations, universities, and laboratories that are part of its Quantum Network.
### Microsoft
Microsoft offers companies access to quantum technology via the Azure Quantum platform.
### Others
There’s interest in quantum computing and its technology from financial services firms such as JPMorgan Chase and Visa.
## What Is Quantum Computing in Simplest Terms?
Quantum computing relates to computing made by a quantum computer. Compared to traditional computing done by a classical computer, a quantum computer should be able to store much more information and operate with more efficient algorithms. This translates to solving extremely complex tasks faster.
## How Hard Is It to Build a Quantum Computer?
Building a quantum computer takes a long time and is vastly expensive. Google has been working on building a quantum computer for years and has spent billions of dollars. It expects to have its quantum computer ready by 2029. In November 2022, Google announced a 433-qubit system, followed a year later by IBM announcing its Condor, a 1,121 superconducting qubit quantum processor. At that time, IBM put out its 2033 roadmap, saying it was aiming at Blue Jay, a system capable of executing one billion gates across 2,000 qubits by 2033.
## How Much Does a Quantum Computer Cost?
A quantum computer cost billions to build. However, in 2020, China-based Shenzhen SpinQ Technology planned to sell a $5,000 desktop quantum computer to consumers for schools and colleges. The previous year, it had began selling a quantum computer for $50,000.
## How Fast Is a Quantum Computer?
A quantum computer is many times faster than a classical computer or a supercomputer. Google’s quantum computer in development, Sycamore, is said to have performed a calculation in 200 seconds, compared to the 10,000 years that one of the world’s fastest computers, IBM's Summit, would take to solve it. IBM disputed Google's claim, saying its supercomputer could solve the calculation in 2.5 days. Even so, that's 1,000 times slower than Google's quantum machine.
## The Bottom Line
Quantum computing is very different from classical computing. It uses qubits, which can be 1 or 0 at the same time. Classical computers use bits, which can only be 1 or 0.
As a result, quantum computing is much faster and more powerful. It is expected to be used to solve a variety of extremely complex, worthwhile tasks.
While it has its limitations at this time, it is poised to be put to work by many high-powered companies in myriad industries.
| What Is Quantum Computing?
Quantum computing is an area of computer science that uses the principles of quantum theory. Quantum theory explains the behavior of energy and material on the atomic and subatomic levels.
Quantum computing uses subatomic particles, such as electrons or photons. Quantum bits, or qubits, allow these particles to exist in more than one state (i.e., 1 and 0) at the same time.
Theoretically, linked qubits can "exploit the interference between their wave-like quantum states to perform calculations that might otherwise take millions of years."
Classical computers today employ a stream of electrical impulses (1 and 0) in a binary manner to encode information in bits. This restricts their processing ability, compared to quantum computing.
Key Takeaways
Quantum computing uses phenomena in quantum physics to create new ways of computing.Quantum computing involves qubits. Unlike a normal computer bit, which can be either 0 or 1, a qubit can exist in a multidimensional state.The power of quantum computers grows exponentially with more qubits.Classical computers that add more bits can increase power only linearly.
Understanding Quantum Computing
The field of quantum computing emerged in the 1980s. It was discovered that certain computational problems could be tackled more efficiently with quantum algorithms than with their classical counterparts.
Quantum computing has the capability to sift through huge numbers of possibilities and extract potential solutions to complex problems and challenges. Where classical computers store information as bits with either 0s or 1s, quantum computers use qubits. Qubits carry information in a quantum state that engages 0 and 1 in a multidimensional way.
Such massive computing potential and the projected market size for its use have attracted the attention of some of the most prominent companies. These include IBM, Microsoft, Google, D-Waves Systems, Alibaba, Nokia, Intel, Airbus, HP, Toshiba, Mitsubishi, SK Telecom, NEC, Raytheon, Lockheed Martin, Rigetti, Biogen, Volkswagen, and Amgen.
Uses and Benefits of Quantum Computing
Quantum computing could contribute greatly to the fields of security, finance, military affairs and intelligence, drug design and discovery, aerospace designing, utilities (nuclear fusion), polymer design, machine learning, artificial intelligence (AI), Big Data search, and digital manufacturing.
Quantum computers could be used to improve the secure sharing of information. Or to improve radars and their ability to detect missiles and aircraft. Another area where quantum computing is expected to help is the environment and keeping water clean with chemical sensors.
Here are some potential benefits of quantum computing:
Financial institutions may be able to use quantum computing to design more effective and efficient investment portfolios for retail and institutional clients. They could focus on creating better trading simulators and improve fraud detection.The healthcare industry could use quantum computing to develop new drugs and genetically-targeted medical care. It could also power more advanced DNA research.For stronger online security, quantum computing can help design better data encryption and ways to use light signals to detect intruders in the system.Quantum computing can be used to design more efficient, safer aircraft and traffic planning systems.
40%
Percentage of large companies planing to create initiatives around quantum computing by 2025, according to research by Gartner.
Features of Quantum Computing
Superposition and entanglement are two features of quantum physics on which quantum computing is based. They empower quantum computers to handle operations at speeds exponentially higher than conventional computers and with much less energy consumption.
Superposition
According to IBM, it's what a qubit can do rather than what it is that's remarkable. A qubit places the quantum information that it contains into a state of superposition. This refers to a combination of all possible configurations of the qubit. "Groups of qubits in superposition can create complex, multidimensional computational spaces. Complex problems can be represented in new ways in these spaces."
Entanglement
Entanglement is integral to quantum computing power. Pairs of qubits can be made to become entangled. This means that the two qubits then exist in a single state. In such a state, changing one qubit directly affects the other in a manner that's predictable.
Quantum algorithms are designed to take advantage of this relationship to solve complex problems. While doubling the number of bits in a classical computer doubles its processing power, adding qubits results in an exponential upswing in computing power and ability.
Decoherence
Decoherence occurs when the quantum behavior of qubits decays. The quantum state can be disturbed instantly by vibrations or temperature changes. This can cause qubits to fall out of superposition and cause errors to appear in computing. It's important that qubits be protected from such interference by, for instance, supercooled refridgerators, insulation, and vacuum chambers.
Limitations of Quantum Computing
Quantum computing offers enormous potential for developments and problem-solving in many industries. However, currently, it has its limitations.
Decoherence, or decay, can be caused by the slightest disturbance in the qubit environment. This results in the collapse of computations or errors to them. As noted above, a quantum computer must be protected from all external interference during the computing stage.Error correction during the computing stage hasn't been perfected. That makes computations potentially unreliable. Since qubits aren't digital bits of data, they can't benefit from conventional error correction solutions used by classical computers.Retrieving computational results can corrupt the data. Developments such as a particular database search algorithm that ensures that the act of measurement will cause the quantum state to decohere into the correct answer hold promise.Security and quantum cryptography is not yet fully developed.A lack of qubits prevents quantum computers from living up to their potential for impactful use. Researchers have yet to produce more than 128, as of 2019.
According to global energy leader Iberdola, "quantum computers must have almost no atmospheric pressure, an ambient temperature close to absolute zero (-273°C) and insulation from the earth's magnetic field to prevent the atoms from moving, colliding with each other, or interacting with the environment."
"In addition, these systems only operate for very short intervals of time, so that the information becomes damaged and cannot be stored, making it even more difficult to recover the data."
Quantum Computer vs. Classical Computer
Quantum computers have a more basic structure than classical computers. They have no memory or processor. All a quantum computer uses is a set of superconducting qubits.
Quantum computers and classical computers process information differently. A quantum computer uses qubits to run multidimensional quantum algorithms. Their processing power increases exponentially as qubits are added. A classical processor uses bits to operate various programs. Their power increases linearly as more bits are added. Classical computers have much less computing power.
Classical computers are best for everyday tasks and have low error rates. Quantum computers are ideal for a higher level of task, e.g., running simulations, analyzing data (such as for chemical or drug trials), creating energy-efficient batteries. They can also have high error rates.
Classical computers don't need extra-special care. They may use a basic internal fan to keep from overheating. Quantum processors need to be protected from the slightest vibrations and must be kept extremely cold. Super-cooled superfluids must be used for that purpose.
Quantum computers are more expensive and difficult to build than classical computers.
In 2019, Google demonstrated a quantum computer that can solve a problem in minutes that would take a classical computer 10,000 years.
Quantum Computers In Development
Google
Google is spending billions of dollars to build its quantum computer by 2029. The company opened a campus in California called Google AI to help it meet this goal. Once developed, Google could launch a quantum computing service via the cloud.
IBM
IBM plans to have a 1,000-qubit quantum computer in place by 2023. For now, IBM allows access to its machines for those research organizations, universities, and laboratories that are part of its Quantum Network.
Microsoft
Microsoft offers companies access to quantum technology via the Azure Quantum platform.
Others
There’s interest in quantum computing and its technology from financial services firms such as JPMorgan Chase and Visa.
What Is Quantum Computing in Simplest Terms?
Quantum computing relates to computing made by a quantum computer. Compared to traditional computing done by a classical computer, a quantum computer should be able to store much more information and operate with more efficient algorithms. This translates to solving extremely complex tasks faster.
How Hard Is It to Build a Quantum Computer?
Building a quantum computer takes a long time and is vastly expensive. Google has been working on building a quantum computer for years and has spent billions of dollars. It expects to have its quantum computer ready by 2029. In November 2022, Google announced a 433-qubit system, followed a year later by IBM announcing its Condor, a 1,121 superconducting qubit quantum processor. At that time, IBM put out its 2033 roadmap, saying it was aiming at Blue Jay, a system capable of executing one billion gates across 2,000 qubits by 2033.
How Much Does a Quantum Computer Cost?
A quantum computer cost billions to build. However, in 2020, China-based Shenzhen SpinQ Technology planned to sell a $5,000 desktop quantum computer to consumers for schools and colleges. The previous year, it had began selling a quantum computer for $50,000.
How Fast Is a Quantum Computer?
A quantum computer is many times faster than a classical computer or a supercomputer. Google’s quantum computer in development, Sycamore, is said to have performed a calculation in 200 seconds, compared to the 10,000 years that one of the world’s fastest computers, IBM's Summit, would take to solve it. IBM disputed Google's claim, saying its supercomputer could solve the calculation in 2.5 days. Even so, that's 1,000 times slower than Google's quantum machine.
The Bottom Line
Quantum computing is very different from classical computing. It uses qubits, which can be 1 or 0 at the same time. Classical computers use bits, which can only be 1 or 0.
As a result, quantum computing is much faster and more powerful. It is expected to be used to solve a variety of extremely complex, worthwhile tasks.
While it has its limitations at this time, it is poised to be put to work by many high-powered companies in myriad industries.
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https://www.investopedia.com/merrick-bank-review-5069784 | Merrick 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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Based in Utah, online-only Merrick Bank was founded in 1997 as a subsidiary of the New York–based financial services firm CardWorks.<span class="ql-inline-citation" data-cite="5"></span> Merrick Bank is not a traditional banking institution and offers no checking, savings, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market accounts</a>. Instead, the institution focuses on credit cards, loans, and <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> and is geared toward customers with lower <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit scores</a>. This in-depth review can help you determine if Merrick Bank’s products will work for you.
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<li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li>
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<div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1">
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<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>High CD yields</p></li>
<li><p>Lower-than-average APR on secured credit cards</p></li>
<li><p>Specializes in boat and RV financing</p></li>
<li><p>Focuses on helping customers with lower credit scores</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>$25,000 minimum CD deposit</p></li>
<li><p>Confusing credit card fees</p></li>
<li><p>Loan rates not listed online</p></li>
<li><p>No typical deposit accounts</p></li>
</ul>
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<span class="definition-list__item-title">Year Founded</span>
<span class="definition-list__item-content definition-list__item-content-0">
1997
</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.merrickbank.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">
CDs, credit cards, loans
</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">
Phone line: 1-800-204-5936
</span>
</span>
</li>
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<span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-1">
<li><strong>High CD yields </strong>–<strong> </strong>Merrick Bank offers CDs in terms ranging from six months to five years, with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apy.asp">annual percentage yields</a> (APYs) that range from 4.05% to 5.25%.<span class="ql-inline-citation" data-cite="6"></span> These rates outpace the national average, which range from 1.53% for a six-month term to 1.54% for a two-year term.<span class="ql-inline-citation" data-cite="1"></span></li>
<li><strong>Lower-than-average APR on secured credit card </strong>– The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securedcard.asp">secured credit card</a>, which is Merrick Bank’s most popular product, has an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rate</a> (APR) of 22.70% for card purchases, which is below the national average of 27.92% APR on average credit cards.<span class="ql-inline-citation" data-cite="7"></span></li>
<li><strong>Specializes in boat and RV financing </strong>–<strong> </strong>While Merrick Bank also offers personal loans, the institution is known for its boat, RV, and horse trailer loans. This makes it an attractive choice for borrowers who might otherwise have trouble finding a lender, either because of the specificity of their purchase or their <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>. Merrick Bank works with thousands of approved dealers across the United States.</li>
<li><strong>Focuses on helping customers with lower credit scores </strong>–<strong> </strong>Though Merrick Bank does not accept all comers regardless of credit history, it is very open to helping <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/082614/start-building-solid-credit-young-age.asp">those with either no credit record or a poor credit record build their credit history</a>.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-2"> <span class="mntl-sc-block-heading__text"> Cons Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-3">
<li><strong>$25,000 minimum CD deposit </strong>–<strong> </strong>The impressive yields for Merrick Bank CDs come with a cost—you can only open one with a $25,000 minimum deposit, placing it out of reach for the average customer.<span class="ql-inline-citation" data-cite="6"></span></li><li><strong>Confusing credit card fees </strong>– Setup and maintenance fees for the secured credit card are “removed” from your credit limit, which can be somewhat confusing.</li><li><strong>Loan rates not listed online </strong>–<strong> </strong>Neither the recreational vehicle loans nor the personal loans have their rates listed on the Merrick Bank website, making it more difficult to do an apples-to-apples comparison with other lenders.</li><li><strong>No typical deposit accounts </strong>–<strong> </strong>Merrick Bank is not a traditional bank, and you cannot open a checking account, savings account, or money market account with it. This makes Merrick Bank a poor choice for any customer looking for a one-stop shop.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-who-is-merrick-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_2-0-4"> <span class="mntl-sc-block-heading__text"> Who Is Merrick 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_2-0-5">
Merrick Bank is going to work best for customers who are looking to get a credit card or loan despite a lackluster credit history. It will especially appeal to customers who:
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6">
<li>Want to build their credit history</li>
<li>Do not need to pair their general banking needs with their lender or credit card issuer</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp" rel="noopener noreferrer">Are comfortable with an online-only banking experience</a></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-what-does-merrick-bank-offer"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-7"> <span class="mntl-sc-block-heading__text"> What Does Merrick Bank Offer? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-8">
This institution only offers a few of the products and services you might expect from a bank. These 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_2-0-9">
<li>CDs</li><li>Credit cards</li><li>Online banking experience</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_2-0-10"> <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_2-0-11">
Merrick Bank’s CDs offer a higher-than-usual rate compared with the national average for CDs. However, the minimum deposit to open a CD is a steep $25,000, which may put this product out of reach for many potential customers.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-12">
You can purchase a CD in any one of the following terms:<span class="ql-inline-citation" data-cite="6"></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_2-0-13">
<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">Merrick Bank CD Rates</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td>Term</td>
<td>APY</td>
</tr>
<tr>
<td>3 Months</td>
<td>5.30%</td>
</tr>
<tr>
<td>6 Months</td>
<td>5.30%</td>
</tr>
<tr>
<td>9 Months</td>
<td>5.15%</td>
</tr>
<tr>
<td>12 Months</td>
<td>4.95%</td>
</tr>
<tr>
<td>18 Months</td>
<td>4.65%</td>
</tr>
<tr>
<td>24 Months</td>
<td>4.40%</td>
</tr>
<tr>
<td>36 Months</td>
<td>4.20%</td>
</tr>
<tr>
<td>48 Months</td>
<td>4.10%</td>
</tr>
<tr>
<td>60 Months</td>
<td>4.05%</td>
</tr>
</tbody>
</table>
<figcaption>(As of Feb. 26, 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_2-0-14">
Merrick Bank also levies a fairly stiff penalty for early withdrawal. CDs with a term of 364 days or less will pay 90 days of interest. CDs with a term of 365 days to 1,459 days have an early withdrawal penalty of 180 days' interest. And CDs with a term of 1,460 days or more have a penalty of 270 days' interest.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-15"> <span class="mntl-sc-block-subheading__text"> Credit Cards </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_2-0-16">
Customers have access to two credit cards through Merrick Bank: the Platinum Visa and the Secured Visa.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-17">
<li><strong>Platinum Visa </strong>–<strong> </strong>The Platinum Visa was created to help you establish or rebuild your credit. This card’s big claim to fame is the fact that Merrick Bank will regularly review your account to increase your credit line.</li><li><strong>Secured Visa </strong>–<strong> </strong>The secured card only has a $200 minimum deposit, which is similar to other secured cards on the market. You also have the option to add to your deposit over time, up to $3,000, thereby giving you more purchasing power.</li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-merrick-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_2-0-18"> <span class="mntl-sc-block-heading__text"> Merrick 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_2-0-19">
Merrick Bank boasts only one physical location in the country, its corporate headquarters in South Jordan, Utah. However, you can reach a customer service agent by phone at 1-800-204-5936, although it’s unclear as to what hours the phones are staffed.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-20">
Merrick Bank also has a mobile app on which you can make payments, contact customer service, check your balance, manage account notifications, access your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ficoscore.asp">FICO score</a> once per month, and even freeze your card in case of loss or theft. However, the app is not highly rated on app stores.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-how-to-bank-with-merrick-bank"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-21"> <span class="mntl-sc-block-heading__text"> How to Bank With Merrick Bank </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-22">
Potential credit card customers can see if they are prequalified for the Platinum Visa online. If you are not, you can apply for the Secured Visa online.
</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">
Borrowers can apply for a loan online, and customers who wish to purchase a CD can do so online as well. Customers looking for a boat, an RV, or a horse trailer loan may see if they qualify and apply at one of the thousands of participating dealers across the country.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-24">
Once you have set up your credit card, loan, or CD, you can access information about your account either online or through the smartphone app.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<div class="comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-25">
<span class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">
Verdict</span><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0">
<p>Customers with less-than-perfect credit may find that Merrick Bank’s offerings fit their needs quite well. The bank’s credit cards and loans are created with credit-building in mind, and these products are available even to many customers who might otherwise be shut out of borrowing. In addition, the impressive yields on CDs may tempt well-heeled customers to grow their money with Merrick Bank. However, the costs of Merrick Bank’s offerings are both unclear and potentially higher than you might find elsewhere, even for those with a spotty credit history. Add in that Merrick offers no other deposit accounts and has a high minimum deposit requirement for CDs, and this bank may not be a good fit, even for the demographic that Merrick specifically courts. You may be able to find less expensive and more convenient credit cards and loans elsewhere, even if you don’t have great credit.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
</div><!-- end: comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block -->
<span class="heading-toc" id="toc-methodology"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-26"> <span class="mntl-sc-block-heading__text"> Methodology </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27">
Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected 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_2-0-28">
<div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0">
<a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-retailer-type="none" data-tracking-container="true" href="https://merrickbank.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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:fill(white):max_bytes(150000):strip_icc()/merrick-bank-logo-ae7409f3ce0e43fcbab434852b51016a.png)
:fill(white):max_bytes(150000):strip_icc()/merrick-bank-logo-ae7409f3ce0e43fcbab434852b51016a.png)
[Open Account](https://merrickbank.com/)
Based in Utah, online-only Merrick Bank was founded in 1997 as a subsidiary of the New York–based financial services firm CardWorks. Merrick Bank is not a traditional banking institution and offers no checking, savings, or [money market accounts](https://www.investopedia.com/terms/m/moneymarketaccount.asp). Instead, the institution focuses on credit cards, loans, and [certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) and is geared toward customers with lower [credit scores](https://www.investopedia.com/terms/c/credit_score.asp). This in-depth review can help you determine if Merrick Bank’s products will work for you.
* Pros & Cons
* Company Overview
Pros & Cons
Pros
* High CD yields
* Lower-than-average APR on secured credit cards
* Specializes in boat and RV financing
* Focuses on helping customers with lower credit scores
Cons
* $25,000 minimum CD deposit
* Confusing credit card fees
* Loan rates not listed online
* No typical deposit accounts
Company Overview
* Year Founded
1997
* Official Website
www.merrickbank.com
* Banking Products Offered
CDs, credit cards, loans
* Customer Support
Phone line: 1-800-204-5936
:fill(white):max_bytes(150000):strip_icc()/merrick-bank-logo-ae7409f3ce0e43fcbab434852b51016a.png)
:fill(white):max_bytes(150000):strip_icc()/merrick-bank-logo-ae7409f3ce0e43fcbab434852b51016a.png)
[Open Account](https://merrickbank.com/)
Table of Contents
View All
Merrick Bank Review
* [Pros Explained](#toc-pros-explained)
* [Cons Explained](#toc-cons-explained)
* [Best For](#toc-who-is-merrick-bank-best-for)
* [Bank Offerings](#toc-what-does-merrick-bank-offer)
* [Customer Service](#toc-merrick-bank-customer-service)
* [How to Bank](#toc-how-to-bank-with-merrick-bank)
* [Methodology](#toc-methodology)
## Pros Explained
* **High CD yields** –Merrick Bank offers CDs in terms ranging from six months to five years, with [annual percentage yields](https://www.investopedia.com/terms/a/apy.asp) (APYs) that range from 4.05% to 5.25%. These rates outpace the national average, which range from 1.53% for a six-month term to 1.54% for a two-year term.
* **Lower-than-average APR on secured credit card** – The [secured credit card](https://www.investopedia.com/terms/s/securedcard.asp), which is Merrick Bank’s most popular product, has an [annual percentage rate](https://www.investopedia.com/terms/a/apr.asp) (APR) of 22.70% for card purchases, which is below the national average of 27.92% APR on average credit cards.
* **Specializes in boat and RV financing** –While Merrick Bank also offers personal loans, the institution is known for its boat, RV, and horse trailer loans. This makes it an attractive choice for borrowers who might otherwise have trouble finding a lender, either because of the specificity of their purchase or their [credit history](https://www.investopedia.com/terms/c/credit-history.asp). Merrick Bank works with thousands of approved dealers across the United States.
* **Focuses on helping customers with lower credit scores** –Though Merrick Bank does not accept all comers regardless of credit history, it is very open to helping [those with either no credit record or a poor credit record build their credit history](https://www.investopedia.com/articles/personal-finance/082614/start-building-solid-credit-young-age.asp).
## Cons Explained
* **$25,000 minimum CD deposit** –The impressive yields for Merrick Bank CDs come with a cost—you can only open one with a $25,000 minimum deposit, placing it out of reach for the average customer.
* **Confusing credit card fees** – Setup and maintenance fees for the secured credit card are “removed” from your credit limit, which can be somewhat confusing.
* **Loan rates not listed online** –Neither the recreational vehicle loans nor the personal loans have their rates listed on the Merrick Bank website, making it more difficult to do an apples-to-apples comparison with other lenders.
* **No typical deposit accounts** –Merrick Bank is not a traditional bank, and you cannot open a checking account, savings account, or money market account with it. This makes Merrick Bank a poor choice for any customer looking for a one-stop shop.
## Who Is Merrick Bank Best For?
Merrick Bank is going to work best for customers who are looking to get a credit card or loan despite a lackluster credit history. It will especially appeal to customers who:
* Want to build their credit history
* Do not need to pair their general banking needs with their lender or credit card issuer
* [Are comfortable with an online-only banking experience](https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp)
## What Does Merrick Bank Offer?
This institution only offers a few of the products and services you might expect from a bank. These include:
* CDs
* Credit cards
* Online banking experience
### CDs
Merrick Bank’s CDs offer a higher-than-usual rate compared with the national average for CDs. However, the minimum deposit to open a CD is a steep $25,000, which may put this product out of reach for many potential customers.
You can purchase a CD in any one of the following terms:
| Merrick Bank CD Rates | |
| --- | --- |
| Term | APY |
| 3 Months | 5.30% |
| 6 Months | 5.30% |
| 9 Months | 5.15% |
| 12 Months | 4.95% |
| 18 Months | 4.65% |
| 24 Months | 4.40% |
| 36 Months | 4.20% |
| 48 Months | 4.10% |
| 60 Months | 4.05% |
(As of Feb. 26, 2024)
Merrick Bank also levies a fairly stiff penalty for early withdrawal. CDs with a term of 364 days or less will pay 90 days of interest. CDs with a term of 365 days to 1,459 days have an early withdrawal penalty of 180 days' interest. And CDs with a term of 1,460 days or more have a penalty of 270 days' interest.
### Credit Cards
Customers have access to two credit cards through Merrick Bank: the Platinum Visa and the Secured Visa.
* **Platinum Visa** –The Platinum Visa was created to help you establish or rebuild your credit. This card’s big claim to fame is the fact that Merrick Bank will regularly review your account to increase your credit line.
* **Secured Visa** –The secured card only has a $200 minimum deposit, which is similar to other secured cards on the market. You also have the option to add to your deposit over time, up to $3,000, thereby giving you more purchasing power.
## Merrick Bank Customer Service
Merrick Bank boasts only one physical location in the country, its corporate headquarters in South Jordan, Utah. However, you can reach a customer service agent by phone at 1-800-204-5936, although it’s unclear as to what hours the phones are staffed.
Merrick Bank also has a mobile app on which you can make payments, contact customer service, check your balance, manage account notifications, access your [FICO score](https://www.investopedia.com/terms/f/ficoscore.asp) once per month, and even freeze your card in case of loss or theft. However, the app is not highly rated on app stores.
## How to Bank With Merrick Bank
Potential credit card customers can see if they are prequalified for the Platinum Visa online. If you are not, you can apply for the Secured Visa online.
Borrowers can apply for a loan online, and customers who wish to purchase a CD can do so online as well. Customers looking for a boat, an RV, or a horse trailer loan may see if they qualify and apply at one of the thousands of participating dealers across the country.
Once you have set up your credit card, loan, or CD, you can access information about your account either online or through the smartphone app.
Verdict
Customers with less-than-perfect credit may find that Merrick Bank’s offerings fit their needs quite well. The bank’s credit cards and loans are created with credit-building in mind, and these products are available even to many customers who might otherwise be shut out of borrowing. In addition, the impressive yields on CDs may tempt well-heeled customers to grow their money with Merrick Bank. However, the costs of Merrick Bank’s offerings are both unclear and potentially higher than you might find elsewhere, even for those with a spotty credit history. Add in that Merrick offers no other deposit accounts and has a high minimum deposit requirement for CDs, and this bank may not be a good fit, even for the demographic that Merrick specifically courts. You may be able to find less expensive and more convenient credit cards and loans elsewhere, even if you don’t have great credit.
## 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://merrickbank.com/)
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|
Open Account
Based in Utah, online-only Merrick Bank was founded in 1997 as a subsidiary of the New York–based financial services firm CardWorks. Merrick Bank is not a traditional banking institution and offers no checking, savings, or money market accounts. Instead, the institution focuses on credit cards, loans, and certificates of deposit (CDs) and is geared toward customers with lower credit scores. This in-depth review can help you determine if Merrick Bank’s products will work for you.
Pros & Cons
Company Overview
Pros & Cons
Pros
High CD yields
Lower-than-average APR on secured credit cards
Specializes in boat and RV financing
Focuses on helping customers with lower credit scores
Cons
$25,000 minimum CD deposit
Confusing credit card fees
Loan rates not listed online
No typical deposit accounts
Company Overview
Year Founded
1997
Official Website
www.merrickbank.com
Banking Products Offered
CDs, credit cards, loans
Customer Support
Phone line: 1-800-204-5936
Open Account
Table of Contents
View All
Merrick Bank Review
Pros Explained
Cons Explained
Best For
Bank Offerings
Customer Service
How to Bank
Methodology
Pros Explained
High CD yields – Merrick Bank offers CDs in terms ranging from six months to five years, with annual percentage yields (APYs) that range from 4.05% to 5.25%. These rates outpace the national average, which range from 1.53% for a six-month term to 1.54% for a two-year term.
Lower-than-average APR on secured credit card – The secured credit card, which is Merrick Bank’s most popular product, has an annual percentage rate (APR) of 22.70% for card purchases, which is below the national average of 27.92% APR on average credit cards.
Specializes in boat and RV financing – While Merrick Bank also offers personal loans, the institution is known for its boat, RV, and horse trailer loans. This makes it an attractive choice for borrowers who might otherwise have trouble finding a lender, either because of the specificity of their purchase or their credit history. Merrick Bank works with thousands of approved dealers across the United States.
Focuses on helping customers with lower credit scores – Though Merrick Bank does not accept all comers regardless of credit history, it is very open to helping those with either no credit record or a poor credit record build their credit history.
Cons Explained
$25,000 minimum CD deposit – The impressive yields for Merrick Bank CDs come with a cost—you can only open one with a $25,000 minimum deposit, placing it out of reach for the average customer.Confusing credit card fees – Setup and maintenance fees for the secured credit card are “removed” from your credit limit, which can be somewhat confusing.Loan rates not listed online – Neither the recreational vehicle loans nor the personal loans have their rates listed on the Merrick Bank website, making it more difficult to do an apples-to-apples comparison with other lenders.No typical deposit accounts – Merrick Bank is not a traditional bank, and you cannot open a checking account, savings account, or money market account with it. This makes Merrick Bank a poor choice for any customer looking for a one-stop shop.
Who Is Merrick Bank Best For?
Merrick Bank is going to work best for customers who are looking to get a credit card or loan despite a lackluster credit history. It will especially appeal to customers who:
Want to build their credit history
Do not need to pair their general banking needs with their lender or credit card issuer
Are comfortable with an online-only banking experience
What Does Merrick Bank Offer?
This institution only offers a few of the products and services you might expect from a bank. These include:
CDsCredit cardsOnline banking experience
CDs
Merrick Bank’s CDs offer a higher-than-usual rate compared with the national average for CDs. However, the minimum deposit to open a CD is a steep $25,000, which may put this product out of reach for many potential customers.
You can purchase a CD in any one of the following terms:
Merrick Bank CD Rates
Term
APY
3 Months
5.30%
6 Months
5.30%
9 Months
5.15%
12 Months
4.95%
18 Months
4.65%
24 Months
4.40%
36 Months
4.20%
48 Months
4.10%
60 Months
4.05%
(As of Feb. 26, 2024)
Merrick Bank also levies a fairly stiff penalty for early withdrawal. CDs with a term of 364 days or less will pay 90 days of interest. CDs with a term of 365 days to 1,459 days have an early withdrawal penalty of 180 days' interest. And CDs with a term of 1,460 days or more have a penalty of 270 days' interest.
Credit Cards
Customers have access to two credit cards through Merrick Bank: the Platinum Visa and the Secured Visa.
Platinum Visa – The Platinum Visa was created to help you establish or rebuild your credit. This card’s big claim to fame is the fact that Merrick Bank will regularly review your account to increase your credit line.Secured Visa – The secured card only has a $200 minimum deposit, which is similar to other secured cards on the market. You also have the option to add to your deposit over time, up to $3,000, thereby giving you more purchasing power.
Merrick Bank Customer Service
Merrick Bank boasts only one physical location in the country, its corporate headquarters in South Jordan, Utah. However, you can reach a customer service agent by phone at 1-800-204-5936, although it’s unclear as to what hours the phones are staffed.
Merrick Bank also has a mobile app on which you can make payments, contact customer service, check your balance, manage account notifications, access your FICO score once per month, and even freeze your card in case of loss or theft. However, the app is not highly rated on app stores.
How to Bank With Merrick Bank
Potential credit card customers can see if they are prequalified for the Platinum Visa online. If you are not, you can apply for the Secured Visa online.
Borrowers can apply for a loan online, and customers who wish to purchase a CD can do so online as well. Customers looking for a boat, an RV, or a horse trailer loan may see if they qualify and apply at one of the thousands of participating dealers across the country.
Once you have set up your credit card, loan, or CD, you can access information about your account either online or through the smartphone app.
Verdict
Customers with less-than-perfect credit may find that Merrick Bank’s offerings fit their needs quite well. The bank’s credit cards and loans are created with credit-building in mind, and these products are available even to many customers who might otherwise be shut out of borrowing. In addition, the impressive yields on CDs may tempt well-heeled customers to grow their money with Merrick Bank. However, the costs of Merrick Bank’s offerings are both unclear and potentially higher than you might find elsewhere, even for those with a spotty credit history. Add in that Merrick offers no other deposit accounts and has a high minimum deposit requirement for CDs, and this bank may not be a good fit, even for the demographic that Merrick specifically courts. You may be able to find less expensive and more convenient credit cards and loans elsewhere, even if you don’t have great credit.
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
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Barclays Bank Review
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<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>In a 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted an investment plan for his wife that seemed to contradict what many experts suggest for retirees.</li><li>He wrote that after he dies, the trustee of his wife’s inheritance has been told to put 90% of her money into a stock index fund<strong> </strong>and 10% into short-term government bonds.</li><li>Most often investors are told to scale back on their percentage of stocks and increase their high-quality bonds as they age, so as to better protect them from potential market downturns.</li><li>A Spanish finance professor put Buffett’s plan to the test, looking at how a hypothetical portfolio set for 90/10 would have performed historically, and found the results were very positive.</li></ul></div></div></div>
<span class="heading-toc" id="toc-against-the-norm"></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"> Against the Norm </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> A well-worn adage in financial investing is to maintain a percentage of stocks equal to 100 minus one’s age, at least as a rule of thumb.<span class="ql-inline-citation" data-cite="8"></span> For example, when you hit the age of, say, 70, you'll likely want most of your investment assets to be high-quality bonds that generally don’t take as big a hit during <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/030716/one-thing-never-do-when-stock-market-goes-down.asp">market downturns</a>. Therefore, at age 70, 70% of your portfolio would be low-risk fixed-income securities while the remaining 30% would be higher-risk equities.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Because people are generally living longer and need to stretch their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nestegg.asp">nest eggs</a>, some experts have suggested being a little more aggressive. It’s now more common to hear about 110 minus your age, or even 120 minus your age, as an appropriate portion of stocks.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="9"></span> Still, 90% in equities, at any age? Even for someone with Buffett’s bona fides, that seems like a risky proposition.
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<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">100 Minus Your Age</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The rule of thumb advisors have traditionally urged investors to use, in terms of the percentage of stocks an investor should have in their portfolio; this equation suggests, for example, that a 30-year-old would hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.</p></div></div></div>
<span class="heading-toc" id="toc-will-it-work-for-every-investor"></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"> Will It Work for Every Investor? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> It’s important to point out that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oracleofomaha.asp">Oracle of Omaha</a> didn’t say that the 90/10 split makes sense for every investor. The larger point he was trying to make was about the makeup of portfolios, not the precise <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp">allocation</a>. His main contention was that most investors will get better returns through low-cost, low-turnover index funds, an interesting admission for someone who’s made a fortune picking individual stocks.<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"> There’s an obvious distinction between Mrs. Buffett and most investors. While we don’t know the exact amount of her <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bequest.asp">bequest</a>, one can assume she’ll get a cushy nest egg. She can likely afford to take on a little more risk and still live comfortably. Still, this 90/10 allocation drew considerable attention from the investing community. Just how well would such a mix of stocks and bonds hold up in the real world?
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<span class="heading-toc" id="toc-understanding-low-fee-index-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Understanding Low-Fee Index Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> A crucial part of Buffet's 90/10 plan is the low-fee index fund. Low-fee stock index funds offer numerous advantages to investors. First, their cost-efficiency ensures that a significant portion of invested capital actively contributes to returns, reducing long-term erosion and fostering portfolio growth. Additionally, these funds provide <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/031115/what-did-warren-buffett-mean-when-he-said-diversification-protection-against-ignorance-it-makes.asp">instant diversification</a> across various companies and sectors, spreading risk and mitigating the impact of underperforming individual stocks.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Index funds usually aim for consistent performance by tracking their underlying indices closely, delivering predictable returns over time. These funds' <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive management</a>, low turnover, and tax efficiency lead to lower expenses and taxes compared to actively managed counterparts, making them an attractive option for long-term investors seeking to save money on fees.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Despite these advantages, it's crucial to acknowledge that index funds are not without market risks. Holding 90% of one's portfolio in equities can only diversify one to a certain degree. In fact, weighted indexes may slant heavier towards larger companies, concentrating holdings. Without active management, passive funds simply strive to match index returns, potentially leaving returns on the table.
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<span class="heading-toc" id="toc-putting-9010-to-the-test"></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"> Putting 90/10 to the Test </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> One Spanish finance professor went to work to find the answer. In a published research paper, Javier Estrada of IESE Business School took a hypothetical $1,000 investment composed of 90% stocks and 10% short-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp">Treasuries</a>. Using historical returns he tracked how the $1,000 would do over a series of overlapping 30-year time intervals. Beginning with the 1900 to 1929 period and ending with 1985 to 2014, he collected data on 86 intervals in all.<span class="ql-inline-citation" data-cite="3"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> To maintain a more-or-less constant 90/10 split, the funds were <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rebalancing.asp">rebalanced</a> once a year. In addition, he assumed an initial 4% withdrawal each year, which was increased over time to account for inflation.<span class="ql-inline-citation" data-cite="5"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> One of the key metrics Estrada looked for was the failure rate, defined as the percentage of time periods in which the money ran out before 30 years, the length of time for which some financial planners suggest retirees plan. As it turned out, Buffett’s aggressive asset mix was surprisingly resilient, failing in only 2.3% of the intervals tested.<span class="ql-inline-citation" data-cite="5"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> What’s equally surprising is how this portfolio of 90% stocks fared during the five worst time periods since 1900. Estrada found that the nest egg was only slightly more depleted than a much more risk-averse 60% stock and 40% bond allocation.<span class="ql-inline-citation" data-cite="5"></span>
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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">Image by Sabrina Jiang © Investopedia 2020 </span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As one might expect, the potential gains for such a stock-heavy portfolio surpassed those of more conservative asset mixes. Not only did the 90/10 allocation do a good job of guarding against <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downsiderisk.asp">downside risk</a>; it also resulted in strong returns.<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_38-0"> According to Estrada’s research, the safest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset-mix.asp">asset mix</a> was actually 60% stocks and 40% bonds, which had a remarkable 0% failure rate. Notably, a portion of stocks any lower than that actually increases your risk, as bonds don’t typically generate enough interest to support retirees who reach an advanced age.<span class="ql-inline-citation" data-cite="6"></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>Loosely defined, an alternative investment is anything that may appreciate in value or generate wealth that is not stocks or bonds.</p></div></div></div>
<span class="heading-toc" id="toc-disregarding-alternative-assets"></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"> Disregarding Alternative Assets </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Another investment option that is disregarding in this plan are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alternative_investment.asp">alternative investments</a>. Alternative investments offer several benefits to investors seeking to diversify their portfolios beyond traditional asset classes like stocks and bonds. These assets often have low correlation with traditional investments, meaning they may perform differently during various market conditions. Alternative investments may also offer the potential for higher returns. Additionally, some alternative investments can serve as a hedge against inflation since they often have intrinsic value tied to real assets like real estate, commodities, or infrastructure.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> It's important to note that Buffet's 90/10 rule is rooted in simplicity. The expectation is that an investor can be appropriately diversified between the two main asset classes and do not need to take on potential additional risk to invest in alternatives. For investors who are interested in these less traditional asset classes, the 90/10 rule may not be suitable.
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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-the-9010-rule-in-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the 90/10 Rule in Investing?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his death, his wife’s trust would be allocated in this method.</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-what-is-a-7030-portfolio"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a 70/30 Portfolio?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40. The ideal allocation will depend on the investor’s age, risk tolerance, and financial goals.</p></div>
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<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-which-etf-does-warren-buffett-recommend"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which ETF Does Warren Buffett Recommend?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Warren Buffett recommends a low-cost <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 benchmarks the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a>. The low-cost feature of such funds will prevent fees from eating into returns. In addition, the S&P 500 will always generate returns over the long term, and, generally, it is tough to beat the market.<span class="ql-inline-citation" data-cite="7"></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_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"> Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest eggs in grave danger. However, if a 90% stock allocation gives you the jitters, pulling back a little is a perfectly acceptable choice.
</p></div> | When most people challenge deeply ingrained wisdom about finances, they’re greeted with eye rolls. When one of the world’s most successful financial gurus is the contrarian, people listen.
Such was the case with [Warren Buffett](https://www.investopedia.com/articles/01/071801.asp)’s 2013 letter to Berkshire Hathaway investors, which seemed to challenge one of the longstanding axioms about retirement planning. Buffett noted that upon his death, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock [index fund](https://www.investopedia.com/terms/i/indexfund.asp)and 10% into short-term government bonds. This is what is called the “[90/10 investing strategy](https://www.investopedia.com/terms/1/90-10-strategy.asp).”
### Key Takeaways
* In a 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted an investment plan for his wife that seemed to contradict what many experts suggest for retirees.
* He wrote that after he dies, the trustee of his wife’s inheritance has been told to put 90% of her money into a stock index fundand 10% into short-term government bonds.
* Most often investors are told to scale back on their percentage of stocks and increase their high-quality bonds as they age, so as to better protect them from potential market downturns.
* A Spanish finance professor put Buffett’s plan to the test, looking at how a hypothetical portfolio set for 90/10 would have performed historically, and found the results were very positive.
## Against the Norm
A well-worn adage in financial investing is to maintain a percentage of stocks equal to 100 minus one’s age, at least as a rule of thumb. For example, when you hit the age of, say, 70, you'll likely want most of your investment assets to be high-quality bonds that generally don’t take as big a hit during [market downturns](https://www.investopedia.com/articles/investing/030716/one-thing-never-do-when-stock-market-goes-down.asp). Therefore, at age 70, 70% of your portfolio would be low-risk fixed-income securities while the remaining 30% would be higher-risk equities.
Because people are generally living longer and need to stretch their [nest eggs](https://www.investopedia.com/terms/n/nestegg.asp), some experts have suggested being a little more aggressive. It’s now more common to hear about 110 minus your age, or even 120 minus your age, as an appropriate portion of stocks. Still, 90% in equities, at any age? Even for someone with Buffett’s bona fides, that seems like a risky proposition.
### 100 Minus Your Age
The rule of thumb advisors have traditionally urged investors to use, in terms of the percentage of stocks an investor should have in their portfolio; this equation suggests, for example, that a 30-year-old would hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.
## Will It Work for Every Investor?
It’s important to point out that the [Oracle of Omaha](https://www.investopedia.com/terms/o/oracleofomaha.asp) didn’t say that the 90/10 split makes sense for every investor. The larger point he was trying to make was about the makeup of portfolios, not the precise [allocation](https://www.investopedia.com/terms/a/assetallocation.asp). His main contention was that most investors will get better returns through low-cost, low-turnover index funds, an interesting admission for someone who’s made a fortune picking individual stocks.
There’s an obvious distinction between Mrs. Buffett and most investors. While we don’t know the exact amount of her [bequest](https://www.investopedia.com/terms/b/bequest.asp), one can assume she’ll get a cushy nest egg. She can likely afford to take on a little more risk and still live comfortably. Still, this 90/10 allocation drew considerable attention from the investing community. Just how well would such a mix of stocks and bonds hold up in the real world?
## Understanding Low-Fee Index Funds
A crucial part of Buffet's 90/10 plan is the low-fee index fund. Low-fee stock index funds offer numerous advantages to investors. First, their cost-efficiency ensures that a significant portion of invested capital actively contributes to returns, reducing long-term erosion and fostering portfolio growth. Additionally, these funds provide [instant diversification](https://www.investopedia.com/ask/answers/031115/what-did-warren-buffett-mean-when-he-said-diversification-protection-against-ignorance-it-makes.asp) across various companies and sectors, spreading risk and mitigating the impact of underperforming individual stocks.
Index funds usually aim for consistent performance by tracking their underlying indices closely, delivering predictable returns over time. These funds' [passive management](https://www.investopedia.com/terms/p/passiveinvesting.asp), low turnover, and tax efficiency lead to lower expenses and taxes compared to actively managed counterparts, making them an attractive option for long-term investors seeking to save money on fees.
Despite these advantages, it's crucial to acknowledge that index funds are not without market risks. Holding 90% of one's portfolio in equities can only diversify one to a certain degree. In fact, weighted indexes may slant heavier towards larger companies, concentrating holdings. Without active management, passive funds simply strive to match index returns, potentially leaving returns on the table.
## Putting 90/10 to the Test
One Spanish finance professor went to work to find the answer. In a published research paper, Javier Estrada of IESE Business School took a hypothetical $1,000 investment composed of 90% stocks and 10% short-term [Treasuries](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp). Using historical returns he tracked how the $1,000 would do over a series of overlapping 30-year time intervals. Beginning with the 1900 to 1929 period and ending with 1985 to 2014, he collected data on 86 intervals in all.
To maintain a more-or-less constant 90/10 split, the funds were [rebalanced](https://www.investopedia.com/terms/r/rebalancing.asp) once a year. In addition, he assumed an initial 4% withdrawal each year, which was increased over time to account for inflation.
One of the key metrics Estrada looked for was the failure rate, defined as the percentage of time periods in which the money ran out before 30 years, the length of time for which some financial planners suggest retirees plan. As it turned out, Buffett’s aggressive asset mix was surprisingly resilient, failing in only 2.3% of the intervals tested.
What’s equally surprising is how this portfolio of 90% stocks fared during the five worst time periods since 1900. Estrada found that the nest egg was only slightly more depleted than a much more risk-averse 60% stock and 40% bond allocation.
![Image]()
:max_bytes(150000):strip_icc()/dotdash_Final_Is_Warren_Buffetts_90_10_Asset_Allocation_Sound_Oct_2020-01-2b05c3eace5c47f6b0867238e0682581.jpg)
Image by Sabrina Jiang © Investopedia 2020
As one might expect, the potential gains for such a stock-heavy portfolio surpassed those of more conservative asset mixes. Not only did the 90/10 allocation do a good job of guarding against [downside risk](https://www.investopedia.com/terms/d/downsiderisk.asp); it also resulted in strong returns.
According to Estrada’s research, the safest [asset mix](https://www.investopedia.com/terms/a/asset-mix.asp) was actually 60% stocks and 40% bonds, which had a remarkable 0% failure rate. Notably, a portion of stocks any lower than that actually increases your risk, as bonds don’t typically generate enough interest to support retirees who reach an advanced age.
###
Loosely defined, an alternative investment is anything that may appreciate in value or generate wealth that is not stocks or bonds.
## Disregarding Alternative Assets
Another investment option that is disregarding in this plan are [alternative investments](https://www.investopedia.com/terms/a/alternative_investment.asp). Alternative investments offer several benefits to investors seeking to diversify their portfolios beyond traditional asset classes like stocks and bonds. These assets often have low correlation with traditional investments, meaning they may perform differently during various market conditions. Alternative investments may also offer the potential for higher returns. Additionally, some alternative investments can serve as a hedge against inflation since they often have intrinsic value tied to real assets like real estate, commodities, or infrastructure.
It's important to note that Buffet's 90/10 rule is rooted in simplicity. The expectation is that an investor can be appropriately diversified between the two main asset classes and do not need to take on potential additional risk to invest in alternatives. For investors who are interested in these less traditional asset classes, the 90/10 rule may not be suitable.
## What Is the 90/10 Rule in Investing?
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his death, his wife’s trust would be allocated in this method.
## What Is a 70/30 Portfolio?
A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40. The ideal allocation will depend on the investor’s age, risk tolerance, and financial goals.
## Which ETF Does Warren Buffett Recommend?
Warren Buffett recommends a low-cost [exchange-traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp) that benchmarks the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp). The low-cost feature of such funds will prevent fees from eating into returns. In addition, the S&P 500 will always generate returns over the long term, and, generally, it is tough to beat the market.
## The Bottom Line
Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest eggs in grave danger. However, if a 90% stock allocation gives you the jitters, pulling back a little is a perfectly acceptable choice.
| When most people challenge deeply ingrained wisdom about finances, they’re greeted with eye rolls. When one of the world’s most successful financial gurus is the contrarian, people listen.
Such was the case with Warren Buffett’s 2013 letter to Berkshire Hathaway investors, which seemed to challenge one of the longstanding axioms about retirement planning. Buffett noted that upon his death, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fund and 10% into short-term government bonds. This is what is called the “90/10 investing strategy.”
Key Takeaways
In a 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted an investment plan for his wife that seemed to contradict what many experts suggest for retirees.He wrote that after he dies, the trustee of his wife’s inheritance has been told to put 90% of her money into a stock index fund and 10% into short-term government bonds.Most often investors are told to scale back on their percentage of stocks and increase their high-quality bonds as they age, so as to better protect them from potential market downturns.A Spanish finance professor put Buffett’s plan to the test, looking at how a hypothetical portfolio set for 90/10 would have performed historically, and found the results were very positive.
Against the Norm
A well-worn adage in financial investing is to maintain a percentage of stocks equal to 100 minus one’s age, at least as a rule of thumb. For example, when you hit the age of, say, 70, you'll likely want most of your investment assets to be high-quality bonds that generally don’t take as big a hit during market downturns. Therefore, at age 70, 70% of your portfolio would be low-risk fixed-income securities while the remaining 30% would be higher-risk equities.
Because people are generally living longer and need to stretch their nest eggs, some experts have suggested being a little more aggressive. It’s now more common to hear about 110 minus your age, or even 120 minus your age, as an appropriate portion of stocks. Still, 90% in equities, at any age? Even for someone with Buffett’s bona fides, that seems like a risky proposition.
100 Minus Your Age
The rule of thumb advisors have traditionally urged investors to use, in terms of the percentage of stocks an investor should have in their portfolio; this equation suggests, for example, that a 30-year-old would hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.
Will It Work for Every Investor?
It’s important to point out that the Oracle of Omaha didn’t say that the 90/10 split makes sense for every investor. The larger point he was trying to make was about the makeup of portfolios, not the precise allocation. His main contention was that most investors will get better returns through low-cost, low-turnover index funds, an interesting admission for someone who’s made a fortune picking individual stocks.
There’s an obvious distinction between Mrs. Buffett and most investors. While we don’t know the exact amount of her bequest, one can assume she’ll get a cushy nest egg. She can likely afford to take on a little more risk and still live comfortably. Still, this 90/10 allocation drew considerable attention from the investing community. Just how well would such a mix of stocks and bonds hold up in the real world?
Understanding Low-Fee Index Funds
A crucial part of Buffet's 90/10 plan is the low-fee index fund. Low-fee stock index funds offer numerous advantages to investors. First, their cost-efficiency ensures that a significant portion of invested capital actively contributes to returns, reducing long-term erosion and fostering portfolio growth. Additionally, these funds provide instant diversification across various companies and sectors, spreading risk and mitigating the impact of underperforming individual stocks.
Index funds usually aim for consistent performance by tracking their underlying indices closely, delivering predictable returns over time. These funds' passive management, low turnover, and tax efficiency lead to lower expenses and taxes compared to actively managed counterparts, making them an attractive option for long-term investors seeking to save money on fees.
Despite these advantages, it's crucial to acknowledge that index funds are not without market risks. Holding 90% of one's portfolio in equities can only diversify one to a certain degree. In fact, weighted indexes may slant heavier towards larger companies, concentrating holdings. Without active management, passive funds simply strive to match index returns, potentially leaving returns on the table.
Putting 90/10 to the Test
One Spanish finance professor went to work to find the answer. In a published research paper, Javier Estrada of IESE Business School took a hypothetical $1,000 investment composed of 90% stocks and 10% short-term Treasuries. Using historical returns he tracked how the $1,000 would do over a series of overlapping 30-year time intervals. Beginning with the 1900 to 1929 period and ending with 1985 to 2014, he collected data on 86 intervals in all.
To maintain a more-or-less constant 90/10 split, the funds were rebalanced once a year. In addition, he assumed an initial 4% withdrawal each year, which was increased over time to account for inflation.
One of the key metrics Estrada looked for was the failure rate, defined as the percentage of time periods in which the money ran out before 30 years, the length of time for which some financial planners suggest retirees plan. As it turned out, Buffett’s aggressive asset mix was surprisingly resilient, failing in only 2.3% of the intervals tested.
What’s equally surprising is how this portfolio of 90% stocks fared during the five worst time periods since 1900. Estrada found that the nest egg was only slightly more depleted than a much more risk-averse 60% stock and 40% bond allocation.
Image by Sabrina Jiang © Investopedia 2020
As one might expect, the potential gains for such a stock-heavy portfolio surpassed those of more conservative asset mixes. Not only did the 90/10 allocation do a good job of guarding against downside risk; it also resulted in strong returns.
According to Estrada’s research, the safest asset mix was actually 60% stocks and 40% bonds, which had a remarkable 0% failure rate. Notably, a portion of stocks any lower than that actually increases your risk, as bonds don’t typically generate enough interest to support retirees who reach an advanced age.
Loosely defined, an alternative investment is anything that may appreciate in value or generate wealth that is not stocks or bonds.
Disregarding Alternative Assets
Another investment option that is disregarding in this plan are alternative investments. Alternative investments offer several benefits to investors seeking to diversify their portfolios beyond traditional asset classes like stocks and bonds. These assets often have low correlation with traditional investments, meaning they may perform differently during various market conditions. Alternative investments may also offer the potential for higher returns. Additionally, some alternative investments can serve as a hedge against inflation since they often have intrinsic value tied to real assets like real estate, commodities, or infrastructure.
It's important to note that Buffet's 90/10 rule is rooted in simplicity. The expectation is that an investor can be appropriately diversified between the two main asset classes and do not need to take on potential additional risk to invest in alternatives. For investors who are interested in these less traditional asset classes, the 90/10 rule may not be suitable.
What Is the 90/10 Rule in Investing?
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his death, his wife’s trust would be allocated in this method.
What Is a 70/30 Portfolio?
A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40. The ideal allocation will depend on the investor’s age, risk tolerance, and financial goals.
Which ETF Does Warren Buffett Recommend?
Warren Buffett recommends a low-cost exchange-traded fund (ETF) that benchmarks the S&P 500. The low-cost feature of such funds will prevent fees from eating into returns. In addition, the S&P 500 will always generate returns over the long term, and, generally, it is tough to beat the market.
The Bottom Line
Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest eggs in grave danger. However, if a 90% stock allocation gives you the jitters, pulling back a little is a perfectly acceptable choice.
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https://www.investopedia.com/terms/m/military-clause.asp | Military Clause: What it Means, 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-a-military-clause"></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 Military Clause? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A military clause is a provision included in a residential lease that allows military personnel to break a lease agreement and have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security-deposit.asp">security deposits</a> returned if they are called to duty or must relocate due to connected service activity. It is only available to active-duty military, National Guard, and reservist members.
</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 provision eliminates the fear of separating families during duty-ordered relocations. It also provides a system where orders do not financially impact military personnel with the loss of deposits.
</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 military clause allows active military personnel, who either are called to duty or must relocate, to break a lease and get their security deposit back.</li><li>This clause is typically included in leases in areas surrounding military bases, but it is not mandatory.</li><li>It is only available to active-duty military, National Guard, and reservist members.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-a-military-clause-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> How a Military Clause Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A military clause is a benefit available to active members of the U.S. military, the Reserves, and the National Guard. This clause is a typical element of leases in areas surrounding military bases, but it is not mandatory. By including the provision, landlords can reduce their vacancies by accommodating military tenants, but they also may find themselves <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/army-emergency-relief-aer-fund-5225124">in financial hardship</a> if tenants need to break a lease.<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"> Military personnel can invoke a military clause if they experience a permanent change of station. To do so, the active-duty member will need to present a copy of their official orders to the landlord if they want to break a written lease that still has time remaining. They also will need to give a written and signed notice of their intention to vacate the property that contains all current contact information for the service member and their commanding officer.<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"> The letter should include a date of final residency and a request to return any security deposits. As with all documents of this nature, it is best to make and keep copies before sending the documents via Certified Mail with a request for a signed delivery receipt.
</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"> After giving a copy of the orders to the landlord, the last day of the lease will be the final day of the month following the month when the landlord received the documents. As an example, if the tenant gave their notification to the landlord in January, then the lease would end on the last day of February. Payment of rent would extend through the last day of February.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<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>Not all rental agreements will include a military clause. It is essential to read and understand the full rental document. Also, some clauses will include a limit as to the distance that the change of station must be before the provision is in effect.</p></div></div></div>
<span class="heading-toc" id="toc-military-clause-and-the-scra"></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"> Military Clause and the SCRA </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The military clause is similar to parts of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://scra.dmdc.osd.mil/scra/#/home" rel="nofollow">Servicemembers Civil Service Relief Act</a> (SCRA). The act, passed in 1940, is a federal law that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/servicemembers-civil-relief-act-scra-5192850">protects those in the military</a> from being taken advantage of or losing property while on active duty. The SCRA protects against vehicle repossession, loss of belongings in storage facilities, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure.asp">foreclosures</a>, pending court cases, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-card-debt.asp">credit card debts</a>, and many other penalties that can beset transitioning service members. The SCRA is effective for both a permanent change of station and a deployment of more than 90 days.<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_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> If a service member is not able to break a lease—or if the landlord does not want to honor the SCRA—then the best course of action is to talk to the nearest military legal assistance program office. Information on where offices are located is available through the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://legalassistance.law.af.mil/">Department of Defense website</a>.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Each state varies in its support of the military clause. In the case of a conflict, any state law will supersede the military clause.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div>
<span class="heading-toc" id="toc-military-clause-example"></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"> Military Clause Example </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The military clause typically states something similar to the following but may vary by contract and state:<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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> <cite>IN THE EVENT the Tenant is, or hereafter becomes, a member of the United States Armed Forces on extended active duty and hereafter the Tenant receives permanent change of station orders to depart from the area where the Premises are located, or is relieved from active duty, retires or separates from the military, or is ordered into military housing, then in any of these events, the Tenant may terminate this lease upon giving thirty (30) days written notice to the Landlord. The Tenant shall also provide to the Landlord a copy of the official orders or a letter signed by the tenant’s commanding officer, reflecting the change, which warrants termination under this clause. The Tenant will pay prorated rent for any days (he/she) occupy the dwelling past the first day of the month. The damage/security deposit will be promptly returned to the tenant, provided there are no damages to the premises.</cite>
</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"> For example, if Pvt. River Johnson signed a lease with a landlord for one year, it might include language stating that if the tenant breaks the lease, they will forfeit the security deposit. However, if the rental contract contains a military clause, then Pvt. Johnson would still be able to receive a return of their security deposit.
</p></div> | ## What Is a Military Clause?
A military clause is a provision included in a residential lease that allows military personnel to break a lease agreement and have [security deposits](https://www.investopedia.com/terms/s/security-deposit.asp) returned if they are called to duty or must relocate due to connected service activity. It is only available to active-duty military, National Guard, and reservist members.
This provision eliminates the fear of separating families during duty-ordered relocations. It also provides a system where orders do not financially impact military personnel with the loss of deposits.
### Key Takeaways
* A military clause allows active military personnel, who either are called to duty or must relocate, to break a lease and get their security deposit back.
* This clause is typically included in leases in areas surrounding military bases, but it is not mandatory.
* It is only available to active-duty military, National Guard, and reservist members.
## How a Military Clause Works
A military clause is a benefit available to active members of the U.S. military, the Reserves, and the National Guard. This clause is a typical element of leases in areas surrounding military bases, but it is not mandatory. By including the provision, landlords can reduce their vacancies by accommodating military tenants, but they also may find themselves [in financial hardship](https://www.investopedia.com/army-emergency-relief-aer-fund-5225124) if tenants need to break a lease.
Military personnel can invoke a military clause if they experience a permanent change of station. To do so, the active-duty member will need to present a copy of their official orders to the landlord if they want to break a written lease that still has time remaining. They also will need to give a written and signed notice of their intention to vacate the property that contains all current contact information for the service member and their commanding officer.
The letter should include a date of final residency and a request to return any security deposits. As with all documents of this nature, it is best to make and keep copies before sending the documents via Certified Mail with a request for a signed delivery receipt.
After giving a copy of the orders to the landlord, the last day of the lease will be the final day of the month following the month when the landlord received the documents. As an example, if the tenant gave their notification to the landlord in January, then the lease would end on the last day of February. Payment of rent would extend through the last day of February.
###
Not all rental agreements will include a military clause. It is essential to read and understand the full rental document. Also, some clauses will include a limit as to the distance that the change of station must be before the provision is in effect.
## Military Clause and the SCRA
The military clause is similar to parts of the [Servicemembers Civil Service Relief Act](https://scra.dmdc.osd.mil/scra/#/home) (SCRA). The act, passed in 1940, is a federal law that [protects those in the military](https://www.investopedia.com/servicemembers-civil-relief-act-scra-5192850) from being taken advantage of or losing property while on active duty. The SCRA protects against vehicle repossession, loss of belongings in storage facilities, [foreclosures](https://www.investopedia.com/terms/f/foreclosure.asp), pending court cases, [credit card debts](https://www.investopedia.com/terms/c/credit-card-debt.asp), and many other penalties that can beset transitioning service members. The SCRA is effective for both a permanent change of station and a deployment of more than 90 days.
If a service member is not able to break a lease—or if the landlord does not want to honor the SCRA—then the best course of action is to talk to the nearest military legal assistance program office. Information on where offices are located is available through the [Department of Defense website](https://legalassistance.law.af.mil/).
###
Each state varies in its support of the military clause. In the case of a conflict, any state law will supersede the military clause.
## Military Clause Example
The military clause typically states something similar to the following but may vary by contract and state:
IN THE EVENT the Tenant is, or hereafter becomes, a member of the United States Armed Forces on extended active duty and hereafter the Tenant receives permanent change of station orders to depart from the area where the Premises are located, or is relieved from active duty, retires or separates from the military, or is ordered into military housing, then in any of these events, the Tenant may terminate this lease upon giving thirty (30) days written notice to the Landlord. The Tenant shall also provide to the Landlord a copy of the official orders or a letter signed by the tenant’s commanding officer, reflecting the change, which warrants termination under this clause. The Tenant will pay prorated rent for any days (he/she) occupy the dwelling past the first day of the month. The damage/security deposit will be promptly returned to the tenant, provided there are no damages to the premises.
For example, if Pvt. River Johnson signed a lease with a landlord for one year, it might include language stating that if the tenant breaks the lease, they will forfeit the security deposit. However, if the rental contract contains a military clause, then Pvt. Johnson would still be able to receive a return of their security deposit.
| What Is a Military Clause?
A military clause is a provision included in a residential lease that allows military personnel to break a lease agreement and have security deposits returned if they are called to duty or must relocate due to connected service activity. It is only available to active-duty military, National Guard, and reservist members.
This provision eliminates the fear of separating families during duty-ordered relocations. It also provides a system where orders do not financially impact military personnel with the loss of deposits.
Key Takeaways
A military clause allows active military personnel, who either are called to duty or must relocate, to break a lease and get their security deposit back.This clause is typically included in leases in areas surrounding military bases, but it is not mandatory.It is only available to active-duty military, National Guard, and reservist members.
How a Military Clause Works
A military clause is a benefit available to active members of the U.S. military, the Reserves, and the National Guard. This clause is a typical element of leases in areas surrounding military bases, but it is not mandatory. By including the provision, landlords can reduce their vacancies by accommodating military tenants, but they also may find themselves in financial hardship if tenants need to break a lease.
Military personnel can invoke a military clause if they experience a permanent change of station. To do so, the active-duty member will need to present a copy of their official orders to the landlord if they want to break a written lease that still has time remaining. They also will need to give a written and signed notice of their intention to vacate the property that contains all current contact information for the service member and their commanding officer.
The letter should include a date of final residency and a request to return any security deposits. As with all documents of this nature, it is best to make and keep copies before sending the documents via Certified Mail with a request for a signed delivery receipt.
After giving a copy of the orders to the landlord, the last day of the lease will be the final day of the month following the month when the landlord received the documents. As an example, if the tenant gave their notification to the landlord in January, then the lease would end on the last day of February. Payment of rent would extend through the last day of February.
Not all rental agreements will include a military clause. It is essential to read and understand the full rental document. Also, some clauses will include a limit as to the distance that the change of station must be before the provision is in effect.
Military Clause and the SCRA
The military clause is similar to parts of the Servicemembers Civil Service Relief Act (SCRA). The act, passed in 1940, is a federal law that protects those in the military from being taken advantage of or losing property while on active duty. The SCRA protects against vehicle repossession, loss of belongings in storage facilities, foreclosures, pending court cases, credit card debts, and many other penalties that can beset transitioning service members. The SCRA is effective for both a permanent change of station and a deployment of more than 90 days.
If a service member is not able to break a lease—or if the landlord does not want to honor the SCRA—then the best course of action is to talk to the nearest military legal assistance program office. Information on where offices are located is available through the Department of Defense website.
Each state varies in its support of the military clause. In the case of a conflict, any state law will supersede the military clause.
Military Clause Example
The military clause typically states something similar to the following but may vary by contract and state:
IN THE EVENT the Tenant is, or hereafter becomes, a member of the United States Armed Forces on extended active duty and hereafter the Tenant receives permanent change of station orders to depart from the area where the Premises are located, or is relieved from active duty, retires or separates from the military, or is ordered into military housing, then in any of these events, the Tenant may terminate this lease upon giving thirty (30) days written notice to the Landlord. The Tenant shall also provide to the Landlord a copy of the official orders or a letter signed by the tenant’s commanding officer, reflecting the change, which warrants termination under this clause. The Tenant will pay prorated rent for any days (he/she) occupy the dwelling past the first day of the month. The damage/security deposit will be promptly returned to the tenant, provided there are no damages to the premises.
For example, if Pvt. River Johnson signed a lease with a landlord for one year, it might include language stating that if the tenant breaks the lease, they will forfeit the security deposit. However, if the rental contract contains a military clause, then Pvt. Johnson would still be able to receive a return of their security deposit.
| [
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https://www.investopedia.com/terms/l/libid.asp | London Interbank Bid Rate (Libid): 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-was-the-london-interbank-bid-rate-libid"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Was the London Interbank Bid Rate (LIBID)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The London Interbank Bid Rate (LIBID) was the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interbankmarket.asp">interbank</a> market. It was the bid rate that banks were willing to pay for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eurocurrency.asp">eurocurrency</a> deposits and other banks' unsecured funds in the London interbank market, while the more popular <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor.asp">LIBOR</a> was the offered rate.
</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"> Eurocurrency deposits refer to money in the form of bank deposits of a currency outside that currency's issuing country. They may be of any currency in any country.
</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"> As a result of the LIBOR <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor-scandal.asp">rate fixing scandals</a>, LIBID was phased out along with LIBOR beginning in 2021.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>LIBID was the London Interbank Bid Rate, the "bid" rate at which banks were willing to borrow eurocurrency deposits.</li><li>The "offer" rate at which banks were willing to lend to each other was the more popular LIBOR.</li><li>The most common currency deposited as eurocurrency was the U.S. dollar.</li><li>Both LIBOR and LIBID were phased out beginning in 2021 due to rate-fixing scandals.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-london-interbank-bid-rate-libid"></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 the London Interbank Bid Rate (LIBID) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The London Interbank Bid Rate (LIBID) was the other side of the more famous London Interbank Offered Rate (LIBOR). Whereas LIBOR was the "ask" rate at which a bank is willing to lend eurocurrency deposits to another bank, LIBID was the "bid" rate at which banks are willing to borrow.
</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 difference between the two is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">bid-ask spread</a> on these transactions. When LIBID was high, it meant that borrowers were seeking to borrow funds with increasing demand.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> While LIBOR was a popular benchmark interest rate that was calculated and published by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intercontinentalexchange.asp">Intercontinental Exchange (ICE)</a>, LIBID was not standardized or publicly available. It was not used outside of the interbank lending market. The most common currency deposited as eurocurrency is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/forex/u/usd-united-states-dollar.asp">U.S. dollar</a>. For example, if U.S. dollars are deposited in any bank outside the U.S.—for example, in Europe or the U.K.—then the deposit is referred to as a eurocurrency (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eurodollar.asp">eurodollars</a> in this case).
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<span class="heading-toc" id="toc-the-difference-between-libid-and-libor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> The Difference Between LIBID and LIBOR </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Both LIBID and LIBOR were reference rates set by banks in the London interbank market. The London interbank market is a wholesale money market in London where banks exchange currencies either directly or through electronic trading platforms.
</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"> Starting in the 1970s, LIBOR was the benchmark rate for interbank lending and is calculated for seven maturities for five currencies: the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chf.asp">Swiss franc</a>, the euro, 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">pound sterling</a>, the U.S. dollar, and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/forex/j/jpy-japanese-yen.asp">Japanese yen</a>. Before LIBOR fell out of use, there were 35 different LIBOR rates released to the market every day.
</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>LIBOR was phased out due to scandals and questions around its validity as a benchmark rate. Most LIBOR rates ceased publication on June 30, 2023, and were replaced by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954">Secured Overnight Financing Rate</a> (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates ceased publication on Dec. 31, 2021.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-the-libid-rate-was-used"></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 the LIBID Rate Was Used </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Until the rate-fixing scandal, both of these rates (especially LIBOR) were considered the foremost global reference rates for short-term interest rates of a variety of global financial instruments such as short-term interest futures contracts, forward rate agreements, interest rate swaps, and currency options.
</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"> LIBOR was also a key driver in the eurodollar market and is the basis for retail products like mortgages and student loans. They were derived from a filtered average of the world's most creditworthy banks' interbank bid/ask rates for institutional loans with maturities that range between overnight and one year.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limean.asp">London Interbank Mean Rate (LIMEAN)</a> is the calculated average between LIBOR and LIBID and could be used to identify the spread between the two rates. LIMEAN was also used by institutions borrowing and lending money in the interbank market (rather than using LIBOR or LIBID) and it was a reliable reference to the mid-market rate of the interbank market.
</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-are-libid-and-libor-still-used"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are LIBID and LIBOR Still Used?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The last LIBOR rate was published on June 30, 2023. After that date, contracts that referenced LIBOR switched to a different reference rate, such as SOFR. However, U.K. regulators required the continued publication of synthetic U.S. Dollar LIBOR for at least 15 months after that date.<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_32-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-why-were-libid-and-libor-phased-out"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Were LIBID and LIBOR Phased Out?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The London Interbank Offer Rate (LIBOR) and Bid Rate (LIBID) were reference rates that were used to measure the cost of lending and borrowing money between British banks. However, the validity of LIBOR was questioned in the 2012 rate-fixing scandal, when it was discovered that some bankers were colluding to manipulate the reference rate. The two rates were slowly phased out starting in 2021; the final LIBOR was published in 2023.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-what-is-replacing-libor-and-libid"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Replacing LIBOR and LIBID?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As a reference rate, LIBOR was replaced by the Secured Overnight Financing Rate (SOFR). However, a synthetic U.S. Dollar LIBOR is still being published in order to aid the transition.<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_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"> LIBID was an interbank reference rate used to measure the cost of borrowing money between different banks. Along with LIBOR, it was frequently used in variable-rate mortgages and contracts to measure the changing costs of borrowing money. LIBID and LIBOR were phased out in 2021 and replaced by the Secure Overnight Financing Rate (SOFR).<br/>
</p></div> | ## What Was the London Interbank Bid Rate (LIBID)?
The London Interbank Bid Rate (LIBID) was the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the [interbank](https://www.investopedia.com/terms/i/interbankmarket.asp) market. It was the bid rate that banks were willing to pay for [eurocurrency](https://www.investopedia.com/terms/e/eurocurrency.asp) deposits and other banks' unsecured funds in the London interbank market, while the more popular [LIBOR](https://www.investopedia.com/terms/l/libor.asp) was the offered rate.
Eurocurrency deposits refer to money in the form of bank deposits of a currency outside that currency's issuing country. They may be of any currency in any country.
As a result of the LIBOR [rate fixing scandals](https://www.investopedia.com/terms/l/libor-scandal.asp), LIBID was phased out along with LIBOR beginning in 2021.
### Key Takeaways
* LIBID was the London Interbank Bid Rate, the "bid" rate at which banks were willing to borrow eurocurrency deposits.
* The "offer" rate at which banks were willing to lend to each other was the more popular LIBOR.
* The most common currency deposited as eurocurrency was the U.S. dollar.
* Both LIBOR and LIBID were phased out beginning in 2021 due to rate-fixing scandals.
## Understanding the London Interbank Bid Rate (LIBID)
The London Interbank Bid Rate (LIBID) was the other side of the more famous London Interbank Offered Rate (LIBOR). Whereas LIBOR was the "ask" rate at which a bank is willing to lend eurocurrency deposits to another bank, LIBID was the "bid" rate at which banks are willing to borrow.
The difference between the two is the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp) on these transactions. When LIBID was high, it meant that borrowers were seeking to borrow funds with increasing demand.
While LIBOR was a popular benchmark interest rate that was calculated and published by [Intercontinental Exchange (ICE)](https://www.investopedia.com/terms/i/intercontinentalexchange.asp), LIBID was not standardized or publicly available. It was not used outside of the interbank lending market. The most common currency deposited as eurocurrency is the [U.S. dollar](https://www.investopedia.com/terms/forex/u/usd-united-states-dollar.asp). For example, if U.S. dollars are deposited in any bank outside the U.S.—for example, in Europe or the U.K.—then the deposit is referred to as a eurocurrency ([eurodollars](https://www.investopedia.com/terms/e/eurodollar.asp) in this case).
## The Difference Between LIBID and LIBOR
Both LIBID and LIBOR were reference rates set by banks in the London interbank market. The London interbank market is a wholesale money market in London where banks exchange currencies either directly or through electronic trading platforms.
Starting in the 1970s, LIBOR was the benchmark rate for interbank lending and is calculated for seven maturities for five currencies: the [Swiss franc](https://www.investopedia.com/terms/c/chf.asp), the euro, the [pound sterling](https://www.investopedia.com/articles/forex/11/five-reports-affect-the-pound.asp), the U.S. dollar, and the [Japanese yen](https://www.investopedia.com/terms/forex/j/jpy-japanese-yen.asp). Before LIBOR fell out of use, there were 35 different LIBOR rates released to the market every day.
###
LIBOR was phased out due to scandals and questions around its validity as a benchmark rate. Most LIBOR rates ceased publication on June 30, 2023, and were replaced by the [Secured Overnight Financing Rate](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954) (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates ceased publication on Dec. 31, 2021.
## How the LIBID Rate Was Used
Until the rate-fixing scandal, both of these rates (especially LIBOR) were considered the foremost global reference rates for short-term interest rates of a variety of global financial instruments such as short-term interest futures contracts, forward rate agreements, interest rate swaps, and currency options.
LIBOR was also a key driver in the eurodollar market and is the basis for retail products like mortgages and student loans. They were derived from a filtered average of the world's most creditworthy banks' interbank bid/ask rates for institutional loans with maturities that range between overnight and one year.
The [London Interbank Mean Rate (LIMEAN)](https://www.investopedia.com/terms/l/limean.asp) is the calculated average between LIBOR and LIBID and could be used to identify the spread between the two rates. LIMEAN was also used by institutions borrowing and lending money in the interbank market (rather than using LIBOR or LIBID) and it was a reliable reference to the mid-market rate of the interbank market.
## Are LIBID and LIBOR Still Used?
The last LIBOR rate was published on June 30, 2023. After that date, contracts that referenced LIBOR switched to a different reference rate, such as SOFR. However, U.K. regulators required the continued publication of synthetic U.S. Dollar LIBOR for at least 15 months after that date.
## Why Were LIBID and LIBOR Phased Out?
The London Interbank Offer Rate (LIBOR) and Bid Rate (LIBID) were reference rates that were used to measure the cost of lending and borrowing money between British banks. However, the validity of LIBOR was questioned in the 2012 rate-fixing scandal, when it was discovered that some bankers were colluding to manipulate the reference rate. The two rates were slowly phased out starting in 2021; the final LIBOR was published in 2023.
## What Is Replacing LIBOR and LIBID?
As a reference rate, LIBOR was replaced by the Secured Overnight Financing Rate (SOFR). However, a synthetic U.S. Dollar LIBOR is still being published in order to aid the transition.
## The Bottom Line
LIBID was an interbank reference rate used to measure the cost of borrowing money between different banks. Along with LIBOR, it was frequently used in variable-rate mortgages and contracts to measure the changing costs of borrowing money. LIBID and LIBOR were phased out in 2021 and replaced by the Secure Overnight Financing Rate (SOFR).
| What Was the London Interbank Bid Rate (LIBID)?
The London Interbank Bid Rate (LIBID) was the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the interbank market. It was the bid rate that banks were willing to pay for eurocurrency deposits and other banks' unsecured funds in the London interbank market, while the more popular LIBOR was the offered rate.
Eurocurrency deposits refer to money in the form of bank deposits of a currency outside that currency's issuing country. They may be of any currency in any country.
As a result of the LIBOR rate fixing scandals, LIBID was phased out along with LIBOR beginning in 2021.
Key Takeaways
LIBID was the London Interbank Bid Rate, the "bid" rate at which banks were willing to borrow eurocurrency deposits.The "offer" rate at which banks were willing to lend to each other was the more popular LIBOR.The most common currency deposited as eurocurrency was the U.S. dollar.Both LIBOR and LIBID were phased out beginning in 2021 due to rate-fixing scandals.
Understanding the London Interbank Bid Rate (LIBID)
The London Interbank Bid Rate (LIBID) was the other side of the more famous London Interbank Offered Rate (LIBOR). Whereas LIBOR was the "ask" rate at which a bank is willing to lend eurocurrency deposits to another bank, LIBID was the "bid" rate at which banks are willing to borrow.
The difference between the two is the bid-ask spread on these transactions. When LIBID was high, it meant that borrowers were seeking to borrow funds with increasing demand.
While LIBOR was a popular benchmark interest rate that was calculated and published by Intercontinental Exchange (ICE), LIBID was not standardized or publicly available. It was not used outside of the interbank lending market. The most common currency deposited as eurocurrency is the U.S. dollar. For example, if U.S. dollars are deposited in any bank outside the U.S.—for example, in Europe or the U.K.—then the deposit is referred to as a eurocurrency (eurodollars in this case).
The Difference Between LIBID and LIBOR
Both LIBID and LIBOR were reference rates set by banks in the London interbank market. The London interbank market is a wholesale money market in London where banks exchange currencies either directly or through electronic trading platforms.
Starting in the 1970s, LIBOR was the benchmark rate for interbank lending and is calculated for seven maturities for five currencies: the Swiss franc, the euro, the pound sterling, the U.S. dollar, and the Japanese yen. Before LIBOR fell out of use, there were 35 different LIBOR rates released to the market every day.
LIBOR was phased out due to scandals and questions around its validity as a benchmark rate. Most LIBOR rates ceased publication on June 30, 2023, and were replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates ceased publication on Dec. 31, 2021.
How the LIBID Rate Was Used
Until the rate-fixing scandal, both of these rates (especially LIBOR) were considered the foremost global reference rates for short-term interest rates of a variety of global financial instruments such as short-term interest futures contracts, forward rate agreements, interest rate swaps, and currency options.
LIBOR was also a key driver in the eurodollar market and is the basis for retail products like mortgages and student loans. They were derived from a filtered average of the world's most creditworthy banks' interbank bid/ask rates for institutional loans with maturities that range between overnight and one year.
The London Interbank Mean Rate (LIMEAN) is the calculated average between LIBOR and LIBID and could be used to identify the spread between the two rates. LIMEAN was also used by institutions borrowing and lending money in the interbank market (rather than using LIBOR or LIBID) and it was a reliable reference to the mid-market rate of the interbank market.
Are LIBID and LIBOR Still Used?
The last LIBOR rate was published on June 30, 2023. After that date, contracts that referenced LIBOR switched to a different reference rate, such as SOFR. However, U.K. regulators required the continued publication of synthetic U.S. Dollar LIBOR for at least 15 months after that date.
Why Were LIBID and LIBOR Phased Out?
The London Interbank Offer Rate (LIBOR) and Bid Rate (LIBID) were reference rates that were used to measure the cost of lending and borrowing money between British banks. However, the validity of LIBOR was questioned in the 2012 rate-fixing scandal, when it was discovered that some bankers were colluding to manipulate the reference rate. The two rates were slowly phased out starting in 2021; the final LIBOR was published in 2023.
What Is Replacing LIBOR and LIBID?
As a reference rate, LIBOR was replaced by the Secured Overnight Financing Rate (SOFR). However, a synthetic U.S. Dollar LIBOR is still being published in order to aid the transition.
The Bottom Line
LIBID was an interbank reference rate used to measure the cost of borrowing money between different banks. Along with LIBOR, it was frequently used in variable-rate mortgages and contracts to measure the changing costs of borrowing money. LIBID and LIBOR were phased out in 2021 and replaced by the Secure Overnight Financing Rate (SOFR).
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[
"rate fixing scandals",
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"bid-ask spread",
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[
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] |
https://www.investopedia.com/how-to-financially-support-loved-ones-8647499 | How to Financially Support Loved Ones Without Sacrificing Your Well-being | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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’s not uncommon for women to take on the role as the default caretaker in domestic and related family matters, but what happens when taking on these responsibilities takes a toll on their own financial well-being?
</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 REAL SIMPLE and Investopedia <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/her-money-mindset-survey-8647284">2024 Her Money Mindset Survey</a> found that most women (67%) have supported a loved one financially at some point in their life, and the percentage is even higher for younger women. However, at the same time, many women are balancing debt, and struggling to pay at least one monthly 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"> In this piece, we’ll explore how to financially support loved ones without compromising personal well-being. We’ll cover strategies that include assessing a financial situation, effective communication with loved ones, alternative forms of support, setting clear boundaries, seeking professional advice, and prioritizing personal well-being.
</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>Assess your financial situation and set clear boundaries to ensure you can support loved ones without sacrificing your own well-being.</li><li>Maintain effective communication with loved ones about financial support to foster healthy relationships.</li><li>Explore alternative forms of support beyond financial assistance, such as emotional support and offering your time and expertise.</li><li>Establish clear boundaries and learn to say “no” when necessary. </li><li>Seek professional advice to navigate complex financial situations and manage your own finances effectively.</li></ul></div></div></div>
<span class="heading-toc" id="toc-women-lending-money"></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"> Women Lending Money </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The 2024 Her Money Mindset survey revealed women tend to be generous despite their own potentially precarious financial situations. When looking at just the women who said they have financially helped a loved one, 1 in 5 also said they are currently struggling to pay at least one monthly expense.
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_12-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/6U9lc/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Women Who Have Helped Family Financially"></iframe></div>
<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"> Women helping others to their own detriment could mean less financial viability in the long run.
</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 report from the U.S. Census Bureau reveals that women are more likely than men to have no retirement savings. Women that outlive their spouses and earn lower wages over their lifetime may be at more risk, as the report also cites that, “About 50% of women ages 55 to 66 have no personal retirement savings, compared to 47% of men.”<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"> From just a few data points it's evident that women, who often shoulder the responsibilities for their loved ones, need to create a plan to support both themselves and their family members effectively.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<span class="heading-toc" id="toc-the-downfalls-of-lending-money-to-family"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> The Downfalls of Lending Money To Family </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Despite any good intentions, there are ways that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/to-lend-or-not-to-lend.asp">lending money to family</a> and friends can go awry. Perhaps you or someone you know have been in this situation with less than ideal outcomes. Before you use your financial resources to help those close to you, first consider the following:
</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"> It can permanently change your relationship </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Lending money to a friend or family member can put a strain on your relationship—especially if the borrower doesn’t adhere to the repayment agreement. This could cause feelings of resentment, frustration and in some cases familial alienation.
</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"> When considering lending money to someone, ask yourself are you willing to have a strained, permanently damaged, or even nonexistent relationship with them? If the answer is no, it may be best not to move forward with the transaction.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> It can negatively impact your own finances </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> If you are already in a tenuous financial situation, lending money to someone could aggravate or worsen your financial stability. There’s an opportunity cost related to lending money. Once lent out, this money is no longer working for you, whether in the stock market or accruing interest in a savings account.
</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"> Plus, if you’ve lent money that you’d otherwise use in a financial emergency, <em>you</em> may have to borrow money for the emergency at a higher interest rate to cover the shortfall. Both situations can put you at a financial disadvantage.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<span class="heading-toc" id="toc-tips-for-lending-money-to-family"></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"> Tips For Lending Money To Family </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> In some cases, you may not be able to avoid lending money (or perhaps you’ve already done it.) Here are some tips in case it’s absolutely necessary.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <li><strong>Set boundaries:</strong> Create a personal budget with a line item for helping people. When it’s exhausted, explain to your loved ones that you’ve reached the limit for that expense category. </li><li><strong>Document everything:</strong> Capture the terms of your transaction, no matter how small, in writing. Even if you’ve already lent money, don’t be afraid to document a verbal agreement retroactively. You can download loan agreement templates online, which can be notarized by both parties. </li><li><strong>If you can’t lose it, don’t lend it:</strong> Though this philosophy may not always fix a money situation gone south, it can lessen the impact on the injured party, i.e. the one who may not be repaid. This approach may also salvage relationships when personal lending goes wrong.</li>
</ol>
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<span class="heading-toc" id="toc-how-to-build-a-financial-plan-for-you-and-loves-ones"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> How to Build a Financial Plan for You and Loves Ones </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> If you want to ensure that giving financial help to others doesn’t set you back, here’s a step-by-step guide for how to go about it.<br/>
</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"> Assess Your Financial Situation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> First, evaluate your finances. Take stock of important key financial metrics like your income, expenses, and savings. From there, make note of your financial goals, current financial situation, and what’s needed to meet those markers. Then, create an action plan based on that information.
</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>If you find that you’re further behind than you’d like to be, it’s appropriate to modify your plan to help relatives accordingly. <br/></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> For instance, instead of setting aside $200 per month to help others, you may want to set aside $100 until you reach your personal financial goals. Whether or not you can contribute to your loved ones' needs or not, communication is key, which we’ll cover next.
</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"> Communicate With Loved Ones </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="externalLink" href="https://humphreysgroup.com/our-team/diane-bourdo/" rel="nofollow">Diane Bourdo</a> is a certified financial planner, CFP, and President of The Humphreys Group, an all-women run wealth management firm based in San Francisco, California. She gives guidance on how to broach sensitive financial topics with family.
</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 first tip is to be proactive," Bourdo said. "By being proactive and planning a conversation when you have time to talk things through calmly, you are a significant step ahead.”
</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"> She describes how you can schedule these conversations to make them more proactive than reactive and emotionally charged. “Don’t blindside the other person … Pick a time when you both will be more relaxed and comfortable.”
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_55-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_56-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Pick a time to sit down with your loved one to discuss your financial situation. Coming in with an agenda and designated meeting length is helpful.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> If you’re hesitant about starting these conversations, Bourdo suggests that you “start small, prepare, and practice."
</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"> Even before you have these conversations, it’s important to have your personal boundaries in place. Bourdo describes this as a “personal policy" which you could also think of as guidelines or a decision framework.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://masterpiecefc.com/financial-coaching" rel="nofollow">Stephanie Lyons</a> is a financial coach and founder of Masterpiece Financial Coaching. She has created personal policies like setting aside a limited amount of money to help family members and not co-signing for loans.
</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"> “I’ve learned through trial and error that in order to maintain healthy relationships and avoid becoming a “crutch” or feeling taken advantage of, it’s important to establish boundaries and to communicate expectations about money clearly,” Lyons said.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> The reality is that these conversations will likely be uncomfortable. However, if you can plan for these discussions proactively and purposefully, it can be easier than if you have to start these conversations during a family emergency or under duress.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-subheading__text"> Explore Alternative Forms of Support </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Once you start communicating with your loved ones about financial support matters, it’s important to inform them about the options outside of or in addition to financial support.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.rahkimsabree.com/" rel="nofollow">Rahkim Sabree</a>, a Financial Therapist and Accredited Financial Counselor who works with people in the realm of financial trauma, says that there are many ways to support a loved one who is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/help-family-members-trouble.asp">struggling financially</a>. He suggests, “Finding ways to provide a solution to a problem through educational resources, referrals, or hand holding through the financial hardship can create a sense of accountability and help empower your loved one to make improved financial decisions.”
</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"> Providing alternative means of support can also help your loved ones become more financially independent. For example, you may offer a relative who struggles with overspending a tutorial on how to make a budget or research ways to make extra money. It may also help to work with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/family-financial-planning-what-financial-advisors-need-to-know-7487767">family financial planner</a> together.
</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"> By empowering your loved ones to become educated about their financial situation, you can help them become more independent while also relieving yourself of financial strain.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-subheading__text"> Prioritize Your Financial and Mental Well-being </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> One of the best ways to help your loved ones in a financial crisis is to take care of yourself. It sounds counterintuitive, but if your loved ones depend on you in some capacity, it can mean you’ll be able to help them for longer.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://alejandrar.com/">Alejandra Rojas</a>, a trauma-informed finance professional dedicated to helping women entrepreneurs achieve financial stability, highlights the importance of evaluating the impact of providing financial aid to loved ones.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> She explains,“If this support causes guilt, shame, or anxiety, it is important to understand the root causes within their personal 'money story' and work towards healing these underlying issues," Rojas said. "This makes strategizing financial support more manageable.”
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> For those who end up becoming a primary source of financial support for relatives, Rojas advises, “Seeking professional advice if financial support leads to struggle, resentment, or negative emotions, as maintaining mental health should be a priority.”
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_85-0"><span class="heading-toc" id="toc-is-it-a-good-idea-to-lend-money-to-family-members"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is it a good idea to lend money to family members?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most financial experts do not recommend lending money to family members. If lending is necessary, you may want to lend only amounts that you are willing to lose if the borrower doesn’t repay you.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_87-0"><span class="heading-toc" id="toc-when-should-i-stop-helping-my-adult-child-financially"></span> <h2 class="mntl-sc-block-questionandanswer__question">When should I stop helping my adult child financially?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In most of the U.S., the age of majority is 18.<span class="ql-inline-citation" data-cite="2"></span> At this point, individuals typically have access to steady employment and the financial system, including banking and lending, to establish their financial independence. However, there may be circumstances where continued support is warranted, such as in cases of job loss, disability, or pursuing education.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_89-0"><span class="heading-toc" id="toc-what-are-some-signs-of-financial-stress"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are some signs of financial stress?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Signs of financial stress may include chronically late payments, mounting debt balances, and the general inability to manage one’s financial affairs. Emotional signs of financial stress may entail anxiety and depression. </p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_91-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> There’s no easy way to mix money and relationships. However, having a strategy that incorporates proactive communication and planning, setting boundaries, and prioritizing your well-being is a good start. The key is striking a balance between supporting your loved ones while safeguarding your financial and emotional health. Though you may never find the perfect solution, don’t get discouraged! Even taking small steps towards a big daunting goal can yield significant benefits for both you and the loved one you wish to support.<br/>
</p></div> | It’s not uncommon for women to take on the role as the default caretaker in domestic and related family matters, but what happens when taking on these responsibilities takes a toll on their own financial well-being?
The REAL SIMPLE and Investopedia [2024 Her Money Mindset Survey](https://www.investopedia.com/her-money-mindset-survey-8647284) found that most women (67%) have supported a loved one financially at some point in their life, and the percentage is even higher for younger women. However, at the same time, many women are balancing debt, and struggling to pay at least one monthly bill.
In this piece, we’ll explore how to financially support loved ones without compromising personal well-being. We’ll cover strategies that include assessing a financial situation, effective communication with loved ones, alternative forms of support, setting clear boundaries, seeking professional advice, and prioritizing personal well-being.
### Key Takeaways
* Assess your financial situation and set clear boundaries to ensure you can support loved ones without sacrificing your own well-being.
* Maintain effective communication with loved ones about financial support to foster healthy relationships.
* Explore alternative forms of support beyond financial assistance, such as emotional support and offering your time and expertise.
* Establish clear boundaries and learn to say “no” when necessary.
* Seek professional advice to navigate complex financial situations and manage your own finances effectively.
## Women Lending Money
The 2024 Her Money Mindset survey revealed women tend to be generous despite their own potentially precarious financial situations. When looking at just the women who said they have financially helped a loved one, 1 in 5 also said they are currently struggling to pay at least one monthly expense.
Women helping others to their own detriment could mean less financial viability in the long run.
A report from the U.S. Census Bureau reveals that women are more likely than men to have no retirement savings. Women that outlive their spouses and earn lower wages over their lifetime may be at more risk, as the report also cites that, “About 50% of women ages 55 to 66 have no personal retirement savings, compared to 47% of men.”
From just a few data points it's evident that women, who often shoulder the responsibilities for their loved ones, need to create a plan to support both themselves and their family members effectively.
## The Downfalls of Lending Money To Family
Despite any good intentions, there are ways that [lending money to family](https://www.investopedia.com/articles/pf/09/to-lend-or-not-to-lend.asp) and friends can go awry. Perhaps you or someone you know have been in this situation with less than ideal outcomes. Before you use your financial resources to help those close to you, first consider the following:
### It can permanently change your relationship
Lending money to a friend or family member can put a strain on your relationship—especially if the borrower doesn’t adhere to the repayment agreement. This could cause feelings of resentment, frustration and in some cases familial alienation.
When considering lending money to someone, ask yourself are you willing to have a strained, permanently damaged, or even nonexistent relationship with them? If the answer is no, it may be best not to move forward with the transaction.
### It can negatively impact your own finances
If you are already in a tenuous financial situation, lending money to someone could aggravate or worsen your financial stability. There’s an opportunity cost related to lending money. Once lent out, this money is no longer working for you, whether in the stock market or accruing interest in a savings account.
Plus, if you’ve lent money that you’d otherwise use in a financial emergency, *you* may have to borrow money for the emergency at a higher interest rate to cover the shortfall. Both situations can put you at a financial disadvantage.
## Tips For Lending Money To Family
In some cases, you may not be able to avoid lending money (or perhaps you’ve already done it.) Here are some tips in case it’s absolutely necessary.
1. **Set boundaries:** Create a personal budget with a line item for helping people. When it’s exhausted, explain to your loved ones that you’ve reached the limit for that expense category.
2. **Document everything:** Capture the terms of your transaction, no matter how small, in writing. Even if you’ve already lent money, don’t be afraid to document a verbal agreement retroactively. You can download loan agreement templates online, which can be notarized by both parties.
3. **If you can’t lose it, don’t lend it:** Though this philosophy may not always fix a money situation gone south, it can lessen the impact on the injured party, i.e. the one who may not be repaid. This approach may also salvage relationships when personal lending goes wrong.
## How to Build a Financial Plan for You and Loves Ones
If you want to ensure that giving financial help to others doesn’t set you back, here’s a step-by-step guide for how to go about it.
### Assess Your Financial Situation
First, evaluate your finances. Take stock of important key financial metrics like your income, expenses, and savings. From there, make note of your financial goals, current financial situation, and what’s needed to meet those markers. Then, create an action plan based on that information.
###
If you find that you’re further behind than you’d like to be, it’s appropriate to modify your plan to help relatives accordingly.
For instance, instead of setting aside $200 per month to help others, you may want to set aside $100 until you reach your personal financial goals. Whether or not you can contribute to your loved ones' needs or not, communication is key, which we’ll cover next.
### Communicate With Loved Ones
[Diane Bourdo](https://humphreysgroup.com/our-team/diane-bourdo/) is a certified financial planner, CFP, and President of The Humphreys Group, an all-women run wealth management firm based in San Francisco, California. She gives guidance on how to broach sensitive financial topics with family.
“The first tip is to be proactive," Bourdo said. "By being proactive and planning a conversation when you have time to talk things through calmly, you are a significant step ahead.”
She describes how you can schedule these conversations to make them more proactive than reactive and emotionally charged. “Don’t blindside the other person … Pick a time when you both will be more relaxed and comfortable.”
### Tip
Pick a time to sit down with your loved one to discuss your financial situation. Coming in with an agenda and designated meeting length is helpful.
If you’re hesitant about starting these conversations, Bourdo suggests that you “start small, prepare, and practice."
Even before you have these conversations, it’s important to have your personal boundaries in place. Bourdo describes this as a “personal policy" which you could also think of as guidelines or a decision framework.
[Stephanie Lyons](https://masterpiecefc.com/financial-coaching) is a financial coach and founder of Masterpiece Financial Coaching. She has created personal policies like setting aside a limited amount of money to help family members and not co-signing for loans.
“I’ve learned through trial and error that in order to maintain healthy relationships and avoid becoming a “crutch” or feeling taken advantage of, it’s important to establish boundaries and to communicate expectations about money clearly,” Lyons said.
The reality is that these conversations will likely be uncomfortable. However, if you can plan for these discussions proactively and purposefully, it can be easier than if you have to start these conversations during a family emergency or under duress.
### Explore Alternative Forms of Support
Once you start communicating with your loved ones about financial support matters, it’s important to inform them about the options outside of or in addition to financial support.
[Rahkim Sabree](https://www.rahkimsabree.com/), a Financial Therapist and Accredited Financial Counselor who works with people in the realm of financial trauma, says that there are many ways to support a loved one who is [struggling financially](https://www.investopedia.com/articles/pf/09/help-family-members-trouble.asp). He suggests, “Finding ways to provide a solution to a problem through educational resources, referrals, or hand holding through the financial hardship can create a sense of accountability and help empower your loved one to make improved financial decisions.”
Providing alternative means of support can also help your loved ones become more financially independent. For example, you may offer a relative who struggles with overspending a tutorial on how to make a budget or research ways to make extra money. It may also help to work with a [family financial planner](https://www.investopedia.com/family-financial-planning-what-financial-advisors-need-to-know-7487767) together.
By empowering your loved ones to become educated about their financial situation, you can help them become more independent while also relieving yourself of financial strain.
### Prioritize Your Financial and Mental Well-being
One of the best ways to help your loved ones in a financial crisis is to take care of yourself. It sounds counterintuitive, but if your loved ones depend on you in some capacity, it can mean you’ll be able to help them for longer.
[Alejandra Rojas](https://alejandrar.com/), a trauma-informed finance professional dedicated to helping women entrepreneurs achieve financial stability, highlights the importance of evaluating the impact of providing financial aid to loved ones.
She explains,“If this support causes guilt, shame, or anxiety, it is important to understand the root causes within their personal 'money story' and work towards healing these underlying issues," Rojas said. "This makes strategizing financial support more manageable.”
For those who end up becoming a primary source of financial support for relatives, Rojas advises, “Seeking professional advice if financial support leads to struggle, resentment, or negative emotions, as maintaining mental health should be a priority.”
## Is it a good idea to lend money to family members?
Most financial experts do not recommend lending money to family members. If lending is necessary, you may want to lend only amounts that you are willing to lose if the borrower doesn’t repay you.
## When should I stop helping my adult child financially?
In most of the U.S., the age of majority is 18. At this point, individuals typically have access to steady employment and the financial system, including banking and lending, to establish their financial independence. However, there may be circumstances where continued support is warranted, such as in cases of job loss, disability, or pursuing education.
## What are some signs of financial stress?
Signs of financial stress may include chronically late payments, mounting debt balances, and the general inability to manage one’s financial affairs. Emotional signs of financial stress may entail anxiety and depression.
## The Bottom Line
There’s no easy way to mix money and relationships. However, having a strategy that incorporates proactive communication and planning, setting boundaries, and prioritizing your well-being is a good start. The key is striking a balance between supporting your loved ones while safeguarding your financial and emotional health. Though you may never find the perfect solution, don’t get discouraged! Even taking small steps towards a big daunting goal can yield significant benefits for both you and the loved one you wish to support.
| It’s not uncommon for women to take on the role as the default caretaker in domestic and related family matters, but what happens when taking on these responsibilities takes a toll on their own financial well-being?
The REAL SIMPLE and Investopedia 2024 Her Money Mindset Survey found that most women (67%) have supported a loved one financially at some point in their life, and the percentage is even higher for younger women. However, at the same time, many women are balancing debt, and struggling to pay at least one monthly bill.
In this piece, we’ll explore how to financially support loved ones without compromising personal well-being. We’ll cover strategies that include assessing a financial situation, effective communication with loved ones, alternative forms of support, setting clear boundaries, seeking professional advice, and prioritizing personal well-being.
Key Takeaways
Assess your financial situation and set clear boundaries to ensure you can support loved ones without sacrificing your own well-being.Maintain effective communication with loved ones about financial support to foster healthy relationships.Explore alternative forms of support beyond financial assistance, such as emotional support and offering your time and expertise.Establish clear boundaries and learn to say “no” when necessary. Seek professional advice to navigate complex financial situations and manage your own finances effectively.
Women Lending Money
The 2024 Her Money Mindset survey revealed women tend to be generous despite their own potentially precarious financial situations. When looking at just the women who said they have financially helped a loved one, 1 in 5 also said they are currently struggling to pay at least one monthly expense.
Women helping others to their own detriment could mean less financial viability in the long run.
A report from the U.S. Census Bureau reveals that women are more likely than men to have no retirement savings. Women that outlive their spouses and earn lower wages over their lifetime may be at more risk, as the report also cites that, “About 50% of women ages 55 to 66 have no personal retirement savings, compared to 47% of men.”
From just a few data points it's evident that women, who often shoulder the responsibilities for their loved ones, need to create a plan to support both themselves and their family members effectively.
The Downfalls of Lending Money To Family
Despite any good intentions, there are ways that lending money to family and friends can go awry. Perhaps you or someone you know have been in this situation with less than ideal outcomes. Before you use your financial resources to help those close to you, first consider the following:
It can permanently change your relationship
Lending money to a friend or family member can put a strain on your relationship—especially if the borrower doesn’t adhere to the repayment agreement. This could cause feelings of resentment, frustration and in some cases familial alienation.
When considering lending money to someone, ask yourself are you willing to have a strained, permanently damaged, or even nonexistent relationship with them? If the answer is no, it may be best not to move forward with the transaction.
It can negatively impact your own finances
If you are already in a tenuous financial situation, lending money to someone could aggravate or worsen your financial stability. There’s an opportunity cost related to lending money. Once lent out, this money is no longer working for you, whether in the stock market or accruing interest in a savings account.
Plus, if you’ve lent money that you’d otherwise use in a financial emergency, you may have to borrow money for the emergency at a higher interest rate to cover the shortfall. Both situations can put you at a financial disadvantage.
Tips For Lending Money To Family
In some cases, you may not be able to avoid lending money (or perhaps you’ve already done it.) Here are some tips in case it’s absolutely necessary.
Set boundaries: Create a personal budget with a line item for helping people. When it’s exhausted, explain to your loved ones that you’ve reached the limit for that expense category. Document everything: Capture the terms of your transaction, no matter how small, in writing. Even if you’ve already lent money, don’t be afraid to document a verbal agreement retroactively. You can download loan agreement templates online, which can be notarized by both parties. If you can’t lose it, don’t lend it: Though this philosophy may not always fix a money situation gone south, it can lessen the impact on the injured party, i.e. the one who may not be repaid. This approach may also salvage relationships when personal lending goes wrong.
How to Build a Financial Plan for You and Loves Ones
If you want to ensure that giving financial help to others doesn’t set you back, here’s a step-by-step guide for how to go about it.
Assess Your Financial Situation
First, evaluate your finances. Take stock of important key financial metrics like your income, expenses, and savings. From there, make note of your financial goals, current financial situation, and what’s needed to meet those markers. Then, create an action plan based on that information.
If you find that you’re further behind than you’d like to be, it’s appropriate to modify your plan to help relatives accordingly.
For instance, instead of setting aside $200 per month to help others, you may want to set aside $100 until you reach your personal financial goals. Whether or not you can contribute to your loved ones' needs or not, communication is key, which we’ll cover next.
Communicate With Loved Ones
Diane Bourdo is a certified financial planner, CFP, and President of The Humphreys Group, an all-women run wealth management firm based in San Francisco, California. She gives guidance on how to broach sensitive financial topics with family.
“The first tip is to be proactive," Bourdo said. "By being proactive and planning a conversation when you have time to talk things through calmly, you are a significant step ahead.”
She describes how you can schedule these conversations to make them more proactive than reactive and emotionally charged. “Don’t blindside the other person … Pick a time when you both will be more relaxed and comfortable.”
Tip
Pick a time to sit down with your loved one to discuss your financial situation. Coming in with an agenda and designated meeting length is helpful.
If you’re hesitant about starting these conversations, Bourdo suggests that you “start small, prepare, and practice."
Even before you have these conversations, it’s important to have your personal boundaries in place. Bourdo describes this as a “personal policy" which you could also think of as guidelines or a decision framework.
Stephanie Lyons is a financial coach and founder of Masterpiece Financial Coaching. She has created personal policies like setting aside a limited amount of money to help family members and not co-signing for loans.
“I’ve learned through trial and error that in order to maintain healthy relationships and avoid becoming a “crutch” or feeling taken advantage of, it’s important to establish boundaries and to communicate expectations about money clearly,” Lyons said.
The reality is that these conversations will likely be uncomfortable. However, if you can plan for these discussions proactively and purposefully, it can be easier than if you have to start these conversations during a family emergency or under duress.
Explore Alternative Forms of Support
Once you start communicating with your loved ones about financial support matters, it’s important to inform them about the options outside of or in addition to financial support.
Rahkim Sabree, a Financial Therapist and Accredited Financial Counselor who works with people in the realm of financial trauma, says that there are many ways to support a loved one who is struggling financially. He suggests, “Finding ways to provide a solution to a problem through educational resources, referrals, or hand holding through the financial hardship can create a sense of accountability and help empower your loved one to make improved financial decisions.”
Providing alternative means of support can also help your loved ones become more financially independent. For example, you may offer a relative who struggles with overspending a tutorial on how to make a budget or research ways to make extra money. It may also help to work with a family financial planner together.
By empowering your loved ones to become educated about their financial situation, you can help them become more independent while also relieving yourself of financial strain.
Prioritize Your Financial and Mental Well-being
One of the best ways to help your loved ones in a financial crisis is to take care of yourself. It sounds counterintuitive, but if your loved ones depend on you in some capacity, it can mean you’ll be able to help them for longer.
Alejandra Rojas, a trauma-informed finance professional dedicated to helping women entrepreneurs achieve financial stability, highlights the importance of evaluating the impact of providing financial aid to loved ones.
She explains,“If this support causes guilt, shame, or anxiety, it is important to understand the root causes within their personal 'money story' and work towards healing these underlying issues," Rojas said. "This makes strategizing financial support more manageable.”
For those who end up becoming a primary source of financial support for relatives, Rojas advises, “Seeking professional advice if financial support leads to struggle, resentment, or negative emotions, as maintaining mental health should be a priority.”
Is it a good idea to lend money to family members?
Most financial experts do not recommend lending money to family members. If lending is necessary, you may want to lend only amounts that you are willing to lose if the borrower doesn’t repay you.
When should I stop helping my adult child financially?
In most of the U.S., the age of majority is 18. At this point, individuals typically have access to steady employment and the financial system, including banking and lending, to establish their financial independence. However, there may be circumstances where continued support is warranted, such as in cases of job loss, disability, or pursuing education.
What are some signs of financial stress?
Signs of financial stress may include chronically late payments, mounting debt balances, and the general inability to manage one’s financial affairs. Emotional signs of financial stress may entail anxiety and depression.
The Bottom Line
There’s no easy way to mix money and relationships. However, having a strategy that incorporates proactive communication and planning, setting boundaries, and prioritizing your well-being is a good start. The key is striking a balance between supporting your loved ones while safeguarding your financial and emotional health. Though you may never find the perfect solution, don’t get discouraged! Even taking small steps towards a big daunting goal can yield significant benefits for both you and the loved one you wish to support.
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]
] |
https://www.investopedia.com/terms/g/green-chip-stocks.asp | Green Chip Stocks: What They are, Segments | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-green-chip-stocks"></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 Green Chip Stocks? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Green chip <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp" rel="noopener noreferrer">stocks</a> are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shares.asp" rel="noopener noreferrer">shares</a> of environmentally-friendly companies. Green chip stocks are likely to be concentrated in areas such as alternative energy, pollution control, carbon abatement, and recycling.
</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"> But despite these issues, green chip stocks may attract significant interest from investors who care about environmentally-friendly market leaders. These stocks are popular with investors who want to focus on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sri.asp" rel="noopener noreferrer">socially responsible investing</a> (SRI).
</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>Green chip stocks are shares of companies that engage in practices seen as being environmentally friendly.</li><li>The companies may fall under sector categories including alternative energy, pollution control, carbon abatement, and recycling. </li><li>Investors who are looking for companies that reflect their values are drawn to green chips, as they tend to fall under the umbrella of socially responsible investing.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-green-chip-stocks"></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 Green Chip Stocks </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The term green chip stocks, or green chips, is derived from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bluechip.asp" rel="noopener noreferrer">blue chips</a>, which refers to stocks that are considered to be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/industry.asp" rel="noopener noreferrer">industry</a> leaders and consistently profitable. Green chips, though, represent public companies whose primary focus and business are seen as eco-friendly or beneficial to the environment. As such, a typical green chip stock may not always be as profitable as a blue-chip stock. That's because its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-structure.asp" rel="noopener noreferrer">financial structure</a> may be less stable than that of a blue-chip.
</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"> Individuals who focus on socially responsible investing generally tend to favor green chips over other companies, regardless of how well they perform. In fact, these companies and their stocks are increasingly popular as environmental issues and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corp-social-responsibility.asp" rel="noopener noreferrer">corporate social responsibility</a> (CSR) takes on more importance in the business world. This <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investing_style.asp" rel="noopener noreferrer">investment style</a> focuses on companies that have a positive impact on society including those that promote high moral values and have a positive impact on the environment.
</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-segments-of-green-chip-companies"></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"> Segments of Green Chip Companies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/publiccompany.asp">public company</a> that operates in the green industry is considered a green chip. These companies may take part in the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0">
<li>Alternative energy, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/renewable_resource.asp">renewable energy</a>, and green power</li>
<li>Recycling and waste reduction</li>
<li>Water and aquaculture</li>
<li>Pollution control</li>
<li>Green transportation</li>
<li>Organic agriculture</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> These segments can be further divided into more specific categories. For instance, the renewable energy segment can be divided into several categories including wind power, solar energy, and geothermal power.
</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"> Wind power is, in fact, one of the fastest-growing sources of alternative energy and has continued to grow within the last 20 years due to a drop in costs.<span class="ql-inline-citation" data-cite="1"></span> Solar power consists of solar power companies and those associated with the construction and installation of these systems. One of the newest entrants into the green sector is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/insights/110916/economic-benefits-legalizing-weed.asp">legal cannabis</a> 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"> These shares tend to be more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp" rel="noopener noreferrer">volatile</a> than other, more profitable companies. Most investors are willing to overlook their limitations during <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp" rel="noopener noreferrer">bull markets</a>, which is when they tend to surge.
</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"> But some investors may not be willing to follow suit during <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearmarket.asp" rel="noopener noreferrer">bear markets</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recession.asp" rel="noopener noreferrer">recessions</a>. That's because there tends to be a flight to safety during these periods, as investors flock to companies that are able to provide more sustainable and predictable returns.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_27-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" 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"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Green ships tend to be more volatile than other, more profitable companies and often surge during bull markets.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> For instance, alternative energy stocks were among the best performers in the latter part of the global bull market between 2003 and 2007, as the search for other energy sources assumed greater importance in an economic situation of triple-digit prices in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crude-oil.asp" rel="noopener noreferrer">crude oil</a>. But these stocks experienced a sudden reversal of fortune in the 2008 bear market, as investors exited their positions in droves due to uncertainty about the global recession and the collapse in conventional energy prices.
</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 outlook for green chips is also generally affected by the level of government <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subsidy.asp" rel="noopener noreferrer">subsidies</a> and support available to them or to users of their end products. While higher subsidy levels can boost these stocks, reduced government subsidies can have an adverse impact on them.
</p></div> | ## What Are Green Chip Stocks?
Green chip [stocks](https://www.investopedia.com/terms/s/stock.asp) are [shares](https://www.investopedia.com/terms/s/shares.asp) of environmentally-friendly companies. Green chip stocks are likely to be concentrated in areas such as alternative energy, pollution control, carbon abatement, and recycling.
But despite these issues, green chip stocks may attract significant interest from investors who care about environmentally-friendly market leaders. These stocks are popular with investors who want to focus on [socially responsible investing](https://www.investopedia.com/terms/s/sri.asp) (SRI).
### Key Takeaways
* Green chip stocks are shares of companies that engage in practices seen as being environmentally friendly.
* The companies may fall under sector categories including alternative energy, pollution control, carbon abatement, and recycling.
* Investors who are looking for companies that reflect their values are drawn to green chips, as they tend to fall under the umbrella of socially responsible investing.
## Understanding Green Chip Stocks
The term green chip stocks, or green chips, is derived from [blue chips](https://www.investopedia.com/terms/b/bluechip.asp), which refers to stocks that are considered to be [industry](https://www.investopedia.com/terms/i/industry.asp) leaders and consistently profitable. Green chips, though, represent public companies whose primary focus and business are seen as eco-friendly or beneficial to the environment. As such, a typical green chip stock may not always be as profitable as a blue-chip stock. That's because its [financial structure](https://www.investopedia.com/terms/f/financial-structure.asp) may be less stable than that of a blue-chip.
Individuals who focus on socially responsible investing generally tend to favor green chips over other companies, regardless of how well they perform. In fact, these companies and their stocks are increasingly popular as environmental issues and [corporate social responsibility](https://www.investopedia.com/terms/c/corp-social-responsibility.asp) (CSR) takes on more importance in the business world. This [investment style](https://www.investopedia.com/terms/i/investing_style.asp) focuses on companies that have a positive impact on society including those that promote high moral values and have a positive impact on the environment.
## Segments of Green Chip Companies
Any [public company](https://www.investopedia.com/terms/p/publiccompany.asp) that operates in the green industry is considered a green chip. These companies may take part in the following:
* Alternative energy, [renewable energy](https://www.investopedia.com/terms/r/renewable_resource.asp), and green power
* Recycling and waste reduction
* Water and aquaculture
* Pollution control
* Green transportation
* Organic agriculture
These segments can be further divided into more specific categories. For instance, the renewable energy segment can be divided into several categories including wind power, solar energy, and geothermal power.
Wind power is, in fact, one of the fastest-growing sources of alternative energy and has continued to grow within the last 20 years due to a drop in costs. Solar power consists of solar power companies and those associated with the construction and installation of these systems. One of the newest entrants into the green sector is the [legal cannabis](https://www.investopedia.com/articles/insights/110916/economic-benefits-legalizing-weed.asp) industry.
## Special Considerations
These shares tend to be more [volatile](https://www.investopedia.com/terms/v/volatility.asp) than other, more profitable companies. Most investors are willing to overlook their limitations during [bull markets](https://www.investopedia.com/terms/b/bullmarket.asp), which is when they tend to surge.
But some investors may not be willing to follow suit during [bear markets](https://www.investopedia.com/terms/b/bearmarket.asp) and [recessions](https://www.investopedia.com/terms/r/recession.asp). That's because there tends to be a flight to safety during these periods, as investors flock to companies that are able to provide more sustainable and predictable returns.
###
Green ships tend to be more volatile than other, more profitable companies and often surge during bull markets.
For instance, alternative energy stocks were among the best performers in the latter part of the global bull market between 2003 and 2007, as the search for other energy sources assumed greater importance in an economic situation of triple-digit prices in [crude oil](https://www.investopedia.com/terms/c/crude-oil.asp). But these stocks experienced a sudden reversal of fortune in the 2008 bear market, as investors exited their positions in droves due to uncertainty about the global recession and the collapse in conventional energy prices.
The outlook for green chips is also generally affected by the level of government [subsidies](https://www.investopedia.com/terms/s/subsidy.asp) and support available to them or to users of their end products. While higher subsidy levels can boost these stocks, reduced government subsidies can have an adverse impact on them.
| What Are Green Chip Stocks?
Green chip stocks are shares of environmentally-friendly companies. Green chip stocks are likely to be concentrated in areas such as alternative energy, pollution control, carbon abatement, and recycling.
But despite these issues, green chip stocks may attract significant interest from investors who care about environmentally-friendly market leaders. These stocks are popular with investors who want to focus on socially responsible investing (SRI).
Key Takeaways
Green chip stocks are shares of companies that engage in practices seen as being environmentally friendly.The companies may fall under sector categories including alternative energy, pollution control, carbon abatement, and recycling. Investors who are looking for companies that reflect their values are drawn to green chips, as they tend to fall under the umbrella of socially responsible investing.
Understanding Green Chip Stocks
The term green chip stocks, or green chips, is derived from blue chips, which refers to stocks that are considered to be industry leaders and consistently profitable. Green chips, though, represent public companies whose primary focus and business are seen as eco-friendly or beneficial to the environment. As such, a typical green chip stock may not always be as profitable as a blue-chip stock. That's because its financial structure may be less stable than that of a blue-chip.
Individuals who focus on socially responsible investing generally tend to favor green chips over other companies, regardless of how well they perform. In fact, these companies and their stocks are increasingly popular as environmental issues and corporate social responsibility (CSR) takes on more importance in the business world. This investment style focuses on companies that have a positive impact on society including those that promote high moral values and have a positive impact on the environment.
Segments of Green Chip Companies
Any public company that operates in the green industry is considered a green chip. These companies may take part in the following:
Alternative energy, renewable energy, and green power
Recycling and waste reduction
Water and aquaculture
Pollution control
Green transportation
Organic agriculture
These segments can be further divided into more specific categories. For instance, the renewable energy segment can be divided into several categories including wind power, solar energy, and geothermal power.
Wind power is, in fact, one of the fastest-growing sources of alternative energy and has continued to grow within the last 20 years due to a drop in costs. Solar power consists of solar power companies and those associated with the construction and installation of these systems. One of the newest entrants into the green sector is the legal cannabis industry.
Special Considerations
These shares tend to be more volatile than other, more profitable companies. Most investors are willing to overlook their limitations during bull markets, which is when they tend to surge.
But some investors may not be willing to follow suit during bear markets and recessions. That's because there tends to be a flight to safety during these periods, as investors flock to companies that are able to provide more sustainable and predictable returns.
Green ships tend to be more volatile than other, more profitable companies and often surge during bull markets.
For instance, alternative energy stocks were among the best performers in the latter part of the global bull market between 2003 and 2007, as the search for other energy sources assumed greater importance in an economic situation of triple-digit prices in crude oil. But these stocks experienced a sudden reversal of fortune in the 2008 bear market, as investors exited their positions in droves due to uncertainty about the global recession and the collapse in conventional energy prices.
The outlook for green chips is also generally affected by the level of government subsidies and support available to them or to users of their end products. While higher subsidy levels can boost these stocks, reduced government subsidies can have an adverse impact on them.
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https://www.investopedia.com/terms/v/valueinvesting.asp | Value Investing Definition, How It Works, Strategies, Risks | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-value-investing"></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 Value Investing? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Value investing is an investment strategy that involves picking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stocks</a> that appear to be trading for less than their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intrinsicvalue.asp">intrinsic</a> or book value. Value investors actively ferret out stocks they think the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockmarket.asp">stock market</a> is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentals.asp">fundamentals</a>. The overreaction offers an opportunity to profit by purchaing stocks at discounted prices.
</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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oracleofomaha.asp">Warren Buffett</a> is probably the best-known value investor today, but there are many others, including <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bengraham.asp">Benjamin Graham</a> (Buffett's professor and mentor), David Dodd, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/charlie-munger.asp">Charlie Munger</a> (Buffet's business partner), Christopher Browne (another Graham student), and billionaire <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge-fund-manager.asp">hedge-fund manager</a>, Seth Klarman.
</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>Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.</li><li>Value investors actively ferret out stocks they think the stock market is underestimating.</li><li>Value investors use financial analysis, don't follow the herd, and are long-term investors of quality companies.</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 / Sydney Saporito</p></span>
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<span class="heading-toc" id="toc-understanding-value-investing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding Value Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The basic concept behind everyday value investing is straightforward: If you know the true value of something, you can save a lot of money when you buy it. Most folks would agree that whether you buy a new TV on sale, or at full price, you’re getting the same TV with the same screen size and picture quality.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Stock prices work in a similar manner, meaning a company’s share price can change even when the company’s valuation has remained the same. This means, strictly speaking, there is no such thing as a true, or intrinsic, value of the stock of a given company. But there are relative values.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Market participants can buy or sell shares without being tethered to an objective price figure. Therefore, stocks, like TVs, go through periods of higher and lower demand leading to price fluctuations. If the company's fundamentals are the same, and its future opportunities are unchanged, then the value of the shares is largely the same even though the price differs.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Value investing developed from a concept by Columbia Business School professors Benjamin Graham and David Dodd in 1934 and was popularized in Graham's 1949 book, "The Intelligent Investor<em>."</em></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Just like savvy shoppers would argue that it makes no sense to pay full price for a TV since TVs go on sale several times a year, savvy value investors believe stocks work the same way. Of course, unlike TVs, stocks won't go on sale at predictable times of the year such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blackfriday.asp">Black Friday</a>, and their sale prices won’t be advertised.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Value investing is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/piotroski-score.asp">process of doing detective work</a> to find these secret sales on stocks and buying them at a discount compared to how the market values them. In return for buying and holding these value stocks for the long term, investors can be rewarded handsomely.
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<span class="heading-toc" id="toc-intrinsic-value-and-value-investing"></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"> Intrinsic Value and Value Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> In the stock market, the equivalent of a stock being cheap or discounted is when its shares are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/undervalued.asp">undervalued</a>. Value investors hope to profit from shares they perceive to be deeply discounted.
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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 use various metrics to attempt to find the valuation or <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> of a stock. Intrinsic value is a combination of using financial analysis, such as studying a company's financial performance, revenue, earnings, cash flow, profit, and fundamental factors. It includes the company's brand, business model, target market, and competitive advantage. Some metrics used to value a company's stock include:
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<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-to-bookratio.asp">Price-to-book</a> (P/B), which measures the value of a company's assets and compares them to the stock price. If the price is lower than the value of the assets, the stock is undervalued, assuming the company is not in financial hardship.</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">Price-to-earnings</a> (P/E), which shows the company's track record for earnings to determine if the stock price is not reflecting all of the earnings or is undervalued.</li>
<li><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>, which is the cash generated from a company's revenue or operations after the costs of expenditures have been subtracted.</li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Free cash flow is the cash remaining after expenses have been paid, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating_expense.asp">operating expenses</a> and large purchases called <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>, which is the purchase of assets like equipment or upgrading a manufacturing plant. If a company is generating free cash flow, it'll have money left over to invest in the future of the business, pay off debt, pay <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> or rewards to shareholders, and issue <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp">share buybacks</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Of course, there are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pegyratio.asp">many other metrics</a> used in the analysis, including analyzing debt, equity, sales, and revenue growth. After reviewing these metrics, the value investor can decide to purchase shares if the comparative value—the stock's current price vis-a-vis its company's intrinsic worth—is attractive enough.
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<span class="heading-toc" id="toc-margin-of-safety"></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"> Margin of Safety </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Value investors require some room for error in their estimation of value, and they often set their own "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginofsafety.asp">margin of safety</a>" based on their particular risk tolerance. The margin of safety principle, one of the keys to successful value investing, is based on the premise that buying stocks at bargain prices gives you a better chance of earning a profit later when you sell them. The margin of safety also makes you less likely to lose money if the stock doesn't perform as you had expected.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> So, if you believe a stock is worth $100 and buy it for $66, you'll make a profit of $34 simply by waiting for the stock's price to rise to the $100 true value. On top of that, the company might grow and become more valuable, giving you a chance to make even more money. If the stock's price rises to $110, you'll make $44 since you bought the stock on sale. If you had purchased it at its full price of $100, you would only make a $10 profit.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Benjamin Graham, the father of value investing, recommended buying stocks when they were priced at two-thirds or less of their liquidation value. This was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<span class="heading-toc" id="toc-value-investors-believe-the-markets-are-not-efficient"></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"> Value Investors Believe the Markets Are Not Efficient </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Value investors don't believe in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp">efficient-market hypothesis</a>, which says that stock prices already take all information about a company into account, so their price always reflects their value. Instead, value investors believe that stocks may be over or underpriced for various reasons.
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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, a stock might be underpriced because the economy is performing poorly and investors are panicking and selling (as was the case during the Great Recession). Or a stock might be overpriced because investors have gotten too excited about an unproven new technology (as was the case of the dot-com bubble). Psychological biases can push a stock price up or down based on news, such as disappointing or unexpected earnings announcements, product recalls, or litigation. Stocks may also be undervalued because they trade under the radar, meaning analysts and the media inadequately cover them.
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<span class="heading-toc" id="toc-value-investors-dont-follow-the-herd"></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"> Value Investors Don't Follow the Herd </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Value investors possess many characteristics of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contrarian.asp">contrarians</a>—they don’t follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they’re often selling or standing back. When everyone else is selling, they’re buying or holding. Value investors don’t buy trendy stocks (because they’re typically overpriced). Instead, they invest in companies that aren’t household names if the financials check out. They also take a second look at stocks that are household names when those stocks’ prices have plummeted, believing such companies can recover from setbacks if their fundamentals remain strong and their products and services still have quality.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Value investors only care about a stock’s intrinsic value. They think about buying a stock for what it actually is: a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.
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<span class="heading-toc" id="toc-value-investing-requires-diligence-and-patience"></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"> Value Investing Requires Diligence and Patience </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Estimating the true intrinsic value of a stock involves some financial analysis but also involves a fair amount of subjectivity—meaning at times, it can be more of an art than a science. Two different investors can analyze the exact same valuation data on a company and arrive at different decisions. So, you'll need to develop a strategy that works for you.
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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"> Find a Preferred Method </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Some investors, who look only at existing financials, don't put much faith in estimating future growth. Other value investors focus primarily on a company's future growth potential and estimated <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashflow.asp">cash flows</a>. Some do both: Noted value investment gurus <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/01/071801.asp">Warren Buffett</a> and Peter Lynch, who ran Fidelity Investment's Magellan Fund for several years are both known for analyzing financial statements and looking at valuation multiples, in order to identify cases where the market has mispriced stocks.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-subheading__text"> Purchase for Less </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Despite different approaches, the underlying logic of value investing is to purchase assets for less than they are currently worth, hold them for the long-term, and profit when they return to the intrinsic value or above. It doesn't provide instant gratification. You can’t expect to buy a stock for $50 on Tuesday and sell it for $100 on Thursday. Instead, you may have to wait years before your stock investments pay off, and you will occasionally lose money. The good news is that, for most investors, long-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp">capital gains</a> are taxed at a lower rate than short-term investment gains.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-subheading__text"> Play the Waiting Game </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Like all investment strategies, you must have the patience and diligence to stick with your investment philosophy. Some stocks you might want to buy because the fundamentals are sound, but you'll have to wait if it's overpriced. You'll want to buy the stock that is most attractively priced at that moment, and if no stocks meet your criteria, you'll have to sit and wait and let your cash sit idle until an opportunity arises.
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<span class="heading-toc" id="toc-why-stocks-become-undervalued"></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"> Why Stocks Become Undervalued </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> If you don’t believe in the efficient market hypothesis, you can identify reasons why stocks might be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/020516/3-best-vanguard-funds-value-investors-2016.asp">trading below their intrinsic value</a>. Here are a few factors that can drag a stock’s price down and make it undervalued.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-subheading__text"> Market Moves and Herd Mentality </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Sometimes, people invest irrationally based on psychological biases rather than market fundamentals. When a specific stock’s price is rising or when the overall market is rising, they buy. They see that if they had invested 12 weeks ago, they could have earned 15% by now, and they develop a fear of missing out.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Conversely, when a stock’s price is falling or when the overall market is declining, loss aversion compels people to sell their stocks. So, instead of keeping their losses on paper and waiting for the market to change directions, they accept a certain loss by selling. Such investor behavior is so widespread that it affects the prices of individual stocks, exacerbating both upward and downward market movements and creating excessive moves.
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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"> Market Crashes </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> A "bubble" is the result of investor exuberance, with prices growing ever higher. When the market reaches an unbelievable high, it usually results in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bubble.asp">bubble bursting</a>. Because the price levels are unsustainable, investors end up panicking and selling off related assets en masse. This results in a market crash. That's what happened in the early 2000s with the dot-com bubble when the values of tech stocks shot up beyond what the companies were worth. We saw the same thing happen when the housing bubble burst in 2006, and the market crashed in the following years.
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<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"> Unnoticed and Unglamorous Stocks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Look beyond what you're hearing in the news. You may find really great investment opportunities in undervalued stocks that may not be on people's radars, like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-cap.asp">small caps</a> or even foreign stocks.<strong> </strong>Most investors want in on the next big thing, such as a technology startup, instead of a boring, established consumer durables manufacturer.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> For example, stocks like Meta (formerly Facebook), Apple, and Google are more likely to be affected by herd-mentality investing than <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conglomerate.asp">conglomerates</a> like Proctor & Gamble or Johnson & Johnson.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-subheading__text"> Bad News </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> Even good companies face setbacks, such as litigation and recalls. However, just because a company experiences one adverse event doesn't mean it isn't still fundamentally valuable or that its stock won't bounce back. In other cases, there may be a segment or division that puts a dent in a company's profitability. But that can change if the company decides to dispose of or close that arm of the business.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Analysts do not have a great track record for predicting the future, yet investors often panic and sell when a company announces earnings that are lower than <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/analyst-expectation.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186">analysts' expectations</a>. But value investors who can see beyond the downgrades and negative news can buy stock at deeper discounts because they can recognize a company's long-term value.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> Cyclicality </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Cyclicality is defined as the fluctuations that affect a business. Companies are not immune to ups and downs in the economic cycle, whether that's seasonality and the time of year or consumer attitudes and moods. All of this can affect profit levels and the price of a company's stock, but it doesn't affect its long-term value.
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<span class="heading-toc" id="toc-value-investing-strategies"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_86-0"> <span class="mntl-sc-block-heading__text"> Value Investing Strategies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> The key to buying an undervalued stock is to thoroughly research the company and make common-sense decisions. Value investor Christopher H. Browne recommends asking if a company is likely to increase its revenue via the following methods:
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> <li>Raising prices on products</li><li>Increasing sales figures</li><li>Decreasing expenses</li><li>Selling off or closing down unprofitable divisions<span class="ql-inline-citation" data-cite="8"></span></li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Browne also suggests studying a company's competitors to evaluate its future growth prospects. But the answers to all of these questions tend to be speculative, without any real supportive numerical data. Simply put, no quantitative software programs are yet available to help achieve these answers, making value stock investing somewhat of a grand guessing game. For this reason, Warren Buffett recommends investing only in industries you have personally worked in or whose consumer goods you are familiar with, like cars, clothes, appliances, and food.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> One thing investors can do is choose the stocks of companies that sell high-demand products and services. While it's difficult to predict when innovative new products will capture market share, it's easy to gauge how long a company has been in business and study how it has adapted to challenges over time.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_95-0"> <span class="mntl-sc-block-subheading__text"> Insider Buying and Selling </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> For our purposes, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insider.asp">insiders</a> are the company’s senior managers and directors, plus any shareholders who own at least 10% of the company’s stock.<span class="ql-inline-citation" data-cite="9"></span> A company’s managers and directors have unique knowledge about the companies they run, so if they are purchasing its stock, it’s reasonable to assume that the company’s prospects look favorable.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> Likewise, investors who own at least 10% of a company’s stock wouldn’t have bought so much if they didn’t see profit potential. Conversely, a stock sale by an insider doesn’t necessarily point to bad news about the company’s anticipated performance—the insider might simply need cash for any number of personal reasons. Nonetheless, if mass sell-offs are occurring by insiders, such a situation may warrant further in-depth analysis of the reason behind the sale.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-subheading__text"> Analyze Financial Reports </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> At some point, value investors have to look at a company's financials to see how its performing and compare it to industry peers.
</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"> Financial reports present a company’s annual and quarterly performance results. The annual report is SEC Form 10-K, and the quarterly report is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10q.asp">SEC Form 10-Q</a>. Companies are required to file these reports with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission</a> (SEC).<span class="ql-inline-citation" data-cite="3"></span> You can find them on the SEC website or the company’s investor relations page on their website.<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_105-0"> You can learn a lot from a company’s annual report. It will explain the products and services offered as well as where the company is heading.
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<span class="heading-toc" id="toc-financial-statements"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_107-0"> <span class="mntl-sc-block-heading__text"> Financial Statements </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> Financial statements are generally included in a company's financial reports to regulators, but they provide a big-picture view of the company's financial condition. There are three statements publicly traded companies are required to file—the balance sheet, the income statement, and the statement of cash flows.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_110-0"> <span class="mntl-sc-block-subheading__text"> Balance Sheet </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_111-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancesheet.asp">balance sheet</a> consists of two sections, one listing the company’s assets and another listing its liabilities and equity. The assets section is broken down into a company’s cash and cash equivalents, investments, accounts receivable or money owed from customers, inventories, and fixed assets such as plant and equipment.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> The liabilities section lists the company’s accounts payable or money owed, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accrued-liability.asp">accrued liabilities</a>, short-term debt, and long-term debt. The shareholders’ equity section reflects how much money is invested in the company, how many shares are outstanding, and how much the company has in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retainedearnings.asp">retained earnings</a>. Retained earnings is a type of savings account that holds the cumulative profits from the company. Retained earnings are used to pay dividends, for example, and are considered a sign of a healthy, profitable company.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_115-0"> <span class="mntl-sc-block-subheading__text"> Income Statement </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> The <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> tells you how much revenue is being generated, the company's expenses, and profits. Looking at the annual income statement rather than a quarterly statement will give you a better idea of the company’s overall position since many companies experience fluctuations in sales volume during the year.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_118-0"> <span class="mntl-sc-block-subheading__text"> Statement of Cash Flows </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> The statement of cash flows lists everywhere cash came from and went to in a company. It tells you which activities created inflow, such as operating, investing, or financing activities. It also lists which of these activities created outflows.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_121-0"><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_122-0"><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>Studies have consistently found that value stocks outperform growth stocks and the market over the long term.</p></div></div></div>
<span class="heading-toc" id="toc-couch-potato-value-investing"></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"> Couch Potato Value Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> It is possible to become a value investor without ever reading a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10-k.asp">10-K</a>. Couch potato investing is a passive strategy of buying and holding a few investing vehicles for which someone else has already done the investment analysis—i.e., mutual funds or exchange-traded funds. In the case of value investing, those funds would be those that follow the value strategy and buy value stocks—or track the moves of high-profile value investors like Warren Buffett.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> Investors can buy shares of his holding company, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B">Berkshire Hathaway</a>, which owns or has an interest in dozens of companies the Oracle of Omaha has researched and evaluated.
</p>
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<span class="heading-toc" id="toc-risks-with-value-investing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_128-0"> <span class="mntl-sc-block-heading__text"> Risks with Value Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_129-0"> As with any investment strategy, there's the risk of loss with value investing despite it being a low-to-medium-risk strategy. Below we highlight a few of those risks and why losses can occur.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_131-0"> <span class="mntl-sc-block-subheading__text"> The Figures are Important </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_132-0"> Many investors use financial statements <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/bookvintrinsic.asp">when they make value investing decisions</a>. So if you rely on your own analysis, make sure you have the most updated information and that your calculations are accurate. If not, you may end up making a poor investment or miss out on a great one. If you aren’t yet confident in your ability to read and analyze <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/06/financialreporting.asp">financial statements</a> and reports, keep studying these subjects and don’t place any trades until you’re truly ready.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_134-0"> One strategy is to read the footnotes. These are the notes in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10-k.asp">Form 10-K</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10q.asp">Form 10-Q</a> that explain a company’s financial statements in greater detail. The notes follow the statements and explain the company’s accounting methods and elaborate on reported results. If the footnotes are unintelligible or the information they present seems unreasonable, you’ll have a better idea of whether to pass on the stock.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_136-0"> <span class="mntl-sc-block-subheading__text"> Extraordinary Gains or Losses </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_137-0"> There are some incidents that may show up on a company's income statement that should be considered exceptions or extraordinary. These are generally beyond the company's control and are called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/extraordinaryitem.asp">extraordinary item</a>—gain or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/extraordinaryitem.asp">extraordinary item</a>—loss. Some examples include lawsuits, restructuring, or even a natural disaster. If you exclude these from your analysis, you can probably get a sense of the company's future performance.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_139-0"> However, think critically about these items and use your best judgment. If a company has a pattern of reporting the same extraordinary item year after year, it might not be too extraordinary. Also, if there are unexpected losses year after year, it can be a sign that the company is having financial problems. Extraordinary items are supposed to be unusual and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nonrecurringcharge.asp">nonrecurring</a>. Also, beware of a pattern of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/write-off.asp">write-offs</a>.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_141-0"> <span class="mntl-sc-block-subheading__text"> Ignoring Ratio Analysis Flaws </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_142-0"> Earlier sections of this tutorial have discussed calculating various financial ratios that help investors diagnose a company’s financial health. There isn't just one way to determine financial ratios, which can be fairly problematic. The following can affect how the ratios can be interpreted:
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_144-0">
<li>Ratios can be determined using before-tax or after-tax numbers.</li>
<li>Some ratios don't give accurate results but lead to estimations.</li>
<li>Depending on how the term earnings are defined, a company's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eps.asp">earnings per share</a> (EPS) may differ.</li>
<li>Comparing different companies by their ratios—even if the ratios are the same—may be difficult since companies have different accounting practices.</li>
</ul>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_146-0"> <span class="mntl-sc-block-subheading__text"> Buying Overvalued Stock </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_147-0"> Overpaying for a stock is one of the main risks for value investors. You can risk losing part or all of your money if you overpay. The same goes if you buy a stock close to its<strong> </strong><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fairmarketvalue.asp" rel="noopener noreferrer">fair market value</a>. Buying a stock that's undervalued means your risk of losing money is reduced, even when the company doesn't do well.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_149-0"> Recall that one of the fundamental principles of value investing is to build a margin of safety into all your investments. This means purchasing stocks at a price of around two-thirds or less of their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intrinsicvalue.asp" rel="noopener noreferrer">intrinsic value</a>. Value investors want to risk as little capital as possible in potentially overvalued assets, so they try not to overpay for investments.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_151-0"> <span class="mntl-sc-block-subheading__text"> Not Diversifying </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_152-0"> Conventional investment wisdom says that investing in individual stocks can be a high-risk strategy. Instead, we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors. However, some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks, as long as you choose stocks that represent different industries and different sectors of the economy. Value investor and investment manager Christopher H. Browne recommends owning a minimum of 10 stocks.<span class="ql-inline-citation" data-cite="2"></span> According to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bengraham.asp">Benjamin Graham</a>, you should look at choosing 10 to 30 stocks if you want to diversify your holdings.<span class="ql-inline-citation" data-cite="5"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_154-0"> Another set of experts, though, say differently. If you want to get big returns, try choosing just a few stocks, according to the authors of the second edition of “Value Investing for Dummies.” They say having more stocks in your portfolio will probably lead to an average return.<span class="ql-inline-citation" data-cite="6"></span> Of course, this advice assumes that you are great at choosing winners, which may not be the case, particularly if you are a value-investing novice.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_156-0"> <span class="mntl-sc-block-subheading__text"> Listening to Your Emotions </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_157-0"> It is difficult to ignore your emotions when making investment decisions. Even if you can take a detached, critical standpoint when evaluating numbers, fear and excitement may creep in when it comes time to actually use part of your hard-earned savings to purchase a stock. More importantly, once you have purchased the stock, you may be tempted to sell it if the price falls.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_159-0"> Keep in mind that the point of value investing is to resist the temptation to panic and go with the herd. So don't fall into the trap of buying when share prices rise and selling when they drop. Such behavior will obliterate your returns (playing follow-the-leader in investing can quickly become a dangerous game).
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<span class="heading-toc" id="toc-example-of-a-value-investment"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_161-0"> <span class="mntl-sc-block-heading__text"> Example of a Value Investment </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_162-0"> Value investors seek to profit from market overreactions that usually come from the release of a quarterly earnings report. As a historical real example, on May 4, 2016, Fitbit released its Q1 2016 earnings report and saw a sharp decline in after-hours trading. After the flurry was over, the company lost nearly 19% of its value. However, while large decreases in a company's share price are not uncommon after the release of an earnings report, Fitbit not only met analyst expectations for the quarter but even increased guidance for 2016.<span class="ql-inline-citation" data-cite="7"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_164-0"> The company earned $505.4 million in revenue for the first quarter of 2016, up more than 50% when compared to the same time period from one year previous. Further, Fitbit expected to generate between $565 million and $585 million in the second quarter of 2016, which was above the $531 million forecasted by analysts.<span class="ql-inline-citation" data-cite="7"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_166-0"> The company looked to be strong and growing. However, since Fitbit invested heavily in research and development costs in the first quarter of the year, earnings per share (EPS) declined compared to the previous year. This is all average investors needed to jump, selling off enough shares to cause the price to fall. However, a value investor who looked at the fundamentals of Fitbit understood it was an undervalued security poised to potentially increase 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_168-0"> Case in point—in 2019, Fitbit posted more than $1.4 billion in revenues; then, in 2021, Google finalized its purchase of Fitbit for $2.1 billion.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span> A value investor purchasing Fitbit stock at an undervalued price of $5.35 on Feb. 9, 2017, would have done well because the stocks were converted to cash at a value of $7.35 per share at the merger and paid to investors.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_170-0"><span class="heading-toc" id="toc-what-is-a-value-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Value Investment?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Value investing is an investment philosophy that involves purchasing assets at a discount to their intrinsic value. This is also known as a security’s margin of safety. Benjamin Graham, known as the father of value investing, first established this term with his landmark book, <em>The Intelligent Investor,</em> in 1949. Notable proponents of value investors include Warren Buffett, Seth Klarman, Mohnish Pabrai, and Joel Greenblatt.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_172-0"><span class="heading-toc" id="toc-what-is-an-example-of-value-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of Value Investing?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Common sense and fundamental analysis underlie many of the principles of value investing. The margin of safety, which is the discount a stock trades at compared to its intrinsic value, is one leading principle. Fundamental metrics, such as the price-to-earnings (PE) ratio, for example, illustrate company earnings in relation to their price. A value investor may invest in a company with a low PE ratio because it provides one barometer for determining whether it is undervalued or overvalued.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_174-0"><span class="heading-toc" id="toc-what-are-common-value-investing-metrics"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Common Value Investing Metrics?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Along with analyzing a company’s price-to-earnings ratio, which can illustrate how expensive it is in relation to its earnings, common metrics include the price-to-book ratio, free cash flow (FCF), and debt-to-equity ratio (D/E).</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_176-0"><span class="heading-toc" id="toc-who-is-mr-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Is Mr. Market?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>First coined by Benjamin Graham, “Mr. Market” represents a hypothetical investor that is prone to sharp mood swings of fear, apathy, and euphoria. “Mr. Market” represents the consequences of emotionally reacting to the stock market, rather than rationally or with fundamental analysis. As an archetype for behavior, “Mr. Market” speaks to the price fluctuations inherent in markets, and the emotions that can influence these on extreme scales, such as greed and fear.</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_178-0"> <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_179-0"> Value investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_181-0"> You will probably want to sell your stocks when it comes time to make a major purchase or retire, but by holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (and the price you paid for them).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_183-0"> <em><strong>Correction—Feb. 8, 2024</strong>: </em>This article has been corrected to state that Benjamin Graham recommended buying stocks when they were priced at two-thirds or less of their liquidation value.<br/>
</p></div> | ## What Is Value Investing?
Value investing is an investment strategy that involves picking [stocks](https://www.investopedia.com/terms/s/stock.asp) that appear to be trading for less than their [intrinsic](https://www.investopedia.com/terms/i/intrinsicvalue.asp) or book value. Value investors actively ferret out stocks they think the [stock market](https://www.investopedia.com/terms/s/stockmarket.asp) is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term [fundamentals](https://www.investopedia.com/terms/f/fundamentals.asp). The overreaction offers an opportunity to profit by purchaing stocks at discounted prices.
[Warren Buffett](https://www.investopedia.com/terms/o/oracleofomaha.asp) is probably the best-known value investor today, but there are many others, including [Benjamin Graham](https://www.investopedia.com/terms/b/bengraham.asp) (Buffett's professor and mentor), David Dodd, [Charlie Munger](https://www.investopedia.com/terms/c/charlie-munger.asp) (Buffet's business partner), Christopher Browne (another Graham student), and billionaire [hedge-fund manager](https://www.investopedia.com/terms/h/hedge-fund-manager.asp), Seth Klarman.
### Key Takeaways
* Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
* Value investors actively ferret out stocks they think the stock market is underestimating.
* Value investors use financial analysis, don't follow the herd, and are long-term investors of quality companies.
![Value Investing]()
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Investopedia / Sydney Saporito
## Understanding Value Investing
The basic concept behind everyday value investing is straightforward: If you know the true value of something, you can save a lot of money when you buy it. Most folks would agree that whether you buy a new TV on sale, or at full price, you’re getting the same TV with the same screen size and picture quality.
Stock prices work in a similar manner, meaning a company’s share price can change even when the company’s valuation has remained the same. This means, strictly speaking, there is no such thing as a true, or intrinsic, value of the stock of a given company. But there are relative values.
Market participants can buy or sell shares without being tethered to an objective price figure. Therefore, stocks, like TVs, go through periods of higher and lower demand leading to price fluctuations. If the company's fundamentals are the same, and its future opportunities are unchanged, then the value of the shares is largely the same even though the price differs.
###
Value investing developed from a concept by Columbia Business School professors Benjamin Graham and David Dodd in 1934 and was popularized in Graham's 1949 book, "The Intelligent Investor*."*
Just like savvy shoppers would argue that it makes no sense to pay full price for a TV since TVs go on sale several times a year, savvy value investors believe stocks work the same way. Of course, unlike TVs, stocks won't go on sale at predictable times of the year such as [Black Friday](https://www.investopedia.com/terms/b/blackfriday.asp), and their sale prices won’t be advertised.
Value investing is the [process of doing detective work](https://www.investopedia.com/terms/p/piotroski-score.asp) to find these secret sales on stocks and buying them at a discount compared to how the market values them. In return for buying and holding these value stocks for the long term, investors can be rewarded handsomely.
## Intrinsic Value and Value Investing
In the stock market, the equivalent of a stock being cheap or discounted is when its shares are [undervalued](https://www.investopedia.com/terms/u/undervalued.asp). Value investors hope to profit from shares they perceive to be deeply discounted.
Investors use various metrics to attempt to find the valuation or [intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp) of a stock. Intrinsic value is a combination of using financial analysis, such as studying a company's financial performance, revenue, earnings, cash flow, profit, and fundamental factors. It includes the company's brand, business model, target market, and competitive advantage. Some metrics used to value a company's stock include:
* [Price-to-book](https://www.investopedia.com/terms/p/price-to-bookratio.asp) (P/B), which measures the value of a company's assets and compares them to the stock price. If the price is lower than the value of the assets, the stock is undervalued, assuming the company is not in financial hardship.
* [Price-to-earnings](https://www.investopedia.com/terms/p/price-earningsratio.asp) (P/E), which shows the company's track record for earnings to determine if the stock price is not reflecting all of the earnings or is undervalued.
* [Free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp), which is the cash generated from a company's revenue or operations after the costs of expenditures have been subtracted.
Free cash flow is the cash remaining after expenses have been paid, including [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp) and large purchases called [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp), which is the purchase of assets like equipment or upgrading a manufacturing plant. If a company is generating free cash flow, it'll have money left over to invest in the future of the business, pay off debt, pay [dividends](https://www.investopedia.com/terms/d/dividend.asp) or rewards to shareholders, and issue [share buybacks](https://www.investopedia.com/terms/b/buyback.asp).
Of course, there are [many other metrics](https://www.investopedia.com/terms/p/pegyratio.asp) used in the analysis, including analyzing debt, equity, sales, and revenue growth. After reviewing these metrics, the value investor can decide to purchase shares if the comparative value—the stock's current price vis-a-vis its company's intrinsic worth—is attractive enough.
## Margin of Safety
Value investors require some room for error in their estimation of value, and they often set their own "[margin of safety](https://www.investopedia.com/terms/m/marginofsafety.asp)" based on their particular risk tolerance. The margin of safety principle, one of the keys to successful value investing, is based on the premise that buying stocks at bargain prices gives you a better chance of earning a profit later when you sell them. The margin of safety also makes you less likely to lose money if the stock doesn't perform as you had expected.
So, if you believe a stock is worth $100 and buy it for $66, you'll make a profit of $34 simply by waiting for the stock's price to rise to the $100 true value. On top of that, the company might grow and become more valuable, giving you a chance to make even more money. If the stock's price rises to $110, you'll make $44 since you bought the stock on sale. If you had purchased it at its full price of $100, you would only make a $10 profit.
###
Benjamin Graham, the father of value investing, recommended buying stocks when they were priced at two-thirds or less of their liquidation value. This was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside.
## Value Investors Believe the Markets Are Not Efficient
Value investors don't believe in the [efficient-market hypothesis](https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp), which says that stock prices already take all information about a company into account, so their price always reflects their value. Instead, value investors believe that stocks may be over or underpriced for various reasons.
For example, a stock might be underpriced because the economy is performing poorly and investors are panicking and selling (as was the case during the Great Recession). Or a stock might be overpriced because investors have gotten too excited about an unproven new technology (as was the case of the dot-com bubble). Psychological biases can push a stock price up or down based on news, such as disappointing or unexpected earnings announcements, product recalls, or litigation. Stocks may also be undervalued because they trade under the radar, meaning analysts and the media inadequately cover them.
## Value Investors Don't Follow the Herd
Value investors possess many characteristics of [contrarians](https://www.investopedia.com/terms/c/contrarian.asp)—they don’t follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they’re often selling or standing back. When everyone else is selling, they’re buying or holding. Value investors don’t buy trendy stocks (because they’re typically overpriced). Instead, they invest in companies that aren’t household names if the financials check out. They also take a second look at stocks that are household names when those stocks’ prices have plummeted, believing such companies can recover from setbacks if their fundamentals remain strong and their products and services still have quality.
Value investors only care about a stock’s intrinsic value. They think about buying a stock for what it actually is: a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.
## Value Investing Requires Diligence and Patience
Estimating the true intrinsic value of a stock involves some financial analysis but also involves a fair amount of subjectivity—meaning at times, it can be more of an art than a science. Two different investors can analyze the exact same valuation data on a company and arrive at different decisions. So, you'll need to develop a strategy that works for you.
### Find a Preferred Method
Some investors, who look only at existing financials, don't put much faith in estimating future growth. Other value investors focus primarily on a company's future growth potential and estimated [cash flows](https://www.investopedia.com/terms/c/cashflow.asp). Some do both: Noted value investment gurus [Warren Buffett](https://www.investopedia.com/articles/01/071801.asp) and Peter Lynch, who ran Fidelity Investment's Magellan Fund for several years are both known for analyzing financial statements and looking at valuation multiples, in order to identify cases where the market has mispriced stocks.
### Purchase for Less
Despite different approaches, the underlying logic of value investing is to purchase assets for less than they are currently worth, hold them for the long-term, and profit when they return to the intrinsic value or above. It doesn't provide instant gratification. You can’t expect to buy a stock for $50 on Tuesday and sell it for $100 on Thursday. Instead, you may have to wait years before your stock investments pay off, and you will occasionally lose money. The good news is that, for most investors, long-term [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) are taxed at a lower rate than short-term investment gains.
### Play the Waiting Game
Like all investment strategies, you must have the patience and diligence to stick with your investment philosophy. Some stocks you might want to buy because the fundamentals are sound, but you'll have to wait if it's overpriced. You'll want to buy the stock that is most attractively priced at that moment, and if no stocks meet your criteria, you'll have to sit and wait and let your cash sit idle until an opportunity arises.
## Why Stocks Become Undervalued
If you don’t believe in the efficient market hypothesis, you can identify reasons why stocks might be [trading below their intrinsic value](https://www.investopedia.com/articles/investing/020516/3-best-vanguard-funds-value-investors-2016.asp). Here are a few factors that can drag a stock’s price down and make it undervalued.
### Market Moves and Herd Mentality
Sometimes, people invest irrationally based on psychological biases rather than market fundamentals. When a specific stock’s price is rising or when the overall market is rising, they buy. They see that if they had invested 12 weeks ago, they could have earned 15% by now, and they develop a fear of missing out.
Conversely, when a stock’s price is falling or when the overall market is declining, loss aversion compels people to sell their stocks. So, instead of keeping their losses on paper and waiting for the market to change directions, they accept a certain loss by selling. Such investor behavior is so widespread that it affects the prices of individual stocks, exacerbating both upward and downward market movements and creating excessive moves.
### Market Crashes
A "bubble" is the result of investor exuberance, with prices growing ever higher. When the market reaches an unbelievable high, it usually results in the [bubble bursting](https://www.investopedia.com/terms/b/bubble.asp). Because the price levels are unsustainable, investors end up panicking and selling off related assets en masse. This results in a market crash. That's what happened in the early 2000s with the dot-com bubble when the values of tech stocks shot up beyond what the companies were worth. We saw the same thing happen when the housing bubble burst in 2006, and the market crashed in the following years.
### Unnoticed and Unglamorous Stocks
Look beyond what you're hearing in the news. You may find really great investment opportunities in undervalued stocks that may not be on people's radars, like [small caps](https://www.investopedia.com/terms/s/small-cap.asp) or even foreign stocks.Most investors want in on the next big thing, such as a technology startup, instead of a boring, established consumer durables manufacturer.
For example, stocks like Meta (formerly Facebook), Apple, and Google are more likely to be affected by herd-mentality investing than [conglomerates](https://www.investopedia.com/terms/c/conglomerate.asp) like Proctor & Gamble or Johnson & Johnson.
### Bad News
Even good companies face setbacks, such as litigation and recalls. However, just because a company experiences one adverse event doesn't mean it isn't still fundamentally valuable or that its stock won't bounce back. In other cases, there may be a segment or division that puts a dent in a company's profitability. But that can change if the company decides to dispose of or close that arm of the business.
Analysts do not have a great track record for predicting the future, yet investors often panic and sell when a company announces earnings that are lower than [analysts' expectations](https://www.investopedia.com/terms/a/analyst-expectation.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186). But value investors who can see beyond the downgrades and negative news can buy stock at deeper discounts because they can recognize a company's long-term value.
### Cyclicality
Cyclicality is defined as the fluctuations that affect a business. Companies are not immune to ups and downs in the economic cycle, whether that's seasonality and the time of year or consumer attitudes and moods. All of this can affect profit levels and the price of a company's stock, but it doesn't affect its long-term value.
## Value Investing Strategies
The key to buying an undervalued stock is to thoroughly research the company and make common-sense decisions. Value investor Christopher H. Browne recommends asking if a company is likely to increase its revenue via the following methods:
* Raising prices on products
* Increasing sales figures
* Decreasing expenses
* Selling off or closing down unprofitable divisions
Browne also suggests studying a company's competitors to evaluate its future growth prospects. But the answers to all of these questions tend to be speculative, without any real supportive numerical data. Simply put, no quantitative software programs are yet available to help achieve these answers, making value stock investing somewhat of a grand guessing game. For this reason, Warren Buffett recommends investing only in industries you have personally worked in or whose consumer goods you are familiar with, like cars, clothes, appliances, and food.
One thing investors can do is choose the stocks of companies that sell high-demand products and services. While it's difficult to predict when innovative new products will capture market share, it's easy to gauge how long a company has been in business and study how it has adapted to challenges over time.
### Insider Buying and Selling
For our purposes, [insiders](https://www.investopedia.com/terms/i/insider.asp) are the company’s senior managers and directors, plus any shareholders who own at least 10% of the company’s stock. A company’s managers and directors have unique knowledge about the companies they run, so if they are purchasing its stock, it’s reasonable to assume that the company’s prospects look favorable.
Likewise, investors who own at least 10% of a company’s stock wouldn’t have bought so much if they didn’t see profit potential. Conversely, a stock sale by an insider doesn’t necessarily point to bad news about the company’s anticipated performance—the insider might simply need cash for any number of personal reasons. Nonetheless, if mass sell-offs are occurring by insiders, such a situation may warrant further in-depth analysis of the reason behind the sale.
### Analyze Financial Reports
At some point, value investors have to look at a company's financials to see how its performing and compare it to industry peers.
Financial reports present a company’s annual and quarterly performance results. The annual report is SEC Form 10-K, and the quarterly report is [SEC Form 10-Q](https://www.investopedia.com/terms/1/10q.asp). Companies are required to file these reports with the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC). You can find them on the SEC website or the company’s investor relations page on their website.
You can learn a lot from a company’s annual report. It will explain the products and services offered as well as where the company is heading.
## Financial Statements
Financial statements are generally included in a company's financial reports to regulators, but they provide a big-picture view of the company's financial condition. There are three statements publicly traded companies are required to file—the balance sheet, the income statement, and the statement of cash flows.
### Balance Sheet
The [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) consists of two sections, one listing the company’s assets and another listing its liabilities and equity. The assets section is broken down into a company’s cash and cash equivalents, investments, accounts receivable or money owed from customers, inventories, and fixed assets such as plant and equipment.
The liabilities section lists the company’s accounts payable or money owed, [accrued liabilities](https://www.investopedia.com/terms/a/accrued-liability.asp), short-term debt, and long-term debt. The shareholders’ equity section reflects how much money is invested in the company, how many shares are outstanding, and how much the company has in [retained earnings](https://www.investopedia.com/terms/r/retainedearnings.asp). Retained earnings is a type of savings account that holds the cumulative profits from the company. Retained earnings are used to pay dividends, for example, and are considered a sign of a healthy, profitable company.
### Income Statement
The [income statement](https://www.investopedia.com/terms/i/incomestatement.asp) tells you how much revenue is being generated, the company's expenses, and profits. Looking at the annual income statement rather than a quarterly statement will give you a better idea of the company’s overall position since many companies experience fluctuations in sales volume during the year.
### Statement of Cash Flows
The statement of cash flows lists everywhere cash came from and went to in a company. It tells you which activities created inflow, such as operating, investing, or financing activities. It also lists which of these activities created outflows.
###
Studies have consistently found that value stocks outperform growth stocks and the market over the long term.
## Couch Potato Value Investing
It is possible to become a value investor without ever reading a [10-K](https://www.investopedia.com/terms/1/10-k.asp). Couch potato investing is a passive strategy of buying and holding a few investing vehicles for which someone else has already done the investment analysis—i.e., mutual funds or exchange-traded funds. In the case of value investing, those funds would be those that follow the value strategy and buy value stocks—or track the moves of high-profile value investors like Warren Buffett.
Investors can buy shares of his holding company, [Berkshire Hathaway](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B), which owns or has an interest in dozens of companies the Oracle of Omaha has researched and evaluated.
## Risks with Value Investing
As with any investment strategy, there's the risk of loss with value investing despite it being a low-to-medium-risk strategy. Below we highlight a few of those risks and why losses can occur.
### The Figures are Important
Many investors use financial statements [when they make value investing decisions](https://www.investopedia.com/ask/answers/05/bookvintrinsic.asp). So if you rely on your own analysis, make sure you have the most updated information and that your calculations are accurate. If not, you may end up making a poor investment or miss out on a great one. If you aren’t yet confident in your ability to read and analyze [financial statements](https://www.investopedia.com/articles/basics/06/financialreporting.asp) and reports, keep studying these subjects and don’t place any trades until you’re truly ready.
One strategy is to read the footnotes. These are the notes in [Form 10-K](https://www.investopedia.com/terms/1/10-k.asp) or [Form 10-Q](https://www.investopedia.com/terms/1/10q.asp) that explain a company’s financial statements in greater detail. The notes follow the statements and explain the company’s accounting methods and elaborate on reported results. If the footnotes are unintelligible or the information they present seems unreasonable, you’ll have a better idea of whether to pass on the stock.
### Extraordinary Gains or Losses
There are some incidents that may show up on a company's income statement that should be considered exceptions or extraordinary. These are generally beyond the company's control and are called [extraordinary item](https://www.investopedia.com/terms/e/extraordinaryitem.asp)—gain or [extraordinary item](https://www.investopedia.com/terms/e/extraordinaryitem.asp)—loss. Some examples include lawsuits, restructuring, or even a natural disaster. If you exclude these from your analysis, you can probably get a sense of the company's future performance.
However, think critically about these items and use your best judgment. If a company has a pattern of reporting the same extraordinary item year after year, it might not be too extraordinary. Also, if there are unexpected losses year after year, it can be a sign that the company is having financial problems. Extraordinary items are supposed to be unusual and [nonrecurring](https://www.investopedia.com/terms/n/nonrecurringcharge.asp). Also, beware of a pattern of [write-offs](https://www.investopedia.com/terms/w/write-off.asp).
### Ignoring Ratio Analysis Flaws
Earlier sections of this tutorial have discussed calculating various financial ratios that help investors diagnose a company’s financial health. There isn't just one way to determine financial ratios, which can be fairly problematic. The following can affect how the ratios can be interpreted:
* Ratios can be determined using before-tax or after-tax numbers.
* Some ratios don't give accurate results but lead to estimations.
* Depending on how the term earnings are defined, a company's [earnings per share](https://www.investopedia.com/terms/e/eps.asp) (EPS) may differ.
* Comparing different companies by their ratios—even if the ratios are the same—may be difficult since companies have different accounting practices.
### Buying Overvalued Stock
Overpaying for a stock is one of the main risks for value investors. You can risk losing part or all of your money if you overpay. The same goes if you buy a stock close to its[fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp). Buying a stock that's undervalued means your risk of losing money is reduced, even when the company doesn't do well.
Recall that one of the fundamental principles of value investing is to build a margin of safety into all your investments. This means purchasing stocks at a price of around two-thirds or less of their [intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp). Value investors want to risk as little capital as possible in potentially overvalued assets, so they try not to overpay for investments.
### Not Diversifying
Conventional investment wisdom says that investing in individual stocks can be a high-risk strategy. Instead, we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors. However, some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks, as long as you choose stocks that represent different industries and different sectors of the economy. Value investor and investment manager Christopher H. Browne recommends owning a minimum of 10 stocks. According to [Benjamin Graham](https://www.investopedia.com/terms/b/bengraham.asp), you should look at choosing 10 to 30 stocks if you want to diversify your holdings.
Another set of experts, though, say differently. If you want to get big returns, try choosing just a few stocks, according to the authors of the second edition of “Value Investing for Dummies.” They say having more stocks in your portfolio will probably lead to an average return. Of course, this advice assumes that you are great at choosing winners, which may not be the case, particularly if you are a value-investing novice.
### Listening to Your Emotions
It is difficult to ignore your emotions when making investment decisions. Even if you can take a detached, critical standpoint when evaluating numbers, fear and excitement may creep in when it comes time to actually use part of your hard-earned savings to purchase a stock. More importantly, once you have purchased the stock, you may be tempted to sell it if the price falls.
Keep in mind that the point of value investing is to resist the temptation to panic and go with the herd. So don't fall into the trap of buying when share prices rise and selling when they drop. Such behavior will obliterate your returns (playing follow-the-leader in investing can quickly become a dangerous game).
## Example of a Value Investment
Value investors seek to profit from market overreactions that usually come from the release of a quarterly earnings report. As a historical real example, on May 4, 2016, Fitbit released its Q1 2016 earnings report and saw a sharp decline in after-hours trading. After the flurry was over, the company lost nearly 19% of its value. However, while large decreases in a company's share price are not uncommon after the release of an earnings report, Fitbit not only met analyst expectations for the quarter but even increased guidance for 2016.
The company earned $505.4 million in revenue for the first quarter of 2016, up more than 50% when compared to the same time period from one year previous. Further, Fitbit expected to generate between $565 million and $585 million in the second quarter of 2016, which was above the $531 million forecasted by analysts.
The company looked to be strong and growing. However, since Fitbit invested heavily in research and development costs in the first quarter of the year, earnings per share (EPS) declined compared to the previous year. This is all average investors needed to jump, selling off enough shares to cause the price to fall. However, a value investor who looked at the fundamentals of Fitbit understood it was an undervalued security poised to potentially increase in the future.
Case in point—in 2019, Fitbit posted more than $1.4 billion in revenues; then, in 2021, Google finalized its purchase of Fitbit for $2.1 billion. A value investor purchasing Fitbit stock at an undervalued price of $5.35 on Feb. 9, 2017, would have done well because the stocks were converted to cash at a value of $7.35 per share at the merger and paid to investors.
## What Is a Value Investment?
Value investing is an investment philosophy that involves purchasing assets at a discount to their intrinsic value. This is also known as a security’s margin of safety. Benjamin Graham, known as the father of value investing, first established this term with his landmark book, *The Intelligent Investor,* in 1949. Notable proponents of value investors include Warren Buffett, Seth Klarman, Mohnish Pabrai, and Joel Greenblatt.
## What Is an Example of Value Investing?
Common sense and fundamental analysis underlie many of the principles of value investing. The margin of safety, which is the discount a stock trades at compared to its intrinsic value, is one leading principle. Fundamental metrics, such as the price-to-earnings (PE) ratio, for example, illustrate company earnings in relation to their price. A value investor may invest in a company with a low PE ratio because it provides one barometer for determining whether it is undervalued or overvalued.
## What Are Common Value Investing Metrics?
Along with analyzing a company’s price-to-earnings ratio, which can illustrate how expensive it is in relation to its earnings, common metrics include the price-to-book ratio, free cash flow (FCF), and debt-to-equity ratio (D/E).
## Who Is Mr. Market?
First coined by Benjamin Graham, “Mr. Market” represents a hypothetical investor that is prone to sharp mood swings of fear, apathy, and euphoria. “Mr. Market” represents the consequences of emotionally reacting to the stock market, rather than rationally or with fundamental analysis. As an archetype for behavior, “Mr. Market” speaks to the price fluctuations inherent in markets, and the emotions that can influence these on extreme scales, such as greed and fear.
## The Bottom Line
Value investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
You will probably want to sell your stocks when it comes time to make a major purchase or retire, but by holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (and the price you paid for them).
***Correction—Feb. 8, 2024**:* This article has been corrected to state that Benjamin Graham recommended buying stocks when they were priced at two-thirds or less of their liquidation value.
| What Is Value Investing?
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The overreaction offers an opportunity to profit by purchaing stocks at discounted prices.
Warren Buffett is probably the best-known value investor today, but there are many others, including Benjamin Graham (Buffett's professor and mentor), David Dodd, Charlie Munger (Buffet's business partner), Christopher Browne (another Graham student), and billionaire hedge-fund manager, Seth Klarman.
Key Takeaways
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.Value investors actively ferret out stocks they think the stock market is underestimating.Value investors use financial analysis, don't follow the herd, and are long-term investors of quality companies.
Investopedia / Sydney Saporito
Understanding Value Investing
The basic concept behind everyday value investing is straightforward: If you know the true value of something, you can save a lot of money when you buy it. Most folks would agree that whether you buy a new TV on sale, or at full price, you’re getting the same TV with the same screen size and picture quality.
Stock prices work in a similar manner, meaning a company’s share price can change even when the company’s valuation has remained the same. This means, strictly speaking, there is no such thing as a true, or intrinsic, value of the stock of a given company. But there are relative values.
Market participants can buy or sell shares without being tethered to an objective price figure. Therefore, stocks, like TVs, go through periods of higher and lower demand leading to price fluctuations. If the company's fundamentals are the same, and its future opportunities are unchanged, then the value of the shares is largely the same even though the price differs.
Value investing developed from a concept by Columbia Business School professors Benjamin Graham and David Dodd in 1934 and was popularized in Graham's 1949 book, "The Intelligent Investor."
Just like savvy shoppers would argue that it makes no sense to pay full price for a TV since TVs go on sale several times a year, savvy value investors believe stocks work the same way. Of course, unlike TVs, stocks won't go on sale at predictable times of the year such as Black Friday, and their sale prices won’t be advertised.
Value investing is the process of doing detective work to find these secret sales on stocks and buying them at a discount compared to how the market values them. In return for buying and holding these value stocks for the long term, investors can be rewarded handsomely.
Intrinsic Value and Value Investing
In the stock market, the equivalent of a stock being cheap or discounted is when its shares are undervalued. Value investors hope to profit from shares they perceive to be deeply discounted.
Investors use various metrics to attempt to find the valuation or intrinsic value of a stock. Intrinsic value is a combination of using financial analysis, such as studying a company's financial performance, revenue, earnings, cash flow, profit, and fundamental factors. It includes the company's brand, business model, target market, and competitive advantage. Some metrics used to value a company's stock include:
Price-to-book (P/B), which measures the value of a company's assets and compares them to the stock price. If the price is lower than the value of the assets, the stock is undervalued, assuming the company is not in financial hardship.
Price-to-earnings (P/E), which shows the company's track record for earnings to determine if the stock price is not reflecting all of the earnings or is undervalued.
Free cash flow, which is the cash generated from a company's revenue or operations after the costs of expenditures have been subtracted.
Free cash flow is the cash remaining after expenses have been paid, including operating expenses and large purchases called capital expenditures, which is the purchase of assets like equipment or upgrading a manufacturing plant. If a company is generating free cash flow, it'll have money left over to invest in the future of the business, pay off debt, pay dividends or rewards to shareholders, and issue share buybacks.
Of course, there are many other metrics used in the analysis, including analyzing debt, equity, sales, and revenue growth. After reviewing these metrics, the value investor can decide to purchase shares if the comparative value—the stock's current price vis-a-vis its company's intrinsic worth—is attractive enough.
Margin of Safety
Value investors require some room for error in their estimation of value, and they often set their own "margin of safety" based on their particular risk tolerance. The margin of safety principle, one of the keys to successful value investing, is based on the premise that buying stocks at bargain prices gives you a better chance of earning a profit later when you sell them. The margin of safety also makes you less likely to lose money if the stock doesn't perform as you had expected.
So, if you believe a stock is worth $100 and buy it for $66, you'll make a profit of $34 simply by waiting for the stock's price to rise to the $100 true value. On top of that, the company might grow and become more valuable, giving you a chance to make even more money. If the stock's price rises to $110, you'll make $44 since you bought the stock on sale. If you had purchased it at its full price of $100, you would only make a $10 profit.
Benjamin Graham, the father of value investing, recommended buying stocks when they were priced at two-thirds or less of their liquidation value. This was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside.
Value Investors Believe the Markets Are Not Efficient
Value investors don't believe in the efficient-market hypothesis, which says that stock prices already take all information about a company into account, so their price always reflects their value. Instead, value investors believe that stocks may be over or underpriced for various reasons.
For example, a stock might be underpriced because the economy is performing poorly and investors are panicking and selling (as was the case during the Great Recession). Or a stock might be overpriced because investors have gotten too excited about an unproven new technology (as was the case of the dot-com bubble). Psychological biases can push a stock price up or down based on news, such as disappointing or unexpected earnings announcements, product recalls, or litigation. Stocks may also be undervalued because they trade under the radar, meaning analysts and the media inadequately cover them.
Value Investors Don't Follow the Herd
Value investors possess many characteristics of contrarians—they don’t follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they’re often selling or standing back. When everyone else is selling, they’re buying or holding. Value investors don’t buy trendy stocks (because they’re typically overpriced). Instead, they invest in companies that aren’t household names if the financials check out. They also take a second look at stocks that are household names when those stocks’ prices have plummeted, believing such companies can recover from setbacks if their fundamentals remain strong and their products and services still have quality.
Value investors only care about a stock’s intrinsic value. They think about buying a stock for what it actually is: a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.
Value Investing Requires Diligence and Patience
Estimating the true intrinsic value of a stock involves some financial analysis but also involves a fair amount of subjectivity—meaning at times, it can be more of an art than a science. Two different investors can analyze the exact same valuation data on a company and arrive at different decisions. So, you'll need to develop a strategy that works for you.
Find a Preferred Method
Some investors, who look only at existing financials, don't put much faith in estimating future growth. Other value investors focus primarily on a company's future growth potential and estimated cash flows. Some do both: Noted value investment gurus Warren Buffett and Peter Lynch, who ran Fidelity Investment's Magellan Fund for several years are both known for analyzing financial statements and looking at valuation multiples, in order to identify cases where the market has mispriced stocks.
Purchase for Less
Despite different approaches, the underlying logic of value investing is to purchase assets for less than they are currently worth, hold them for the long-term, and profit when they return to the intrinsic value or above. It doesn't provide instant gratification. You can’t expect to buy a stock for $50 on Tuesday and sell it for $100 on Thursday. Instead, you may have to wait years before your stock investments pay off, and you will occasionally lose money. The good news is that, for most investors, long-term capital gains are taxed at a lower rate than short-term investment gains.
Play the Waiting Game
Like all investment strategies, you must have the patience and diligence to stick with your investment philosophy. Some stocks you might want to buy because the fundamentals are sound, but you'll have to wait if it's overpriced. You'll want to buy the stock that is most attractively priced at that moment, and if no stocks meet your criteria, you'll have to sit and wait and let your cash sit idle until an opportunity arises.
Why Stocks Become Undervalued
If you don’t believe in the efficient market hypothesis, you can identify reasons why stocks might be trading below their intrinsic value. Here are a few factors that can drag a stock’s price down and make it undervalued.
Market Moves and Herd Mentality
Sometimes, people invest irrationally based on psychological biases rather than market fundamentals. When a specific stock’s price is rising or when the overall market is rising, they buy. They see that if they had invested 12 weeks ago, they could have earned 15% by now, and they develop a fear of missing out.
Conversely, when a stock’s price is falling or when the overall market is declining, loss aversion compels people to sell their stocks. So, instead of keeping their losses on paper and waiting for the market to change directions, they accept a certain loss by selling. Such investor behavior is so widespread that it affects the prices of individual stocks, exacerbating both upward and downward market movements and creating excessive moves.
Market Crashes
A "bubble" is the result of investor exuberance, with prices growing ever higher. When the market reaches an unbelievable high, it usually results in the bubble bursting. Because the price levels are unsustainable, investors end up panicking and selling off related assets en masse. This results in a market crash. That's what happened in the early 2000s with the dot-com bubble when the values of tech stocks shot up beyond what the companies were worth. We saw the same thing happen when the housing bubble burst in 2006, and the market crashed in the following years.
Unnoticed and Unglamorous Stocks
Look beyond what you're hearing in the news. You may find really great investment opportunities in undervalued stocks that may not be on people's radars, like small caps or even foreign stocks. Most investors want in on the next big thing, such as a technology startup, instead of a boring, established consumer durables manufacturer.
For example, stocks like Meta (formerly Facebook), Apple, and Google are more likely to be affected by herd-mentality investing than conglomerates like Proctor & Gamble or Johnson & Johnson.
Bad News
Even good companies face setbacks, such as litigation and recalls. However, just because a company experiences one adverse event doesn't mean it isn't still fundamentally valuable or that its stock won't bounce back. In other cases, there may be a segment or division that puts a dent in a company's profitability. But that can change if the company decides to dispose of or close that arm of the business.
Analysts do not have a great track record for predicting the future, yet investors often panic and sell when a company announces earnings that are lower than analysts' expectations. But value investors who can see beyond the downgrades and negative news can buy stock at deeper discounts because they can recognize a company's long-term value.
Cyclicality
Cyclicality is defined as the fluctuations that affect a business. Companies are not immune to ups and downs in the economic cycle, whether that's seasonality and the time of year or consumer attitudes and moods. All of this can affect profit levels and the price of a company's stock, but it doesn't affect its long-term value.
Value Investing Strategies
The key to buying an undervalued stock is to thoroughly research the company and make common-sense decisions. Value investor Christopher H. Browne recommends asking if a company is likely to increase its revenue via the following methods:
Raising prices on productsIncreasing sales figuresDecreasing expensesSelling off or closing down unprofitable divisions
Browne also suggests studying a company's competitors to evaluate its future growth prospects. But the answers to all of these questions tend to be speculative, without any real supportive numerical data. Simply put, no quantitative software programs are yet available to help achieve these answers, making value stock investing somewhat of a grand guessing game. For this reason, Warren Buffett recommends investing only in industries you have personally worked in or whose consumer goods you are familiar with, like cars, clothes, appliances, and food.
One thing investors can do is choose the stocks of companies that sell high-demand products and services. While it's difficult to predict when innovative new products will capture market share, it's easy to gauge how long a company has been in business and study how it has adapted to challenges over time.
Insider Buying and Selling
For our purposes, insiders are the company’s senior managers and directors, plus any shareholders who own at least 10% of the company’s stock. A company’s managers and directors have unique knowledge about the companies they run, so if they are purchasing its stock, it’s reasonable to assume that the company’s prospects look favorable.
Likewise, investors who own at least 10% of a company’s stock wouldn’t have bought so much if they didn’t see profit potential. Conversely, a stock sale by an insider doesn’t necessarily point to bad news about the company’s anticipated performance—the insider might simply need cash for any number of personal reasons. Nonetheless, if mass sell-offs are occurring by insiders, such a situation may warrant further in-depth analysis of the reason behind the sale.
Analyze Financial Reports
At some point, value investors have to look at a company's financials to see how its performing and compare it to industry peers.
Financial reports present a company’s annual and quarterly performance results. The annual report is SEC Form 10-K, and the quarterly report is SEC Form 10-Q. Companies are required to file these reports with the Securities and Exchange Commission (SEC). You can find them on the SEC website or the company’s investor relations page on their website.
You can learn a lot from a company’s annual report. It will explain the products and services offered as well as where the company is heading.
Financial Statements
Financial statements are generally included in a company's financial reports to regulators, but they provide a big-picture view of the company's financial condition. There are three statements publicly traded companies are required to file—the balance sheet, the income statement, and the statement of cash flows.
Balance Sheet
The balance sheet consists of two sections, one listing the company’s assets and another listing its liabilities and equity. The assets section is broken down into a company’s cash and cash equivalents, investments, accounts receivable or money owed from customers, inventories, and fixed assets such as plant and equipment.
The liabilities section lists the company’s accounts payable or money owed, accrued liabilities, short-term debt, and long-term debt. The shareholders’ equity section reflects how much money is invested in the company, how many shares are outstanding, and how much the company has in retained earnings. Retained earnings is a type of savings account that holds the cumulative profits from the company. Retained earnings are used to pay dividends, for example, and are considered a sign of a healthy, profitable company.
Income Statement
The income statement tells you how much revenue is being generated, the company's expenses, and profits. Looking at the annual income statement rather than a quarterly statement will give you a better idea of the company’s overall position since many companies experience fluctuations in sales volume during the year.
Statement of Cash Flows
The statement of cash flows lists everywhere cash came from and went to in a company. It tells you which activities created inflow, such as operating, investing, or financing activities. It also lists which of these activities created outflows.
Studies have consistently found that value stocks outperform growth stocks and the market over the long term.
Couch Potato Value Investing
It is possible to become a value investor without ever reading a 10-K. Couch potato investing is a passive strategy of buying and holding a few investing vehicles for which someone else has already done the investment analysis—i.e., mutual funds or exchange-traded funds. In the case of value investing, those funds would be those that follow the value strategy and buy value stocks—or track the moves of high-profile value investors like Warren Buffett.
Investors can buy shares of his holding company, Berkshire Hathaway, which owns or has an interest in dozens of companies the Oracle of Omaha has researched and evaluated.
Risks with Value Investing
As with any investment strategy, there's the risk of loss with value investing despite it being a low-to-medium-risk strategy. Below we highlight a few of those risks and why losses can occur.
The Figures are Important
Many investors use financial statements when they make value investing decisions. So if you rely on your own analysis, make sure you have the most updated information and that your calculations are accurate. If not, you may end up making a poor investment or miss out on a great one. If you aren’t yet confident in your ability to read and analyze financial statements and reports, keep studying these subjects and don’t place any trades until you’re truly ready.
One strategy is to read the footnotes. These are the notes in Form 10-K or Form 10-Q that explain a company’s financial statements in greater detail. The notes follow the statements and explain the company’s accounting methods and elaborate on reported results. If the footnotes are unintelligible or the information they present seems unreasonable, you’ll have a better idea of whether to pass on the stock.
Extraordinary Gains or Losses
There are some incidents that may show up on a company's income statement that should be considered exceptions or extraordinary. These are generally beyond the company's control and are called extraordinary item—gain or extraordinary item—loss. Some examples include lawsuits, restructuring, or even a natural disaster. If you exclude these from your analysis, you can probably get a sense of the company's future performance.
However, think critically about these items and use your best judgment. If a company has a pattern of reporting the same extraordinary item year after year, it might not be too extraordinary. Also, if there are unexpected losses year after year, it can be a sign that the company is having financial problems. Extraordinary items are supposed to be unusual and nonrecurring. Also, beware of a pattern of write-offs.
Ignoring Ratio Analysis Flaws
Earlier sections of this tutorial have discussed calculating various financial ratios that help investors diagnose a company’s financial health. There isn't just one way to determine financial ratios, which can be fairly problematic. The following can affect how the ratios can be interpreted:
Ratios can be determined using before-tax or after-tax numbers.
Some ratios don't give accurate results but lead to estimations.
Depending on how the term earnings are defined, a company's earnings per share (EPS) may differ.
Comparing different companies by their ratios—even if the ratios are the same—may be difficult since companies have different accounting practices.
Buying Overvalued Stock
Overpaying for a stock is one of the main risks for value investors. You can risk losing part or all of your money if you overpay. The same goes if you buy a stock close to its fair market value. Buying a stock that's undervalued means your risk of losing money is reduced, even when the company doesn't do well.
Recall that one of the fundamental principles of value investing is to build a margin of safety into all your investments. This means purchasing stocks at a price of around two-thirds or less of their intrinsic value. Value investors want to risk as little capital as possible in potentially overvalued assets, so they try not to overpay for investments.
Not Diversifying
Conventional investment wisdom says that investing in individual stocks can be a high-risk strategy. Instead, we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors. However, some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks, as long as you choose stocks that represent different industries and different sectors of the economy. Value investor and investment manager Christopher H. Browne recommends owning a minimum of 10 stocks. According to Benjamin Graham, you should look at choosing 10 to 30 stocks if you want to diversify your holdings.
Another set of experts, though, say differently. If you want to get big returns, try choosing just a few stocks, according to the authors of the second edition of “Value Investing for Dummies.” They say having more stocks in your portfolio will probably lead to an average return. Of course, this advice assumes that you are great at choosing winners, which may not be the case, particularly if you are a value-investing novice.
Listening to Your Emotions
It is difficult to ignore your emotions when making investment decisions. Even if you can take a detached, critical standpoint when evaluating numbers, fear and excitement may creep in when it comes time to actually use part of your hard-earned savings to purchase a stock. More importantly, once you have purchased the stock, you may be tempted to sell it if the price falls.
Keep in mind that the point of value investing is to resist the temptation to panic and go with the herd. So don't fall into the trap of buying when share prices rise and selling when they drop. Such behavior will obliterate your returns (playing follow-the-leader in investing can quickly become a dangerous game).
Example of a Value Investment
Value investors seek to profit from market overreactions that usually come from the release of a quarterly earnings report. As a historical real example, on May 4, 2016, Fitbit released its Q1 2016 earnings report and saw a sharp decline in after-hours trading. After the flurry was over, the company lost nearly 19% of its value. However, while large decreases in a company's share price are not uncommon after the release of an earnings report, Fitbit not only met analyst expectations for the quarter but even increased guidance for 2016.
The company earned $505.4 million in revenue for the first quarter of 2016, up more than 50% when compared to the same time period from one year previous. Further, Fitbit expected to generate between $565 million and $585 million in the second quarter of 2016, which was above the $531 million forecasted by analysts.
The company looked to be strong and growing. However, since Fitbit invested heavily in research and development costs in the first quarter of the year, earnings per share (EPS) declined compared to the previous year. This is all average investors needed to jump, selling off enough shares to cause the price to fall. However, a value investor who looked at the fundamentals of Fitbit understood it was an undervalued security poised to potentially increase in the future.
Case in point—in 2019, Fitbit posted more than $1.4 billion in revenues; then, in 2021, Google finalized its purchase of Fitbit for $2.1 billion. A value investor purchasing Fitbit stock at an undervalued price of $5.35 on Feb. 9, 2017, would have done well because the stocks were converted to cash at a value of $7.35 per share at the merger and paid to investors.
What Is a Value Investment?
Value investing is an investment philosophy that involves purchasing assets at a discount to their intrinsic value. This is also known as a security’s margin of safety. Benjamin Graham, known as the father of value investing, first established this term with his landmark book, The Intelligent Investor, in 1949. Notable proponents of value investors include Warren Buffett, Seth Klarman, Mohnish Pabrai, and Joel Greenblatt.
What Is an Example of Value Investing?
Common sense and fundamental analysis underlie many of the principles of value investing. The margin of safety, which is the discount a stock trades at compared to its intrinsic value, is one leading principle. Fundamental metrics, such as the price-to-earnings (PE) ratio, for example, illustrate company earnings in relation to their price. A value investor may invest in a company with a low PE ratio because it provides one barometer for determining whether it is undervalued or overvalued.
What Are Common Value Investing Metrics?
Along with analyzing a company’s price-to-earnings ratio, which can illustrate how expensive it is in relation to its earnings, common metrics include the price-to-book ratio, free cash flow (FCF), and debt-to-equity ratio (D/E).
Who Is Mr. Market?
First coined by Benjamin Graham, “Mr. Market” represents a hypothetical investor that is prone to sharp mood swings of fear, apathy, and euphoria. “Mr. Market” represents the consequences of emotionally reacting to the stock market, rather than rationally or with fundamental analysis. As an archetype for behavior, “Mr. Market” speaks to the price fluctuations inherent in markets, and the emotions that can influence these on extreme scales, such as greed and fear.
The Bottom Line
Value investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
You will probably want to sell your stocks when it comes time to make a major purchase or retire, but by holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (and the price you paid for them).
Correction—Feb. 8, 2024: This article has been corrected to state that Benjamin Graham recommended buying stocks when they were priced at two-thirds or less of their liquidation value.
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https://www.investopedia.com/dow-jones-today-05172024-8650115 | Markets News, May 17, 2024: Dow Tops 40K, Capping Fourth Straight Winning Week for Stocks | <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"> The Dow Jones Industrial Average eked out gains on Friday to close above 40,000 for the first time, bringing to a close a fourth consecutive winning week for U.S. stocks.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average</a> rose 0.3% Friday, while the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a> inched up 0.1%. Both indexes rose more than 1% over the week. The <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp">Nasdaq Composite</a> slipped 0.1% on Friday but finished the week up more than 2%.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The indexes were propelled to record highs on Wednesday by slightly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-ticked-downward-in-april-2024-8648737">better-than-expected consumer inflation data</a> that revived investor optimism that the Federal Reserve will cut interest rates at some point this year.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> GameStop (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GME">GME</a>) shares sank nearly 20% on Friday as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/meme-stock-5206762">meme stock</a> craze that was revived at the start of the week fizzled as quickly as it began. The stock also took a hit from disappointing preliminary quarterly results and the announcement of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/gamestop-issues-new-shares-sending-stock-tumbling-8650090">a major stock offering</a>.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Treasury yields crept higher Friday but finished the week lower due to Wednesday's inflation data.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Copper futures climbed to near-record highs Friday after the International Energy Agency warned the world’s copper and lithium mining projects would be insufficient to meet the demands of the green energy transition.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The Dow climbed early in the morning yesterday to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/dow-jones-today-05162024-8649407">cross 40,000 points for the first time</a> before retreating to close marginally lower. The S&P 500 and Nasdaq Composite also ticked lower.
</p></div>
<div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-05-17t203446180z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p>Stock Indexes Wrap: Energy, Materials Lead Indexes; AI Stocks Lag</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">May 17, 2024 04:34 PM EDT</div>
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</button>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <strong><u>The Dow</u></strong>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Boeing (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BA">BA</a>) rose 1.1% after shareholders voted to reelect outgoing CEO Dave Calhoun to the jet maker’s board of directors.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Walmart (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=WMT">WMT</a>) gained 1%, continuing to rise after jumping to a record high yesterday following the announcement of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/walmart-q1-fy25-earnings-beat-raised-guidance-8649391">better-than-expected first-quarter earnings</a>. <br/>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <strong><u>The S&P 500</u></strong>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Energy stocks were among the day’s best performers, led by oil refiner Valero (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=VLO">VLO</a>), up 4.8%. Marathon Petroleum (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MPC">MPC</a>) and ExxonMobil (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM">XOM</a>) followed, rising 2.8% and 1.5%, respectively.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Freeport-McMoRan (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FCX">FCX</a>) advanced 4.2% as copper futures climbed steadily to trade near record highs.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Chubb (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CB">CB</a>) added 3.6%, building on yesterday’s gains that followed Berkshire Hathaway’s revelation of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/berkshire-filing-reveals-insurer-chubb-as-buffetts-mystery-stock-8649210">a 6% stake</a> in the insurance company.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> AI stocks slips, including 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>), down 2%, and Super Micro Computer (<a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMCI">SMCI</a>), down 1.8%. <br/>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <strong><u>The Nasdaq 100</u></strong>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Advanced Micro Devices (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMD">AMD</a>) rose 1.1% after Microsoft said it would offer cloud customers an AMD-based platform that would compete with its Nvidia offerings.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Take-Two Interactive (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TTWO">TTWO</a>) gained 0.8% after the video game company scheduled its hotly anticipated Grand Theft Auto VI for release in the fall of 2025. The company also <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/take-two-interactive-sets-grand-theft-auto-vi-release-date-8650139">beat revenue estimates</a> in the first quarter.
</p></div>
<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div>
<div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_2-0"><span class="heading-toc" id="toc-2024-05-17t190409302z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_2-0"><p>Doximity Surges on Earnings Beat, Strong Outlook, Stock Buyback Announcement</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_2-0">May 17, 2024 03:04 PM EDT</div>
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</button>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Shares in Doximity (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=docs">DOCS</a>) surged Friday after the digital medical networking company announced earnings that beat Wall Street estimates, provided a better-than-expected current-quarter outlook, and unveiled a share <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp">buyback</a> program.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> For the fiscal fourth quarter ending March 31, the provider of curated medical news and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/telehealth-5115239#:~:text=Telehealth%20refers%20to%20the%20use,smartphones%2C%20tablets%2C%20and%20computers.">telehealth</a> tools reported <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Key%20Takeaways,tax%20liabilities%2C%20and%20capital%20gains.">adjusted earnings</a> of 25 cents per share, comfortably topping forecasts of 20 cents a share. Revenue in the period of $118.1 million improved 6% from a year earlier and beat analysts’ expectations of $116.4 million.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Looking ahead, Doximity expects current-quarter <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netsales.asp">net sales</a> to range between $119.5 million and $120.5 million, with the lower end of that range surpassing forecasts of $119.2 million.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Doximity also unveiled a stock buyback program, announcing that it had authorized the purchase of up to $500 million of its Class A <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>.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Doximity shares were up 17.6% at $27.92 with about an hour left in the session on Friday.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/contributors/54411/">Timothy Smith</a></em>
</p></div>
<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="2" id="mntl-sc-block-adslot_2-0"></div>
<div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_3-0"><span class="heading-toc" id="toc-2024-05-17t180737801z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_3-0"><p>Cracker Barrel Slashes Its Dividend as It Shakes Up Operations, Sending Stock Plunging</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_3-0">May 17, 2024 02:07 PM EDT</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>SOPA Images / Contributor / Getty Images</p></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"> Shares of Cracker Barrel Old Country Store (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CBRL">CBRL</a>) plunged in intraday trading Friday after the restaurant and novelty store chain slashed its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a> as it embarked on what it called a “strategic transformation plan,” and lowered its guidance.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The company announced it would be reducing its quarterly dividend to 25 cents from $1.30 as part of its efforts to modify its capital allocation “to support increased investment in the business to drive organic growth."<span class="ql-inline-citation" data-cite="7"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Cracker Barrel warned that because of weaker-than-expected traffic, it anticipates its current and fourth-quarter results could be lower than previously thought. In addition, it expects fiscal 2025 to be “an investment year,” with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ebitda.asp">earnings before interest, taxes, depreciation, and amortization (EBITDA)</a> in line or slightly below that of 2024.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Cracker Barrel shares were more than 13% lower Friday afternoon. They’ve lost over one-third of their value since the start of the year.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bill-mccoll-5186338">Bill McColl</a></em>
</p></div>
<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="3" id="mntl-sc-block-adslot_3-0"></div>
<div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_4-0"><span class="heading-toc" id="toc-2024-05-17t171149578z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_4-0"><p>Copper Futures Rise as Record Prices Squeeze Short Sellers</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_4-0">May 17, 2024 01:11 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_31-0"> Copper futures climbed on Friday, with front-month contracts trading on U.S. exchanges rising more than 3% to as much as $5.05 per pound, just shy of the $5.12 record hit Wednesday.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Copper futures have risen nearly 30% this year—nearly 14% in April alone—driven up by robust demand and a scarcity of mining projects. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/international-energy-agency.asp">International Energy Agency</a> (IEA) on Friday warned that the world will fail to meet its climate goals without greater investment in mining metals critical to the green energy transition. The IEA estimates that existing and planned mining projects will only supply 70% of the copper and 50% of the lithium countries will need in 2035.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> However, the basics of supply and demand don’t account for all of copper’s recent rise. Commodities traders have also faced a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortsqueeze.asp">short squeeze</a>. Investors, chasing copper’s momentum, have piled into the industrial metal, pushing up the price and forcing short sellers to settle contracts, increasing demand further.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="5"></span>
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<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="4" id="mntl-sc-block-adslot_4-0"></div>
<div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_5-0"><span class="heading-toc" id="toc-2024-05-17t161611132z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_5-0"><p>Reddit Stock Soars After Company Inks Partnership With ChatGPT Owner OpenAI</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_5-0">May 17, 2024 12:16 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_34-0"> 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 in intraday trading Friday after the company <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/reddit-stock-soars-after-company-inks-partnership-with-chatgpt-owner-openai-8649996">announced a partnership with OpenAI</a> that allows the ChatGPT owner to train its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a> models using the news aggregation social network’s content.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> 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. 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>
<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_36-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:37.9%;">
<img alt="This image depicts the RDDT chart." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/aZTKd9rbneaA97NuIkTEP5ircWQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/RDDTChart-9f26e066372442b2a747dee679af6335.GIF" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/aZTKd9rbneaA97NuIkTEP5ircWQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/RDDTChart-9f26e066372442b2a747dee679af6335.GIF" data-srcset="https://www.investopedia.com/thmb/GDTY5xWNxURlvXr_JIfCxKdU1Go=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/RDDTChart-9f26e066372442b2a747dee679af6335.GIF 750w" data-tracking-container="true" height="674" id="mntl-sc-block-image_2-0" width="1777"/>
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<img alt="This image depicts the RDDT chart." class="img--noscript universal-image__image" height="674" sizes="750px" src="https://www.investopedia.com/thmb/aZTKd9rbneaA97NuIkTEP5ircWQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/RDDTChart-9f26e066372442b2a747dee679af6335.GIF" srcset="https://www.investopedia.com/thmb/GDTY5xWNxURlvXr_JIfCxKdU1Go=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/RDDTChart-9f26e066372442b2a747dee679af6335.GIF 750w" width="1777"/>
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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">Source: TradingView.com.</span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> 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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> 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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Reddit shares were up more than 13% at $64 midday Friday.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/contributors/54411/">Timothy Smith</a></em>
</p></div>
<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="5" id="mntl-sc-block-adslot_5-0"></div>
<div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_6-0"><span class="heading-toc" id="toc-2024-05-17t151940437z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_6-0"><p>GameStop Issues New Shares, Sending Stock Tumbling</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_6-0">May 17, 2024 11:19 AM EDT</div>
<button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05172024-8650115#toc-2024-05-17t151940437z" id="mntl-blogpost__copylink_6-0">
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> GameStop (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GME">GME</a>) shares tumbled in intraday trading Friday after the gaming retailer announced plans to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/gamestop-issues-new-shares-sending-stock-tumbling-8650090">issue up to 45 million new shares</a> and released initial estimates for its first-quarter financial performance below expectations.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> GameStop plans to sell up to 45 million new shares of its common stock, the company said in a filing with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission (SEC</a>) Friday. The new sale will bring GameStop’s total shares on the market to about 351.19 million.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> GameStop said in the filing it will use the proceeds from the sale for “general corporate purposes” like investments and acquisitions. At its share price Friday morning, the stock sale could net GameStop just under $1 billion.
</p>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_44-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:66.6%;">
<img alt="A GameStop store in New York on May 14, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Iu8Om5aQCLaqws2mcRG4-i-8Uec=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2152381450-28c3502f30db44418d7c4e4cc3239c6a.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Iu8Om5aQCLaqws2mcRG4-i-8Uec=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2152381450-28c3502f30db44418d7c4e4cc3239c6a.jpg" data-srcset="https://www.investopedia.com/thmb/B9b_JRPuc_XGZjsKtCaNHL6vblw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2152381450-28c3502f30db44418d7c4e4cc3239c6a.jpg 750w" data-tracking-container="true" height="3360" id="mntl-sc-block-image_3-0" width="5040"/>
<noscript>
<img alt="A GameStop store in New York on May 14, 2024" class="img--noscript universal-image__image" height="3360" sizes="750px" src="https://www.investopedia.com/thmb/Iu8Om5aQCLaqws2mcRG4-i-8Uec=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2152381450-28c3502f30db44418d7c4e4cc3239c6a.jpg" srcset="https://www.investopedia.com/thmb/B9b_JRPuc_XGZjsKtCaNHL6vblw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2152381450-28c3502f30db44418d7c4e4cc3239c6a.jpg 750w" width="5040"/>
</noscript>
</div> </div>
<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_3-0"> <span class="figure-article-caption-owner"><p>Michael Nagle / Bloomberg via Getty Images</p></span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> GameStop also released first-quarter preliminary results Friday. The retailer guided net sales of $872 million to $892 million for the 13 weeks through May 4, below analyst projections of $1 billion, according to estimates compiled by Visible Alpha. GameStop also expects to post a larger net loss than estimates, from a range of $27 million to $37 million, mostly wider than the $30.6 million analysts predict.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> As of Friday morning, shares were down 26%, now just 16% above where the stock closed last week.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/aaron-mcdade-8603749">Aaron McDade</a></em>
</p></div>
<div class="comp mntl-sc-block-adslot mntl-block" data-item-index="6" id="mntl-sc-block-adslot_6-0"></div>
<div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_7-0"><span class="heading-toc" id="toc-2024-05-17t145154857z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_7-0"><p>Stocks Making the Biggest Moves Friday</p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_7-0">May 17, 2024 10:51 AM EDT</div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> <strong>Gains:</strong>
</p>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0">
<li>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 of the social media company jumped 13% after it struck a deal to license its content to OpenAI as training material for artificial intelligence models. </li>
<li>KE Holdings (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BEKE">BEKE</a>): Shares of the Chinese real estate firm climbed 4% after China's government announced a series of measures to prop up the country’s ailing property sector, including removing the floor on mortgage rates and offering government-backed firms 300 billion yuan ($42 billion) to purchase excess inventory. </li>
<li>Advanced Micro Devices (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMD">AMD</a>): The chipmaker’s shares rose 3% after Microsoft said it planned to offer cloud customers a platform built on AMD’s artificial intelligence chips as an alternative to Nvidia’s offerings. <br/></li>
</ul>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <strong>Losses:</strong>
</p>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0">
<li>DXC Technology (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DXC">DXC</a>): Shares fell 18% after the IT services company forecasted current-quarter revenue and earnings guidance that fell well short of analysts’ estimates. </li>
<li>GameStop (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GME">GME</a>): Shares of the video game retailer tumbled 23% after it reported net sales declined more than Wall Street had forecast in the first quarter. It also announced plans to sell up to 45 million shares. </li>
</ul></div>
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The Dow Jones Industrial Average eked out gains on Friday to close above 40,000 for the first time, bringing to a close a fourth consecutive winning week for U.S. stocks.
The [Dow Jones Industrial Average](https://www.investopedia.com/terms/d/djia.asp) rose 0.3% Friday, while the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) inched up 0.1%. Both indexes rose more than 1% over the week. The [Nasdaq Composite](https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp) slipped 0.1% on Friday but finished the week up more than 2%.
The indexes were propelled to record highs on Wednesday by slightly [better-than-expected consumer inflation data](https://www.investopedia.com/inflation-ticked-downward-in-april-2024-8648737) that revived investor optimism that the Federal Reserve will cut interest rates at some point this year.
GameStop ([GME](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GME)) shares sank nearly 20% on Friday as the [meme stock](https://www.investopedia.com/meme-stock-5206762) craze that was revived at the start of the week fizzled as quickly as it began. The stock also took a hit from disappointing preliminary quarterly results and the announcement of [a major stock offering](https://www.investopedia.com/gamestop-issues-new-shares-sending-stock-tumbling-8650090).
Treasury yields crept higher Friday but finished the week lower due to Wednesday's inflation data.
Copper futures climbed to near-record highs Friday after the International Energy Agency warned the world’s copper and lithium mining projects would be insufficient to meet the demands of the green energy transition.
The Dow climbed early in the morning yesterday to [cross 40,000 points for the first time](https://www.investopedia.com/dow-jones-today-05162024-8649407) before retreating to close marginally lower. The S&P 500 and Nasdaq Composite also ticked lower.
## Stock Indexes Wrap: Energy, Materials Lead Indexes; AI Stocks Lag
May 17, 2024 04:34 PM EDT
**The Dow**
Boeing ([BA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BA)) rose 1.1% after shareholders voted to reelect outgoing CEO Dave Calhoun to the jet maker’s board of directors.
Walmart ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WMT)) gained 1%, continuing to rise after jumping to a record high yesterday following the announcement of [better-than-expected first-quarter earnings](https://www.investopedia.com/walmart-q1-fy25-earnings-beat-raised-guidance-8649391).
**The S&P 500**
Energy stocks were among the day’s best performers, led by oil refiner Valero ([VLO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=VLO)), up 4.8%. Marathon Petroleum ([MPC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MPC)) and ExxonMobil ([XOM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM)) followed, rising 2.8% and 1.5%, respectively.
Freeport-McMoRan ([FCX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FCX)) advanced 4.2% as copper futures climbed steadily to trade near record highs.
Chubb ([CB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CB)) added 3.6%, building on yesterday’s gains that followed Berkshire Hathaway’s revelation of [a 6% stake](https://www.investopedia.com/berkshire-filing-reveals-insurer-chubb-as-buffetts-mystery-stock-8649210) in the insurance company.
AI stocks slips, including Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)), down 2%, and Super Micro Computer ([SMCI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMCI)), down 1.8%.
**The Nasdaq 100**
Advanced Micro Devices ([AMD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMD)) rose 1.1% after Microsoft said it would offer cloud customers an AMD-based platform that would compete with its Nvidia offerings.
Take-Two Interactive ([TTWO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TTWO)) gained 0.8% after the video game company scheduled its hotly anticipated Grand Theft Auto VI for release in the fall of 2025. The company also [beat revenue estimates](https://www.investopedia.com/take-two-interactive-sets-grand-theft-auto-vi-release-date-8650139) in the first quarter.
## Doximity Surges on Earnings Beat, Strong Outlook, Stock Buyback Announcement
May 17, 2024 03:04 PM EDT
Shares in Doximity ([DOCS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=docs)) surged Friday after the digital medical networking company announced earnings that beat Wall Street estimates, provided a better-than-expected current-quarter outlook, and unveiled a share [buyback](https://www.investopedia.com/terms/b/buyback.asp) program.
For the fiscal fourth quarter ending March 31, the provider of curated medical news and [telehealth](https://www.investopedia.com/telehealth-5115239#:~:text=Telehealth%20refers%20to%20the%20use,smartphones%2C%20tablets%2C%20and%20computers.) tools reported [adjusted earnings](https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Key%20Takeaways,tax%20liabilities%2C%20and%20capital%20gains.) of 25 cents per share, comfortably topping forecasts of 20 cents a share. Revenue in the period of $118.1 million improved 6% from a year earlier and beat analysts’ expectations of $116.4 million.
Looking ahead, Doximity expects current-quarter [net sales](https://www.investopedia.com/terms/n/netsales.asp) to range between $119.5 million and $120.5 million, with the lower end of that range surpassing forecasts of $119.2 million.
Doximity also unveiled a stock buyback program, announcing that it had authorized the purchase of up to $500 million of its Class A [common stock](https://www.investopedia.com/terms/c/commonstock.asp).
Doximity shares were up 17.6% at $27.92 with about an hour left in the session on Friday.
*-[Timothy Smith](https://www.investopedia.com/contributors/54411/)*
## Cracker Barrel Slashes Its Dividend as It Shakes Up Operations, Sending Stock Plunging
May 17, 2024 02:07 PM EDT
![Cracker Barrel Old Country Store sign]()
:max_bytes(150000):strip_icc()/GettyImages-1797517951-2a7480f410b946c19a427c91f8e06f97.jpg)
SOPA Images / Contributor / Getty Images
Shares of Cracker Barrel Old Country Store ([CBRL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CBRL)) plunged in intraday trading Friday after the restaurant and novelty store chain slashed its [dividend](https://www.investopedia.com/terms/d/dividend.asp) as it embarked on what it called a “strategic transformation plan,” and lowered its guidance.
The company announced it would be reducing its quarterly dividend to 25 cents from $1.30 as part of its efforts to modify its capital allocation “to support increased investment in the business to drive organic growth."
Cracker Barrel warned that because of weaker-than-expected traffic, it anticipates its current and fourth-quarter results could be lower than previously thought. In addition, it expects fiscal 2025 to be “an investment year,” with [earnings before interest, taxes, depreciation, and amortization (EBITDA)](https://www.investopedia.com/terms/e/ebitda.asp) in line or slightly below that of 2024.
Cracker Barrel shares were more than 13% lower Friday afternoon. They’ve lost over one-third of their value since the start of the year.
*-[Bill McColl](https://www.investopedia.com/bill-mccoll-5186338)*
## Copper Futures Rise as Record Prices Squeeze Short Sellers
May 17, 2024 01:11 PM EDT
Copper futures climbed on Friday, with front-month contracts trading on U.S. exchanges rising more than 3% to as much as $5.05 per pound, just shy of the $5.12 record hit Wednesday.
Copper futures have risen nearly 30% this year—nearly 14% in April alone—driven up by robust demand and a scarcity of mining projects. The [International Energy Agency](https://www.investopedia.com/terms/i/international-energy-agency.asp) (IEA) on Friday warned that the world will fail to meet its climate goals without greater investment in mining metals critical to the green energy transition. The IEA estimates that existing and planned mining projects will only supply 70% of the copper and 50% of the lithium countries will need in 2035.
However, the basics of supply and demand don’t account for all of copper’s recent rise. Commodities traders have also faced a [short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp). Investors, chasing copper’s momentum, have piled into the industrial metal, pushing up the price and forcing short sellers to settle contracts, increasing demand further.
## Reddit Stock Soars After Company Inks Partnership With ChatGPT Owner OpenAI
May 17, 2024 12:16 PM EDT
Reddit ([RDDT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt)) shares soared in intraday trading Friday after the company [announced a partnership with OpenAI](https://www.investopedia.com/reddit-stock-soars-after-company-inks-partnership-with-chatgpt-owner-openai-8649996) 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. 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.).
![This image depicts the RDDT chart.]()
:max_bytes(150000):strip_icc()/RDDTChart-9f26e066372442b2a747dee679af6335.GIF)
Source: TradingView.com.
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 shares were up more than 13% at $64 midday Friday.
*-[Timothy Smith](https://www.investopedia.com/contributors/54411/)*
## GameStop Issues New Shares, Sending Stock Tumbling
May 17, 2024 11:19 AM EDT
GameStop ([GME](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GME)) shares tumbled in intraday trading Friday after the gaming retailer announced plans to [issue up to 45 million new shares](https://www.investopedia.com/gamestop-issues-new-shares-sending-stock-tumbling-8650090) and released initial estimates for its first-quarter financial performance below expectations.
GameStop plans to sell up to 45 million new shares of its common stock, the company said in a filing with the [Securities and Exchange Commission (SEC](https://www.investopedia.com/terms/s/sec.asp)) Friday. The new sale will bring GameStop’s total shares on the market to about 351.19 million.
GameStop said in the filing it will use the proceeds from the sale for “general corporate purposes” like investments and acquisitions. At its share price Friday morning, the stock sale could net GameStop just under $1 billion.
![A GameStop store in New York on May 14, 2024]()
:max_bytes(150000):strip_icc()/GettyImages-2152381450-28c3502f30db44418d7c4e4cc3239c6a.jpg)
Michael Nagle / Bloomberg via Getty Images
GameStop also released first-quarter preliminary results Friday. The retailer guided net sales of $872 million to $892 million for the 13 weeks through May 4, below analyst projections of $1 billion, according to estimates compiled by Visible Alpha. GameStop also expects to post a larger net loss than estimates, from a range of $27 million to $37 million, mostly wider than the $30.6 million analysts predict.
As of Friday morning, shares were down 26%, now just 16% above where the stock closed last week.
*-[Aaron McDade](https://www.investopedia.com/aaron-mcdade-8603749)*
## Stocks Making the Biggest Moves Friday
May 17, 2024 10:51 AM EDT
**Gains:**
* Reddit ([RDDT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=RDDT)): Shares of the social media company jumped 13% after it struck a deal to license its content to OpenAI as training material for artificial intelligence models.
* KE Holdings ([BEKE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BEKE)): Shares of the Chinese real estate firm climbed 4% after China's government announced a series of measures to prop up the country’s ailing property sector, including removing the floor on mortgage rates and offering government-backed firms 300 billion yuan ($42 billion) to purchase excess inventory.
* Advanced Micro Devices ([AMD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMD)): The chipmaker’s shares rose 3% after Microsoft said it planned to offer cloud customers a platform built on AMD’s artificial intelligence chips as an alternative to Nvidia’s offerings.
**Losses:**
* DXC Technology ([DXC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DXC)): Shares fell 18% after the IT services company forecasted current-quarter revenue and earnings guidance that fell well short of analysts’ estimates.
* GameStop ([GME](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GME)): Shares of the video game retailer tumbled 23% after it reported net sales declined more than Wall Street had forecast in the first quarter. It also announced plans to sell up to 45 million shares.
|
The Dow Jones Industrial Average eked out gains on Friday to close above 40,000 for the first time, bringing to a close a fourth consecutive winning week for U.S. stocks.
The Dow Jones Industrial Average rose 0.3% Friday, while the S&P 500 inched up 0.1%. Both indexes rose more than 1% over the week. The Nasdaq Composite slipped 0.1% on Friday but finished the week up more than 2%.
The indexes were propelled to record highs on Wednesday by slightly better-than-expected consumer inflation data that revived investor optimism that the Federal Reserve will cut interest rates at some point this year.
GameStop (GME) shares sank nearly 20% on Friday as the meme stock craze that was revived at the start of the week fizzled as quickly as it began. The stock also took a hit from disappointing preliminary quarterly results and the announcement of a major stock offering.
Treasury yields crept higher Friday but finished the week lower due to Wednesday's inflation data.
Copper futures climbed to near-record highs Friday after the International Energy Agency warned the world’s copper and lithium mining projects would be insufficient to meet the demands of the green energy transition.
The Dow climbed early in the morning yesterday to cross 40,000 points for the first time before retreating to close marginally lower. The S&P 500 and Nasdaq Composite also ticked lower.
Stock Indexes Wrap: Energy, Materials Lead Indexes; AI Stocks Lag
May 17, 2024 04:34 PM EDT
The Dow
Boeing (BA) rose 1.1% after shareholders voted to reelect outgoing CEO Dave Calhoun to the jet maker’s board of directors.
Walmart (WMT) gained 1%, continuing to rise after jumping to a record high yesterday following the announcement of better-than-expected first-quarter earnings.
The S&P 500
Energy stocks were among the day’s best performers, led by oil refiner Valero (VLO), up 4.8%. Marathon Petroleum (MPC) and ExxonMobil (XOM) followed, rising 2.8% and 1.5%, respectively.
Freeport-McMoRan (FCX) advanced 4.2% as copper futures climbed steadily to trade near record highs.
Chubb (CB) added 3.6%, building on yesterday’s gains that followed Berkshire Hathaway’s revelation of a 6% stake in the insurance company.
AI stocks slips, including Nvidia (NVDA), down 2%, and Super Micro Computer (SMCI), down 1.8%.
The Nasdaq 100
Advanced Micro Devices (AMD) rose 1.1% after Microsoft said it would offer cloud customers an AMD-based platform that would compete with its Nvidia offerings.
Take-Two Interactive (TTWO) gained 0.8% after the video game company scheduled its hotly anticipated Grand Theft Auto VI for release in the fall of 2025. The company also beat revenue estimates in the first quarter.
Doximity Surges on Earnings Beat, Strong Outlook, Stock Buyback Announcement
May 17, 2024 03:04 PM EDT
Shares in Doximity (DOCS) surged Friday after the digital medical networking company announced earnings that beat Wall Street estimates, provided a better-than-expected current-quarter outlook, and unveiled a share buyback program.
For the fiscal fourth quarter ending March 31, the provider of curated medical news and telehealth tools reported adjusted earnings of 25 cents per share, comfortably topping forecasts of 20 cents a share. Revenue in the period of $118.1 million improved 6% from a year earlier and beat analysts’ expectations of $116.4 million.
Looking ahead, Doximity expects current-quarter net sales to range between $119.5 million and $120.5 million, with the lower end of that range surpassing forecasts of $119.2 million.
Doximity also unveiled a stock buyback program, announcing that it had authorized the purchase of up to $500 million of its Class A common stock.
Doximity shares were up 17.6% at $27.92 with about an hour left in the session on Friday.
-Timothy Smith
Cracker Barrel Slashes Its Dividend as It Shakes Up Operations, Sending Stock Plunging
May 17, 2024 02:07 PM EDT
SOPA Images / Contributor / Getty Images
Shares of Cracker Barrel Old Country Store (CBRL) plunged in intraday trading Friday after the restaurant and novelty store chain slashed its dividend as it embarked on what it called a “strategic transformation plan,” and lowered its guidance.
The company announced it would be reducing its quarterly dividend to 25 cents from $1.30 as part of its efforts to modify its capital allocation “to support increased investment in the business to drive organic growth."
Cracker Barrel warned that because of weaker-than-expected traffic, it anticipates its current and fourth-quarter results could be lower than previously thought. In addition, it expects fiscal 2025 to be “an investment year,” with earnings before interest, taxes, depreciation, and amortization (EBITDA) in line or slightly below that of 2024.
Cracker Barrel shares were more than 13% lower Friday afternoon. They’ve lost over one-third of their value since the start of the year.
-Bill McColl
Copper Futures Rise as Record Prices Squeeze Short Sellers
May 17, 2024 01:11 PM EDT
Copper futures climbed on Friday, with front-month contracts trading on U.S. exchanges rising more than 3% to as much as $5.05 per pound, just shy of the $5.12 record hit Wednesday.
Copper futures have risen nearly 30% this year—nearly 14% in April alone—driven up by robust demand and a scarcity of mining projects. The International Energy Agency (IEA) on Friday warned that the world will fail to meet its climate goals without greater investment in mining metals critical to the green energy transition. The IEA estimates that existing and planned mining projects will only supply 70% of the copper and 50% of the lithium countries will need in 2035.
However, the basics of supply and demand don’t account for all of copper’s recent rise. Commodities traders have also faced a short squeeze. Investors, chasing copper’s momentum, have piled into the industrial metal, pushing up the price and forcing short sellers to settle contracts, increasing demand further.
Reddit Stock Soars After Company Inks Partnership With ChatGPT Owner OpenAI
May 17, 2024 12:16 PM EDT
Reddit (RDDT) shares soared in intraday trading Friday 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. Reddit will also add OpenAI as an advertising partner.
Source: TradingView.com.
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 shares were up more than 13% at $64 midday Friday.
-Timothy Smith
GameStop Issues New Shares, Sending Stock Tumbling
May 17, 2024 11:19 AM EDT
GameStop (GME) shares tumbled in intraday trading Friday after the gaming retailer announced plans to issue up to 45 million new shares and released initial estimates for its first-quarter financial performance below expectations.
GameStop plans to sell up to 45 million new shares of its common stock, the company said in a filing with the Securities and Exchange Commission (SEC) Friday. The new sale will bring GameStop’s total shares on the market to about 351.19 million.
GameStop said in the filing it will use the proceeds from the sale for “general corporate purposes” like investments and acquisitions. At its share price Friday morning, the stock sale could net GameStop just under $1 billion.
Michael Nagle / Bloomberg via Getty Images
GameStop also released first-quarter preliminary results Friday. The retailer guided net sales of $872 million to $892 million for the 13 weeks through May 4, below analyst projections of $1 billion, according to estimates compiled by Visible Alpha. GameStop also expects to post a larger net loss than estimates, from a range of $27 million to $37 million, mostly wider than the $30.6 million analysts predict.
As of Friday morning, shares were down 26%, now just 16% above where the stock closed last week.
-Aaron McDade
Stocks Making the Biggest Moves Friday
May 17, 2024 10:51 AM EDT
Gains:
Reddit (RDDT): Shares of the social media company jumped 13% after it struck a deal to license its content to OpenAI as training material for artificial intelligence models.
KE Holdings (BEKE): Shares of the Chinese real estate firm climbed 4% after China's government announced a series of measures to prop up the country’s ailing property sector, including removing the floor on mortgage rates and offering government-backed firms 300 billion yuan ($42 billion) to purchase excess inventory.
Advanced Micro Devices (AMD): The chipmaker’s shares rose 3% after Microsoft said it planned to offer cloud customers a platform built on AMD’s artificial intelligence chips as an alternative to Nvidia’s offerings.
Losses:
DXC Technology (DXC): Shares fell 18% after the IT services company forecasted current-quarter revenue and earnings guidance that fell well short of analysts’ estimates.
GameStop (GME): Shares of the video game retailer tumbled 23% after it reported net sales declined more than Wall Street had forecast in the first quarter. It also announced plans to sell up to 45 million shares.
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https://www.investopedia.com/student-loan-debt-by-gender-5194243 | Student Loan Debt by Gender | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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’s no secret that large student loan debt is a problem for many people. Americans collectively owe more in student loans than the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product (GDP)</a> of all but 13 countries, and that amount is only growing bigger over time.<span class="ql-inline-citation" data-cite="57"></span><span class="ql-inline-citation" data-cite="56"></span> Taking out debt is a solid way to finance a higher education and can even help a recent graduate establish a healthy credit profile; however, the most economically vulnerable are often at risk of being unable to keep up with their payments.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> When we analyze student loan debt further by gender, it quickly becomes apparent that the majority of this financial burden isn’t being shouldered by men.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Student loan debt is the second-highest source of household debt, following housing.</li><li>The American Association of University Women (AAUW) estimates that women held nearly 67% of all U.S. student loan debt, or approximately $929 billion.</li><li>Black women owe the largest amount of debt, followed by White, Hispanic/Latinx, and Asian borrowers.</li><li>Female borrowers typically require more education to earn a wage equal to less-educated men. In fact, to exceed the lifetime earnings of a male graduate with just an associate degree, a woman may need at least a master’s degree.</li><li>According to the AAUW, most women will face a gendered wage gap as soon as they graduate, which typically worsens as they age.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-student-loan-debt"></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 Student Loan Debt </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/student-debt.asp">Student loan debt</a> is what’s owed to a lender that provides funding for higher education. This money is often primarily used to pay tuition but also can be used for school supplies, basic necessities, and anything else that a borrower purchases during their academic career. Most students are unable to pay for college without financial aid, even if they receive funding from parents and/or scholarships, due to how the price of higher education has escalated over time.<span class="ql-inline-citation" data-cite="67"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> While it’s possible to find a well-paid job after graduation, many aren’t so lucky—or don’t work in fields with high salaries—which will limit their ability to pay down their debt. This can lead to a loan becoming <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/delinquent.asp">delinquent</a> due to late payments, a situation that can lead to the loan <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">defaulting</a>. As a result, many struggling graduates can take a major hit to their <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a> and/or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a> not long after completing their education.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In addition to affecting more than 43.4 million Americans and totaling more than $1.63 trillion, student loan debt is also the highest source of household debt.<span class="ql-inline-citation" data-cite="49"></span><span class="ql-inline-citation" data-cite="64"></span> College attendance is high, but the cost of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/affordable-college-education.asp">college education</a> more than doubled compared to the prior generation.<span class="ql-inline-citation" data-cite="60"></span> Meanwhile, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/household_income.asp">household incomes</a> have remained relatively static.<span class="ql-inline-citation" data-cite="77"></span> This difficult reality falls especially hard on women. This group faces numerous additional challenges that result in both higher loan balances and a lower ability to pay down their debt.<span class="ql-inline-citation" data-cite="37"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> What causes these <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-scores-by-gender-5214525">gender discrepancies</a>? Our <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-research-data-hub-5192040">research</a> throws light on some of the issues that disadvantage women and looks at what we could find on issues faced by nonbinary/gender-nonconforming borrowers as well as differences between cisgender and transgender borrowers.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Note that the names of certain groups used below may not be entirely consistent throughout the article to match the terminology used by our sources. For instance, although Investopedia prefers the identifier “Latinx,” this article uses terms such as “Hispanic/Latinx” that represent how particular researchers reported information. Also, note that most of these studies are not done annually, so we will be reporting data from different years.
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<span class="heading-toc" id="toc-student-debt-by-gender-breakdown"></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"> Student Debt by Gender Breakdown </span> </h2>
<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/ZhWVR/6/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Average Student Loan Debt by Gender & Race"></iframe></div>
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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 starters, it’s important to know that the majority of undergraduate college students today are women: approximately 58.5% for the 2021–2022 school year. So it’s not surprising that women held nearly 67% of all U.S. student loan debt, about $929 billion.<span class="ql-inline-citation" data-cite="51"></span><span class="ql-inline-citation" data-cite="37"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> As such, women’s debt burden isn’t equal. According to the American Association of University Women (AAUW), women graduate owing $3,120 more on average than their male counterparts—an average of $22,000 in student debt, compared to $18,880 for men.<span class="ql-inline-citation" data-cite="37"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> They not only owe more but also face a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wage-gaps-by-gender-5082675">gendered wage gap</a> from the beginning: Women graduating with a bachelor’s degree expected to earn $35,338 on average, which equates to approximately 81% of what men anticipated earning. As a result, even if women had the same amount of debt as their male counterparts, the lack of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/equal-pay-act-1963-5207271">equal pay</a> would still make it more difficult to rid themselves of their financial burdens.<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_27-0"> In fact, female borrowers typically require more education to earn a wage equal to less-educated men. To exceed the lifetime earnings of a male graduate with just an associate degree, a woman may need to earn at least a master’s degree. Those who receive a graduate education to counteract pay gaps will ultimately take on even more debt and pay more in the long run. Female students borrowed $51,035 on average for graduate school, which can increase to an average of $61,626 a year after graduation, thanks to interest.<span class="ql-inline-citation" data-cite="38"></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_29-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/vM4VK/2/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Cumulative Female Graduate Loan Debt by Race"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Even if women had the same amount of debt as their male counterparts, the lack of equal pay still would make it more difficult to pay off these loans. When we remember that women on average owe more on student loans than men, it’s easy to see how the wage and debt gaps reinforce one another.<span class="ql-inline-citation" data-cite="37"></span> This frequently forces female borrowers to delay saving for retirement, purchasing a house, and/or starting their own business. Adding to this is the fact that women are also the most likely to experience general financial difficulties, with 34% reporting an inability to afford basic necessities in 2019.<span class="ql-inline-citation" data-cite="15"></span>
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<span class="heading-toc" id="toc-the-intersection-of-gender-and-race"></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 Intersection of Gender and Race </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/student-loans-4689727">student loan</a> debt burden isn’t shared equally across all women borrowers.<strong> </strong>At $37,558, Black women had the highest average student loan debt in 2017, followed by White women at $31,346. Both Black and White women owed more student loan debt than their male counterparts. Conversely, Hispanic/Latinx women owed slightly less ($423) than men in this same group. Similarly, Asian women not only had the lowest debt amount of all female borrowers but also owed slightly less than Asian men.<span class="ql-inline-citation" data-cite="3"></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_36-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/au4qQ/2/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Cumulative Female Undergraduate Loan Debt by Race"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> That unequal start doesn’t get any better at one year out of college, the AAUW reports. At $41,466.05 on average, Black women owed the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-by-race-5193137">largest amount of debt</a>, followed by White, Hispanic/Latinx, and Asian borrowers. Although there was an increase across all categories in 2017, one group experienced their debt rising faster than others: Black women.<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_40-0"> There was a roughly $2,000 increase to the student loan debt balances of White, Hispanic/Latinx, and Asian women, whereas there was a nearly $4,000 increase for Black borrowers. This data set also shows that female Pacific Islander/Hawaiian Native and American Indian or Alaska Native borrowers (at $38,747.44 and $36,184.40, respectively) owed more than White borrowers.<span class="ql-inline-citation" data-cite="3"></span><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_42-0"> Larger student debt levels and the racial wealth gap—as well as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-diversity-grows-while-leadership-remains-white-5112518">unequal access</a> to and outcomes within higher education—are other socioeconomic factors that reinforce each other and negatively impact women of color.<span class="ql-inline-citation" data-cite="61"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> In 2021, the U.S. Government Accountability Office reported that African American women and Latinas were paid $0.63 and $0.58, respectively, for every $1 earned by White men.<span class="ql-inline-citation" data-cite="78"></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>After the Supreme Court blocked federal student loan forgiveness, the Department of Education announced a 12-month "on ramp" as loan payments resume. During the first year as payments resume, federal student loans will start accumulating interest, but borrowers will not be held delinquent or be reported to credit agencies for missed payments.<span class="ql-inline-citation" data-cite="65"></span> Interest began accruing on Sept. 1, 2023.</p></div></div></div>
<span class="heading-toc" id="toc-how-college-type-affects-debt"></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"> How College Type Affects Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The type of college attended also affects debt. The AAUW found that women attending public four-year institutions on average had $29,611 in student loan debt in 2017. Following this were debt loads from private nonprofit four-year and for-profit four-year universities, at an average of $32,086 and $42,778, respectively.<span class="ql-inline-citation" data-cite="3"></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_51-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/3sxzO/2/" frameborder="0" id="mntl-sc-block-iframe__uri_4-0" title="Average Student Loan Borrowed by Women (Institution)"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Although all of these amounts are high, the difference between the costs of public four-year institutions and for-profit four-year ones is stark. They may not enroll as many students as public universities, but for-profit institutions disproportionately enroll women, particularly Black women and/or single mothers. The existence of student lending enables these universities to find people who can borrow enough to pay a higher price for their degrees.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="9"></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>Women<strong> </strong>accounted for 68.6% of the student body at for-profit universities in 2022, compared to 57.4% at public two‐year colleges.<span class="ql-inline-citation" data-cite="51"></span></p></div></div></div>
<span class="heading-toc" id="toc-the-mom-factor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-heading__text"> The Mom Factor </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Although childcare won’t be a concern for every student, it’s a major economic factor for millions of women. According to the Center for Responsible Lending, approximately 25% of all college students in 2018 were parents with dependent children; more than 40% of parents were single mothers.<span class="ql-inline-citation" data-cite="8"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Students who are also mothers face additional barriers to repaying debt, reports the AAUW. One year after graduation, women in 2017 could expect to spend $920 on housing (plus $163 for utilities), $396 on vehicle payments, $387 on food, and $113 on medical expenses. The 16% of women who are mothers had an additional $520 for childcare each month on average.<span class="ql-inline-citation" data-cite="68"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Adding in a $307 monthly student loan payment can make it difficult, if not impossible, to cover all these basic necessities and pay down debt, much less save any money. Even those who can afford to repay on time may still experience their loan balances increasing over time. This happens when loan interest is accruing and capitalizing on their loans, outpacing any minimum payments. For example, if a student takes advantage of the six-month <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grace_period.asp">grace period</a> after graduation before starting repayment, that unpaid interest is added to their loan.<span class="ql-inline-citation" data-cite="69"></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_64-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/wj13M/3/" frameborder="0" id="mntl-sc-block-iframe__uri_5-0" title="Average Monthly Budget"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> The scarcity of on-campus <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090415/cost-raising-child-america.asp">childcare</a>, which met just 5% of demand in 2018,<strong> </strong>makes things especially difficult for parents still attending school.<span class="ql-inline-citation" data-cite="8"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Since they are also one of the groups often targeted by for-profit universities—putting them in the highest debt group—single mothers are more likely to drop out of college due to all of these elements. This, of course, leaves them with burdensome student loan debt and nothing to show for it.<span class="ql-inline-citation" data-cite="8"></span>
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<span class="heading-toc" id="toc-differences-in-repayment"></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"> Differences in Repayment </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_71-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/i60jM/4/" frameborder="0" id="mntl-sc-block-iframe__uri_6-0" title="Percent of Debt Paid Off in Three Years"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> According to the AAUW, women tended to repay their loans at a slower rate than men in 2020, due in part to the wage gap between the two groups. College-educated, full-time female workers generally made 26% less than their male counterparts. This gap has been shown to increase over time—starting at 18% one year following graduation and rising to 20% four years later.<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"> As previously discussed, having a lower wage means having less available income to pay down debt. From one to four years following graduation, women had paid off 31% of their outstanding debt, compared to the 38% that men paid off.<span class="ql-inline-citation" data-cite="70"></span> Black and Hispanic women were significantly further behind during this same time period, at 12% and 18%, respectively.<span class="ql-inline-citation" data-cite="71"></span> Additionally, the AAUW found that 57% of Black female borrowers in 2008–2012 faced financial difficulties while paying down their debt, compared to 42%, 30%, and 28% for Hispanic, White, and Asian women, respectively.<span class="ql-inline-citation" data-cite="72"></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_77-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/7rUg9/2/" frameborder="0" id="mntl-sc-block-iframe__uri_7-0" title="Percent of Graduates in Default Four Years After College"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> The discrepancies in student loan repayment can also be seen in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defaultrate.asp">default rates</a>. From 2008 to 2012, the AAUW found that, among bachelor’s degree graduates, these rates were slightly higher for women than men and much higher for Black and Hispanic women than for their White and Asian counterparts. These results were similar when accounting for students enrolled in an additional degree program.<span class="ql-inline-citation" data-cite="73"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Each kind of university also produces different default rates. For-profit institutions enrolled a significantly larger number of borrowers who defaulted within two years after graduation. For-profit universities also disproportionately enroll women, which further raises women’s risk of default.<span class="ql-inline-citation" data-cite="74"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> Beyond the Binary </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> There is very little student debt information about borrowers who identify outside of the gender binary, often because they are consolidated within broader <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/guide-to-finance-for-lgbtq-americans-5118290">LGBTQ+</a> debt statistics.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> However, the Williams Institute at the UCLA School of Law reports that 51% of transgender <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-by-age-5200927">adults</a> took out federal student loans to finance their education in 2021, compared to 35.9% and 27.9% of LBQ cisgender women and GBQ cisgender male borrowers, respectively.<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_88-0"> Looking deeper, federal student loans don’t require credit checks, but <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp">private student loans generally do</a>. Transgender people have a greater risk of experiencing credit rejection, given that 18 U.S. states and territories lack laws prohibiting discrimination in lending based on gender identity.<span class="ql-inline-citation" data-cite="22"></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_90-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Qjpp2/4/" frameborder="0" id="mntl-sc-block-iframe__uri_8-0" title="Percentage of LGBT+ Adults Holding Federal Student Loans "></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> A 2017 survey conducted by the Center for the Study of Student Life at The Ohio State University found that the 244 participants who identified as either transgender men or gender-nonconforming borrowers were more likely to take out a loan to pay for college (8.2%), somewhat more likely to have student loan debt (3.9%), and slightly more likely to rely on financial assistance from family members to pay for college expenses (2.2%) than their cisgender counterparts. Transgender men or gender-nonconforming borrowers also were slightly more likely to fund their education via federal loans (3.7%), scholarships (2.1%), and parent income (0.8%) than cisgender students.<span class="ql-inline-citation" data-cite="75"></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_94-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/uJYoC/3/" frameborder="0" id="mntl-sc-block-iframe__uri_9-0" title="Transgender or Gender Non-conforming Student Aid Status & Funding Sources"></iframe></div>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> The National Transgender Discrimination Survey—which surveyed nearly 6,500 transgender respondents attending undergraduate, graduate, professional, or technical school—found that, in addition to a lack of financial aid, participants experienced several other barriers in higher education in 2017, such as harassment and financial issues related to transition. These challenges can lead to students dropping out, which, as we’ve previously established, would leave those who did receive financial aid with a large debt balance and no degree to help pay it off.<span class="ql-inline-citation" data-cite="16"></span>
</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"> Adding to these financial challenges is the fact that—despite the data from the Center for the Study of Student Life reported above—parents may rescind promises to finance the higher education of their transgender and/or nonbinary children, should they even offer to do so in the first place.<span class="ql-inline-citation" data-cite="63"></span> Further compounding these difficult circumstances are numerous other inequalities, such as employment discrimination and a pay gap.
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<span class="heading-toc" id="toc-student-loan-forgiveness"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-heading__text"> Student Loan Forgiveness </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> Debt forgiveness may be possible, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-debt-affect-economy-8550501">it may be the key to restoring economic mobility</a> and financial security to those most burdened by high student debt balances. But debt forgiveness isn't without its detractors. When the Biden-Harris administration released its plan to forgive $10,000 per borrower making under $125,000, with $20,000 for Pell Grant recipients, they were met with legal opposition and eventually overturned.<span class="ql-inline-citation" data-cite="48"></span><span class="ql-inline-citation" data-cite="45"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-student-loans-not-forgiven-7152229">Forgiving student loans</a> is a controversial idea for some. What’s more, loan forgiveness would only be a stopgap measure without fixing the underlying lending system. At the very least, steps should be taken to eliminate the gendered wage gaps and other discriminatory factors that worsen the unequal student debt burden that women and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-by-race-5193137">people of color</a> face each day.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> After the Supreme Court blocked the Biden Administration's loan forgiveness plan, the Department of Education announced a new set of plans to reduce student debt. Under the Saving for a Valuable Education (SAVE) plan, borrowers have to pay a smaller percentage of their discretionary income, and the amount of income considered non-discretionary is increased to 225% of the federal poverty line. This means that many borrowers will have reduced payments, even as low as 0$.<span class="ql-inline-citation" data-cite="66"></span>
</p>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_107-0"><span class="heading-toc" id="toc-how-else-does-student-loan-debt-differ-demographically"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Else Does Student Loan Debt Differ Demographically?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Black women had the highest average student loan debt at $37,558. Second was White women, who owed $31,346 on average. Black and White men owed $35,665 and $29,862, respectively, which is less than their female counterparts. Hispanic/Latinx women owed $27,029 on average, while their male counterparts owed slightly more at $27,452. Finally, at $25,252, Asian women had the lowest debt burden compared to any other female borrowers, and Asian men owed $25,507.<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_109-0"><span class="heading-toc" id="toc-why-is-american-student-debt-so-high"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is American Student Debt So High?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Student loan debt is the second-highest source of household debt due to income not having kept pace with the growth of college tuition, forcing students to take out more money in student loans in order to afford a higher education.<span class="ql-inline-citation" data-cite="64"></span></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_111-0"><span class="heading-toc" id="toc-which-gender-has-the-most-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Gender Has the Most Student Loan Debt?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Collectively, women owed approximately $929 billion in 2022, which is nearly 67% of all U.S. student loan debt. On an individual level, women also owed an average of $22,000 in student debt, whereas their male counterparts owed $18,880.<span class="ql-inline-citation" data-cite="37"></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_113-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> The negative effects of student debt are not just financial. A 2020 report found a positive association between a person’s debt balance and the amount of stress that they feel regarding it. The authors also reported that this anxiety correlates with poor health and symptoms of depression among students, particularly Black women.<span class="ql-inline-citation" data-cite="76"></span>
</p></div> | It’s no secret that large student loan debt is a problem for many people. Americans collectively owe more in student loans than the [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) of all but 13 countries, and that amount is only growing bigger over time. Taking out debt is a solid way to finance a higher education and can even help a recent graduate establish a healthy credit profile; however, the most economically vulnerable are often at risk of being unable to keep up with their payments.
When we analyze student loan debt further by gender, it quickly becomes apparent that the majority of this financial burden isn’t being shouldered by men.
### Key Takeaways
* Student loan debt is the second-highest source of household debt, following housing.
* The American Association of University Women (AAUW) estimates that women held nearly 67% of all U.S. student loan debt, or approximately $929 billion.
* Black women owe the largest amount of debt, followed by White, Hispanic/Latinx, and Asian borrowers.
* Female borrowers typically require more education to earn a wage equal to less-educated men. In fact, to exceed the lifetime earnings of a male graduate with just an associate degree, a woman may need at least a master’s degree.
* According to the AAUW, most women will face a gendered wage gap as soon as they graduate, which typically worsens as they age.
## Understanding Student Loan Debt
[Student loan debt](https://www.investopedia.com/terms/s/student-debt.asp) is what’s owed to a lender that provides funding for higher education. This money is often primarily used to pay tuition but also can be used for school supplies, basic necessities, and anything else that a borrower purchases during their academic career. Most students are unable to pay for college without financial aid, even if they receive funding from parents and/or scholarships, due to how the price of higher education has escalated over time.
While it’s possible to find a well-paid job after graduation, many aren’t so lucky—or don’t work in fields with high salaries—which will limit their ability to pay down their debt. This can lead to a loan becoming [delinquent](https://www.investopedia.com/terms/d/delinquent.asp) due to late payments, a situation that can lead to the loan [defaulting](https://www.investopedia.com/terms/d/default2.asp). As a result, many struggling graduates can take a major hit to their [credit score](https://www.investopedia.com/terms/c/credit_score.asp) and/or [credit report](https://www.investopedia.com/terms/c/creditreport.asp) not long after completing their education.
In addition to affecting more than 43.4 million Americans and totaling more than $1.63 trillion, student loan debt is also the highest source of household debt. College attendance is high, but the cost of a [college education](https://www.investopedia.com/articles/pf/08/affordable-college-education.asp) more than doubled compared to the prior generation. Meanwhile, [household incomes](https://www.investopedia.com/terms/h/household_income.asp) have remained relatively static. This difficult reality falls especially hard on women. This group faces numerous additional challenges that result in both higher loan balances and a lower ability to pay down their debt.
What causes these [gender discrepancies](https://www.investopedia.com/average-credit-scores-by-gender-5214525)? Our [research](https://www.investopedia.com/financial-research-data-hub-5192040) throws light on some of the issues that disadvantage women and looks at what we could find on issues faced by nonbinary/gender-nonconforming borrowers as well as differences between cisgender and transgender borrowers.
Note that the names of certain groups used below may not be entirely consistent throughout the article to match the terminology used by our sources. For instance, although Investopedia prefers the identifier “Latinx,” this article uses terms such as “Hispanic/Latinx” that represent how particular researchers reported information. Also, note that most of these studies are not done annually, so we will be reporting data from different years.
## Student Debt by Gender Breakdown
For starters, it’s important to know that the majority of undergraduate college students today are women: approximately 58.5% for the 2021–2022 school year. So it’s not surprising that women held nearly 67% of all U.S. student loan debt, about $929 billion.
As such, women’s debt burden isn’t equal. According to the American Association of University Women (AAUW), women graduate owing $3,120 more on average than their male counterparts—an average of $22,000 in student debt, compared to $18,880 for men.
They not only owe more but also face a [gendered wage gap](https://www.investopedia.com/wage-gaps-by-gender-5082675) from the beginning: Women graduating with a bachelor’s degree expected to earn $35,338 on average, which equates to approximately 81% of what men anticipated earning. As a result, even if women had the same amount of debt as their male counterparts, the lack of [equal pay](https://www.investopedia.com/equal-pay-act-1963-5207271) would still make it more difficult to rid themselves of their financial burdens.
In fact, female borrowers typically require more education to earn a wage equal to less-educated men. To exceed the lifetime earnings of a male graduate with just an associate degree, a woman may need to earn at least a master’s degree. Those who receive a graduate education to counteract pay gaps will ultimately take on even more debt and pay more in the long run. Female students borrowed $51,035 on average for graduate school, which can increase to an average of $61,626 a year after graduation, thanks to interest.
Even if women had the same amount of debt as their male counterparts, the lack of equal pay still would make it more difficult to pay off these loans. When we remember that women on average owe more on student loans than men, it’s easy to see how the wage and debt gaps reinforce one another. This frequently forces female borrowers to delay saving for retirement, purchasing a house, and/or starting their own business. Adding to this is the fact that women are also the most likely to experience general financial difficulties, with 34% reporting an inability to afford basic necessities in 2019.
## The Intersection of Gender and Race
The [student loan](https://www.investopedia.com/student-loans-4689727) debt burden isn’t shared equally across all women borrowers.At $37,558, Black women had the highest average student loan debt in 2017, followed by White women at $31,346. Both Black and White women owed more student loan debt than their male counterparts. Conversely, Hispanic/Latinx women owed slightly less ($423) than men in this same group. Similarly, Asian women not only had the lowest debt amount of all female borrowers but also owed slightly less than Asian men.
That unequal start doesn’t get any better at one year out of college, the AAUW reports. At $41,466.05 on average, Black women owed the [largest amount of debt](https://www.investopedia.com/student-loan-debt-by-race-5193137), followed by White, Hispanic/Latinx, and Asian borrowers. Although there was an increase across all categories in 2017, one group experienced their debt rising faster than others: Black women.
There was a roughly $2,000 increase to the student loan debt balances of White, Hispanic/Latinx, and Asian women, whereas there was a nearly $4,000 increase for Black borrowers. This data set also shows that female Pacific Islander/Hawaiian Native and American Indian or Alaska Native borrowers (at $38,747.44 and $36,184.40, respectively) owed more than White borrowers.
Larger student debt levels and the racial wealth gap—as well as [unequal access](https://www.investopedia.com/student-diversity-grows-while-leadership-remains-white-5112518) to and outcomes within higher education—are other socioeconomic factors that reinforce each other and negatively impact women of color.
In 2021, the U.S. Government Accountability Office reported that African American women and Latinas were paid $0.63 and $0.58, respectively, for every $1 earned by White men.
###
After the Supreme Court blocked federal student loan forgiveness, the Department of Education announced a 12-month "on ramp" as loan payments resume. During the first year as payments resume, federal student loans will start accumulating interest, but borrowers will not be held delinquent or be reported to credit agencies for missed payments. Interest began accruing on Sept. 1, 2023.
## How College Type Affects Debt
The type of college attended also affects debt. The AAUW found that women attending public four-year institutions on average had $29,611 in student loan debt in 2017. Following this were debt loads from private nonprofit four-year and for-profit four-year universities, at an average of $32,086 and $42,778, respectively.
Although all of these amounts are high, the difference between the costs of public four-year institutions and for-profit four-year ones is stark. They may not enroll as many students as public universities, but for-profit institutions disproportionately enroll women, particularly Black women and/or single mothers. The existence of student lending enables these universities to find people who can borrow enough to pay a higher price for their degrees.
###
Womenaccounted for 68.6% of the student body at for-profit universities in 2022, compared to 57.4% at public two‐year colleges.
## The Mom Factor
Although childcare won’t be a concern for every student, it’s a major economic factor for millions of women. According to the Center for Responsible Lending, approximately 25% of all college students in 2018 were parents with dependent children; more than 40% of parents were single mothers.
Students who are also mothers face additional barriers to repaying debt, reports the AAUW. One year after graduation, women in 2017 could expect to spend $920 on housing (plus $163 for utilities), $396 on vehicle payments, $387 on food, and $113 on medical expenses. The 16% of women who are mothers had an additional $520 for childcare each month on average.
Adding in a $307 monthly student loan payment can make it difficult, if not impossible, to cover all these basic necessities and pay down debt, much less save any money. Even those who can afford to repay on time may still experience their loan balances increasing over time. This happens when loan interest is accruing and capitalizing on their loans, outpacing any minimum payments. For example, if a student takes advantage of the six-month [grace period](https://www.investopedia.com/terms/g/grace_period.asp) after graduation before starting repayment, that unpaid interest is added to their loan.
The scarcity of on-campus [childcare](https://www.investopedia.com/articles/personal-finance/090415/cost-raising-child-america.asp), which met just 5% of demand in 2018,makes things especially difficult for parents still attending school.
Since they are also one of the groups often targeted by for-profit universities—putting them in the highest debt group—single mothers are more likely to drop out of college due to all of these elements. This, of course, leaves them with burdensome student loan debt and nothing to show for it.
## Differences in Repayment
According to the AAUW, women tended to repay their loans at a slower rate than men in 2020, due in part to the wage gap between the two groups. College-educated, full-time female workers generally made 26% less than their male counterparts. This gap has been shown to increase over time—starting at 18% one year following graduation and rising to 20% four years later.
As previously discussed, having a lower wage means having less available income to pay down debt. From one to four years following graduation, women had paid off 31% of their outstanding debt, compared to the 38% that men paid off. Black and Hispanic women were significantly further behind during this same time period, at 12% and 18%, respectively. Additionally, the AAUW found that 57% of Black female borrowers in 2008–2012 faced financial difficulties while paying down their debt, compared to 42%, 30%, and 28% for Hispanic, White, and Asian women, respectively.
The discrepancies in student loan repayment can also be seen in [default rates](https://www.investopedia.com/terms/d/defaultrate.asp). From 2008 to 2012, the AAUW found that, among bachelor’s degree graduates, these rates were slightly higher for women than men and much higher for Black and Hispanic women than for their White and Asian counterparts. These results were similar when accounting for students enrolled in an additional degree program.
Each kind of university also produces different default rates. For-profit institutions enrolled a significantly larger number of borrowers who defaulted within two years after graduation. For-profit universities also disproportionately enroll women, which further raises women’s risk of default.
### Beyond the Binary
There is very little student debt information about borrowers who identify outside of the gender binary, often because they are consolidated within broader [LGBTQ+](https://www.investopedia.com/guide-to-finance-for-lgbtq-americans-5118290) debt statistics.
However, the Williams Institute at the UCLA School of Law reports that 51% of transgender [adults](https://www.investopedia.com/student-loan-debt-by-age-5200927) took out federal student loans to finance their education in 2021, compared to 35.9% and 27.9% of LBQ cisgender women and GBQ cisgender male borrowers, respectively.
Looking deeper, federal student loans don’t require credit checks, but [private student loans generally do](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp). Transgender people have a greater risk of experiencing credit rejection, given that 18 U.S. states and territories lack laws prohibiting discrimination in lending based on gender identity.
A 2017 survey conducted by the Center for the Study of Student Life at The Ohio State University found that the 244 participants who identified as either transgender men or gender-nonconforming borrowers were more likely to take out a loan to pay for college (8.2%), somewhat more likely to have student loan debt (3.9%), and slightly more likely to rely on financial assistance from family members to pay for college expenses (2.2%) than their cisgender counterparts. Transgender men or gender-nonconforming borrowers also were slightly more likely to fund their education via federal loans (3.7%), scholarships (2.1%), and parent income (0.8%) than cisgender students.
The National Transgender Discrimination Survey—which surveyed nearly 6,500 transgender respondents attending undergraduate, graduate, professional, or technical school—found that, in addition to a lack of financial aid, participants experienced several other barriers in higher education in 2017, such as harassment and financial issues related to transition. These challenges can lead to students dropping out, which, as we’ve previously established, would leave those who did receive financial aid with a large debt balance and no degree to help pay it off.
Adding to these financial challenges is the fact that—despite the data from the Center for the Study of Student Life reported above—parents may rescind promises to finance the higher education of their transgender and/or nonbinary children, should they even offer to do so in the first place. Further compounding these difficult circumstances are numerous other inequalities, such as employment discrimination and a pay gap.
## Student Loan Forgiveness
Debt forgiveness may be possible, and [it may be the key to restoring economic mobility](https://www.investopedia.com/student-debt-affect-economy-8550501) and financial security to those most burdened by high student debt balances. But debt forgiveness isn't without its detractors. When the Biden-Harris administration released its plan to forgive $10,000 per borrower making under $125,000, with $20,000 for Pell Grant recipients, they were met with legal opposition and eventually overturned.
[Forgiving student loans](https://www.investopedia.com/what-happens-student-loans-not-forgiven-7152229) is a controversial idea for some. What’s more, loan forgiveness would only be a stopgap measure without fixing the underlying lending system. At the very least, steps should be taken to eliminate the gendered wage gaps and other discriminatory factors that worsen the unequal student debt burden that women and [people of color](https://www.investopedia.com/student-loan-debt-by-race-5193137) face each day.
After the Supreme Court blocked the Biden Administration's loan forgiveness plan, the Department of Education announced a new set of plans to reduce student debt. Under the Saving for a Valuable Education (SAVE) plan, borrowers have to pay a smaller percentage of their discretionary income, and the amount of income considered non-discretionary is increased to 225% of the federal poverty line. This means that many borrowers will have reduced payments, even as low as 0$.
## How Else Does Student Loan Debt Differ Demographically?
Black women had the highest average student loan debt at $37,558. Second was White women, who owed $31,346 on average. Black and White men owed $35,665 and $29,862, respectively, which is less than their female counterparts. Hispanic/Latinx women owed $27,029 on average, while their male counterparts owed slightly more at $27,452. Finally, at $25,252, Asian women had the lowest debt burden compared to any other female borrowers, and Asian men owed $25,507.
## Why Is American Student Debt So High?
Student loan debt is the second-highest source of household debt due to income not having kept pace with the growth of college tuition, forcing students to take out more money in student loans in order to afford a higher education.
## Which Gender Has the Most Student Loan Debt?
Collectively, women owed approximately $929 billion in 2022, which is nearly 67% of all U.S. student loan debt. On an individual level, women also owed an average of $22,000 in student debt, whereas their male counterparts owed $18,880.
## The Bottom Line
The negative effects of student debt are not just financial. A 2020 report found a positive association between a person’s debt balance and the amount of stress that they feel regarding it. The authors also reported that this anxiety correlates with poor health and symptoms of depression among students, particularly Black women.
| It’s no secret that large student loan debt is a problem for many people. Americans collectively owe more in student loans than the gross domestic product (GDP) of all but 13 countries, and that amount is only growing bigger over time. Taking out debt is a solid way to finance a higher education and can even help a recent graduate establish a healthy credit profile; however, the most economically vulnerable are often at risk of being unable to keep up with their payments.
When we analyze student loan debt further by gender, it quickly becomes apparent that the majority of this financial burden isn’t being shouldered by men.
Key Takeaways
Student loan debt is the second-highest source of household debt, following housing.The American Association of University Women (AAUW) estimates that women held nearly 67% of all U.S. student loan debt, or approximately $929 billion.Black women owe the largest amount of debt, followed by White, Hispanic/Latinx, and Asian borrowers.Female borrowers typically require more education to earn a wage equal to less-educated men. In fact, to exceed the lifetime earnings of a male graduate with just an associate degree, a woman may need at least a master’s degree.According to the AAUW, most women will face a gendered wage gap as soon as they graduate, which typically worsens as they age.
Understanding Student Loan Debt
Student loan debt is what’s owed to a lender that provides funding for higher education. This money is often primarily used to pay tuition but also can be used for school supplies, basic necessities, and anything else that a borrower purchases during their academic career. Most students are unable to pay for college without financial aid, even if they receive funding from parents and/or scholarships, due to how the price of higher education has escalated over time.
While it’s possible to find a well-paid job after graduation, many aren’t so lucky—or don’t work in fields with high salaries—which will limit their ability to pay down their debt. This can lead to a loan becoming delinquent due to late payments, a situation that can lead to the loan defaulting. As a result, many struggling graduates can take a major hit to their credit score and/or credit report not long after completing their education.
In addition to affecting more than 43.4 million Americans and totaling more than $1.63 trillion, student loan debt is also the highest source of household debt. College attendance is high, but the cost of a college education more than doubled compared to the prior generation. Meanwhile, household incomes have remained relatively static. This difficult reality falls especially hard on women. This group faces numerous additional challenges that result in both higher loan balances and a lower ability to pay down their debt.
What causes these gender discrepancies? Our research throws light on some of the issues that disadvantage women and looks at what we could find on issues faced by nonbinary/gender-nonconforming borrowers as well as differences between cisgender and transgender borrowers.
Note that the names of certain groups used below may not be entirely consistent throughout the article to match the terminology used by our sources. For instance, although Investopedia prefers the identifier “Latinx,” this article uses terms such as “Hispanic/Latinx” that represent how particular researchers reported information. Also, note that most of these studies are not done annually, so we will be reporting data from different years.
Student Debt by Gender Breakdown
For starters, it’s important to know that the majority of undergraduate college students today are women: approximately 58.5% for the 2021–2022 school year. So it’s not surprising that women held nearly 67% of all U.S. student loan debt, about $929 billion.
As such, women’s debt burden isn’t equal. According to the American Association of University Women (AAUW), women graduate owing $3,120 more on average than their male counterparts—an average of $22,000 in student debt, compared to $18,880 for men.
They not only owe more but also face a gendered wage gap from the beginning: Women graduating with a bachelor’s degree expected to earn $35,338 on average, which equates to approximately 81% of what men anticipated earning. As a result, even if women had the same amount of debt as their male counterparts, the lack of equal pay would still make it more difficult to rid themselves of their financial burdens.
In fact, female borrowers typically require more education to earn a wage equal to less-educated men. To exceed the lifetime earnings of a male graduate with just an associate degree, a woman may need to earn at least a master’s degree. Those who receive a graduate education to counteract pay gaps will ultimately take on even more debt and pay more in the long run. Female students borrowed $51,035 on average for graduate school, which can increase to an average of $61,626 a year after graduation, thanks to interest.
Even if women had the same amount of debt as their male counterparts, the lack of equal pay still would make it more difficult to pay off these loans. When we remember that women on average owe more on student loans than men, it’s easy to see how the wage and debt gaps reinforce one another. This frequently forces female borrowers to delay saving for retirement, purchasing a house, and/or starting their own business. Adding to this is the fact that women are also the most likely to experience general financial difficulties, with 34% reporting an inability to afford basic necessities in 2019.
The Intersection of Gender and Race
The student loan debt burden isn’t shared equally across all women borrowers. At $37,558, Black women had the highest average student loan debt in 2017, followed by White women at $31,346. Both Black and White women owed more student loan debt than their male counterparts. Conversely, Hispanic/Latinx women owed slightly less ($423) than men in this same group. Similarly, Asian women not only had the lowest debt amount of all female borrowers but also owed slightly less than Asian men.
That unequal start doesn’t get any better at one year out of college, the AAUW reports. At $41,466.05 on average, Black women owed the largest amount of debt, followed by White, Hispanic/Latinx, and Asian borrowers. Although there was an increase across all categories in 2017, one group experienced their debt rising faster than others: Black women.
There was a roughly $2,000 increase to the student loan debt balances of White, Hispanic/Latinx, and Asian women, whereas there was a nearly $4,000 increase for Black borrowers. This data set also shows that female Pacific Islander/Hawaiian Native and American Indian or Alaska Native borrowers (at $38,747.44 and $36,184.40, respectively) owed more than White borrowers.
Larger student debt levels and the racial wealth gap—as well as unequal access to and outcomes within higher education—are other socioeconomic factors that reinforce each other and negatively impact women of color.
In 2021, the U.S. Government Accountability Office reported that African American women and Latinas were paid $0.63 and $0.58, respectively, for every $1 earned by White men.
After the Supreme Court blocked federal student loan forgiveness, the Department of Education announced a 12-month "on ramp" as loan payments resume. During the first year as payments resume, federal student loans will start accumulating interest, but borrowers will not be held delinquent or be reported to credit agencies for missed payments. Interest began accruing on Sept. 1, 2023.
How College Type Affects Debt
The type of college attended also affects debt. The AAUW found that women attending public four-year institutions on average had $29,611 in student loan debt in 2017. Following this were debt loads from private nonprofit four-year and for-profit four-year universities, at an average of $32,086 and $42,778, respectively.
Although all of these amounts are high, the difference between the costs of public four-year institutions and for-profit four-year ones is stark. They may not enroll as many students as public universities, but for-profit institutions disproportionately enroll women, particularly Black women and/or single mothers. The existence of student lending enables these universities to find people who can borrow enough to pay a higher price for their degrees.
Women accounted for 68.6% of the student body at for-profit universities in 2022, compared to 57.4% at public two‐year colleges.
The Mom Factor
Although childcare won’t be a concern for every student, it’s a major economic factor for millions of women. According to the Center for Responsible Lending, approximately 25% of all college students in 2018 were parents with dependent children; more than 40% of parents were single mothers.
Students who are also mothers face additional barriers to repaying debt, reports the AAUW. One year after graduation, women in 2017 could expect to spend $920 on housing (plus $163 for utilities), $396 on vehicle payments, $387 on food, and $113 on medical expenses. The 16% of women who are mothers had an additional $520 for childcare each month on average.
Adding in a $307 monthly student loan payment can make it difficult, if not impossible, to cover all these basic necessities and pay down debt, much less save any money. Even those who can afford to repay on time may still experience their loan balances increasing over time. This happens when loan interest is accruing and capitalizing on their loans, outpacing any minimum payments. For example, if a student takes advantage of the six-month grace period after graduation before starting repayment, that unpaid interest is added to their loan.
The scarcity of on-campus childcare, which met just 5% of demand in 2018, makes things especially difficult for parents still attending school.
Since they are also one of the groups often targeted by for-profit universities—putting them in the highest debt group—single mothers are more likely to drop out of college due to all of these elements. This, of course, leaves them with burdensome student loan debt and nothing to show for it.
Differences in Repayment
According to the AAUW, women tended to repay their loans at a slower rate than men in 2020, due in part to the wage gap between the two groups. College-educated, full-time female workers generally made 26% less than their male counterparts. This gap has been shown to increase over time—starting at 18% one year following graduation and rising to 20% four years later.
As previously discussed, having a lower wage means having less available income to pay down debt. From one to four years following graduation, women had paid off 31% of their outstanding debt, compared to the 38% that men paid off. Black and Hispanic women were significantly further behind during this same time period, at 12% and 18%, respectively. Additionally, the AAUW found that 57% of Black female borrowers in 2008–2012 faced financial difficulties while paying down their debt, compared to 42%, 30%, and 28% for Hispanic, White, and Asian women, respectively.
The discrepancies in student loan repayment can also be seen in default rates. From 2008 to 2012, the AAUW found that, among bachelor’s degree graduates, these rates were slightly higher for women than men and much higher for Black and Hispanic women than for their White and Asian counterparts. These results were similar when accounting for students enrolled in an additional degree program.
Each kind of university also produces different default rates. For-profit institutions enrolled a significantly larger number of borrowers who defaulted within two years after graduation. For-profit universities also disproportionately enroll women, which further raises women’s risk of default.
Beyond the Binary
There is very little student debt information about borrowers who identify outside of the gender binary, often because they are consolidated within broader LGBTQ+ debt statistics.
However, the Williams Institute at the UCLA School of Law reports that 51% of transgender adults took out federal student loans to finance their education in 2021, compared to 35.9% and 27.9% of LBQ cisgender women and GBQ cisgender male borrowers, respectively.
Looking deeper, federal student loans don’t require credit checks, but private student loans generally do. Transgender people have a greater risk of experiencing credit rejection, given that 18 U.S. states and territories lack laws prohibiting discrimination in lending based on gender identity.
A 2017 survey conducted by the Center for the Study of Student Life at The Ohio State University found that the 244 participants who identified as either transgender men or gender-nonconforming borrowers were more likely to take out a loan to pay for college (8.2%), somewhat more likely to have student loan debt (3.9%), and slightly more likely to rely on financial assistance from family members to pay for college expenses (2.2%) than their cisgender counterparts. Transgender men or gender-nonconforming borrowers also were slightly more likely to fund their education via federal loans (3.7%), scholarships (2.1%), and parent income (0.8%) than cisgender students.
The National Transgender Discrimination Survey—which surveyed nearly 6,500 transgender respondents attending undergraduate, graduate, professional, or technical school—found that, in addition to a lack of financial aid, participants experienced several other barriers in higher education in 2017, such as harassment and financial issues related to transition. These challenges can lead to students dropping out, which, as we’ve previously established, would leave those who did receive financial aid with a large debt balance and no degree to help pay it off.
Adding to these financial challenges is the fact that—despite the data from the Center for the Study of Student Life reported above—parents may rescind promises to finance the higher education of their transgender and/or nonbinary children, should they even offer to do so in the first place. Further compounding these difficult circumstances are numerous other inequalities, such as employment discrimination and a pay gap.
Student Loan Forgiveness
Debt forgiveness may be possible, and it may be the key to restoring economic mobility and financial security to those most burdened by high student debt balances. But debt forgiveness isn't without its detractors. When the Biden-Harris administration released its plan to forgive $10,000 per borrower making under $125,000, with $20,000 for Pell Grant recipients, they were met with legal opposition and eventually overturned.
Forgiving student loans is a controversial idea for some. What’s more, loan forgiveness would only be a stopgap measure without fixing the underlying lending system. At the very least, steps should be taken to eliminate the gendered wage gaps and other discriminatory factors that worsen the unequal student debt burden that women and people of color face each day.
After the Supreme Court blocked the Biden Administration's loan forgiveness plan, the Department of Education announced a new set of plans to reduce student debt. Under the Saving for a Valuable Education (SAVE) plan, borrowers have to pay a smaller percentage of their discretionary income, and the amount of income considered non-discretionary is increased to 225% of the federal poverty line. This means that many borrowers will have reduced payments, even as low as 0$.
How Else Does Student Loan Debt Differ Demographically?
Black women had the highest average student loan debt at $37,558. Second was White women, who owed $31,346 on average. Black and White men owed $35,665 and $29,862, respectively, which is less than their female counterparts. Hispanic/Latinx women owed $27,029 on average, while their male counterparts owed slightly more at $27,452. Finally, at $25,252, Asian women had the lowest debt burden compared to any other female borrowers, and Asian men owed $25,507.
Why Is American Student Debt So High?
Student loan debt is the second-highest source of household debt due to income not having kept pace with the growth of college tuition, forcing students to take out more money in student loans in order to afford a higher education.
Which Gender Has the Most Student Loan Debt?
Collectively, women owed approximately $929 billion in 2022, which is nearly 67% of all U.S. student loan debt. On an individual level, women also owed an average of $22,000 in student debt, whereas their male counterparts owed $18,880.
The Bottom Line
The negative effects of student debt are not just financial. A 2020 report found a positive association between a person’s debt balance and the amount of stress that they feel regarding it. The authors also reported that this anxiety correlates with poor health and symptoms of depression among students, particularly Black women.
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https://www.investopedia.com/terms/t/technicalindicator.asp | Technical Indicator: Definition, Analyst Uses, Types and Examples | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-technical-indicator"></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 Technical Indicator? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis.
</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"> By analyzing historical data, technical analysts use indicators to predict future price movements. Examples of common technical indicators include the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rsi.asp">Relative Strength Index</a> (RSI), <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mfi.asp">Money Flow Index</a> (MFI), stochastics, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/macd.asp">moving average convergence divergence</a> (MACD), and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bollingerbands.asp">Bollinger Bands®</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>Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis.</li><li>Technical analysts or chartists look for technical indicators in historical asset price data to judge entry and exit points for trades.</li><li>There are several technical indicators that fall broadly into two main categories: overlays and oscillators.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-technical-indicators-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 Technical Indicators Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/easeofmovement.asp">price movement and volume</a>. Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value based on financial or economic data, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technical-analyst.asp">technical analysts</a> focus on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security’s strength or weakness.
</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"> Technical analysis can be used on any security with historical trading data. This includes stocks, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodities</a>, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forex.asp">forex</a> markets, where <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/daytrader.asp">traders</a> focus on short-term price movements.
</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"> Technical indicators, also known as “technicals,” are focused on historical trading data, such as price, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volume.asp">volume</a>, and open interest, rather than the fundamentals of a business, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnings.asp">earnings</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a>, or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp">profit margins</a>. Technical indicators are commonly used by active traders, since they’re designed to <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mass-index.asp">analyze short-term price movements</a>, but long-term investors may also use technical indicators to identify entry and exit points.
</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-types-of-indicators"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Types of Indicators </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There are two basic types of technical indicators:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0">
<li><strong>Overlays:</strong> Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include moving averages and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bollingerbands.asp">Bollinger Bands®</a>.</li>
<li><strong>Oscillators:</strong> Technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stochasticoscillator.asp">stochastic oscillator</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/macd.asp">MACD</a>, or RSI.</li>
</ol>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Traders often use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tsv.asp">many different technical indicators</a> when analyzing a security. With thousands of different options, traders must choose <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/04/120804.asp">the indicators that work best</a> for them and familiarize themselves with how they work. Traders may also combine technical indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up with trade ideas. Technical indicators can also be incorporated into automated trading systems, given their quantitative nature.
</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-technical-indicators"></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 Technical Indicators </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The following chart shows some of the most common technical indicators, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/movingaverage.asp">moving averages</a>, the RSI, and the MACD.
</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-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_25-0"> <div class="figure-media">
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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">Image by Sabrina Jiang © Investopedia 2020</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"> In this example, the 50- and 200-day moving averages are plotted over the top of the prices to show where the current price stands relative to its historical averages. The 50-day moving averages is higher than the 200-day moving average in this case, which suggests that the overall <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trend.asp">trend</a> has been positive. The RSI above the chart shows the strength of the current trend—a neutral 49.07, in this case. The MACD below the chart shows how the two moving averages have <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convergence.asp">converged</a> or <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divergence.asp">diverged</a>—slightly bearish, in this case.
</p></div> | ## What Is a Technical Indicator?
Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis.
By analyzing historical data, technical analysts use indicators to predict future price movements. Examples of common technical indicators include the [Relative Strength Index](https://www.investopedia.com/terms/r/rsi.asp) (RSI), [Money Flow Index](https://www.investopedia.com/terms/m/mfi.asp) (MFI), stochastics, [moving average convergence divergence](https://www.investopedia.com/terms/m/macd.asp) (MACD), and [Bollinger Bands®](https://www.investopedia.com/terms/b/bollingerbands.asp).
### Key Takeaways
* Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis.
* Technical analysts or chartists look for technical indicators in historical asset price data to judge entry and exit points for trades.
* There are several technical indicators that fall broadly into two main categories: overlays and oscillators.
## How Technical Indicators Work
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as [price movement and volume](https://www.investopedia.com/terms/e/easeofmovement.asp). Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value based on financial or economic data, [technical analysts](https://www.investopedia.com/terms/t/technical-analyst.asp) focus on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security’s strength or weakness.
Technical analysis can be used on any security with historical trading data. This includes stocks, [futures](https://www.investopedia.com/terms/f/futures.asp), [commodities](https://www.investopedia.com/terms/c/commodity.asp), fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and [forex](https://www.investopedia.com/terms/f/forex.asp) markets, where [traders](https://www.investopedia.com/terms/d/daytrader.asp) focus on short-term price movements.
Technical indicators, also known as “technicals,” are focused on historical trading data, such as price, [volume](https://www.investopedia.com/terms/v/volume.asp), and open interest, rather than the fundamentals of a business, such as [earnings](https://www.investopedia.com/terms/e/earnings.asp), [revenue](https://www.investopedia.com/terms/r/revenue.asp), or [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp). Technical indicators are commonly used by active traders, since they’re designed to [analyze short-term price movements](https://www.investopedia.com/terms/m/mass-index.asp), but long-term investors may also use technical indicators to identify entry and exit points.
## Types of Indicators
There are two basic types of technical indicators:
1. **Overlays:** Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include moving averages and [Bollinger Bands®](https://www.investopedia.com/terms/b/bollingerbands.asp).
2. **Oscillators:** Technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the [stochastic oscillator](https://www.investopedia.com/terms/s/stochasticoscillator.asp), [MACD](https://www.investopedia.com/terms/m/macd.asp), or RSI.
Traders often use [many different technical indicators](https://www.investopedia.com/terms/t/tsv.asp) when analyzing a security. With thousands of different options, traders must choose [the indicators that work best](https://www.investopedia.com/articles/trading/04/120804.asp) for them and familiarize themselves with how they work. Traders may also combine technical indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up with trade ideas. Technical indicators can also be incorporated into automated trading systems, given their quantitative nature.
## Example of Technical Indicators
The following chart shows some of the most common technical indicators, including [moving averages](https://www.investopedia.com/terms/m/movingaverage.asp), the RSI, and the MACD.
![Image]()
:max_bytes(150000):strip_icc()/dotdash_Final_Technical_Indicator_Nov_2020-01-4561561f629f4e07a2e7cebb7cd11636.jpg)
Image by Sabrina Jiang © Investopedia 2020
In this example, the 50- and 200-day moving averages are plotted over the top of the prices to show where the current price stands relative to its historical averages. The 50-day moving averages is higher than the 200-day moving average in this case, which suggests that the overall [trend](https://www.investopedia.com/terms/t/trend.asp) has been positive. The RSI above the chart shows the strength of the current trend—a neutral 49.07, in this case. The MACD below the chart shows how the two moving averages have [converged](https://www.investopedia.com/terms/c/convergence.asp) or [diverged](https://www.investopedia.com/terms/d/divergence.asp)—slightly bearish, in this case.
| What Is a Technical Indicator?
Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis.
By analyzing historical data, technical analysts use indicators to predict future price movements. Examples of common technical indicators include the Relative Strength Index (RSI), Money Flow Index (MFI), stochastics, moving average convergence divergence (MACD), and Bollinger Bands®.
Key Takeaways
Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis.Technical analysts or chartists look for technical indicators in historical asset price data to judge entry and exit points for trades.There are several technical indicators that fall broadly into two main categories: overlays and oscillators.
How Technical Indicators Work
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value based on financial or economic data, technical analysts focus on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security’s strength or weakness.
Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and forex markets, where traders focus on short-term price movements.
Technical indicators, also known as “technicals,” are focused on historical trading data, such as price, volume, and open interest, rather than the fundamentals of a business, such as earnings, revenue, or profit margins. Technical indicators are commonly used by active traders, since they’re designed to analyze short-term price movements, but long-term investors may also use technical indicators to identify entry and exit points.
Types of Indicators
There are two basic types of technical indicators:
Overlays: Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include moving averages and Bollinger Bands®.
Oscillators: Technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the stochastic oscillator, MACD, or RSI.
Traders often use many different technical indicators when analyzing a security. With thousands of different options, traders must choose the indicators that work best for them and familiarize themselves with how they work. Traders may also combine technical indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up with trade ideas. Technical indicators can also be incorporated into automated trading systems, given their quantitative nature.
Example of Technical Indicators
The following chart shows some of the most common technical indicators, including moving averages, the RSI, and the MACD.
Image by Sabrina Jiang © Investopedia 2020
In this example, the 50- and 200-day moving averages are plotted over the top of the prices to show where the current price stands relative to its historical averages. The 50-day moving averages is higher than the 200-day moving average in this case, which suggests that the overall trend has been positive. The RSI above the chart shows the strength of the current trend—a neutral 49.07, in this case. The MACD below the chart shows how the two moving averages have converged or diverged—slightly bearish, in this case.
| [
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],
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],
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],
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],
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],
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"profit margins",
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],
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"analyze short-term price movements",
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],
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"Bollinger Bands®",
"https://www.investopedia.com/terms/b/bollingerbands.asp"
],
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"stochastic oscillator",
"https://www.investopedia.com/terms/s/stochasticoscillator.asp"
],
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"MACD",
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],
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"many different technical indicators",
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],
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"trend",
"https://www.investopedia.com/terms/t/trend.asp"
],
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"converged",
"https://www.investopedia.com/terms/c/convergence.asp"
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https://www.investopedia.com/terms/c/cblo.asp | Collateralized Borrowing and Lending Obligation (CBLO) Overview | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-collateralized-borrowing-and-lending-obligation-cblo"></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 Collateralized Borrowing and Lending Obligation (CBLO)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A collateralized borrowing and lending obligation (CBLO) is a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">money market</a> instrument that represents an obligation between a borrower and a lender concerning the terms and conditions of a loan. CBLOs allow those restricted from using the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interbank_call_money_market.asp">interbank call money market</a> in any given specific country to participate in the short-term money markets.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>CBLO is a money market instrument that represents an obligation between a borrower and a lender.</li><li>The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest.</li><li>The term, the interest rate, and the specifics of the CBLO are often all negotiable between the two parties. </li><li>A CBLO is much like a Treasury bill or very short term market instrument; the primary difference is a CBLO entails collateral in the transaction. </li></ul></div></div></div>
<span class="heading-toc" id="toc-how-a-cblo-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How a CBLO Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> CBLOs may exist around the world, though they are most common in India. In that context, CBLOs are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI). CBLOs allow short-term loans to be secured by financial institutions, helping to cover their transactions. To access these funds, the institution must provide eligible <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-securities.asp">securities</a> as collateral—such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">Treasury Bills</a> that are at least six months from 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"> The CBLO works like a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bond</a>—the lender buys the CBLO and a borrower sells the money market instrument with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>. The CBLO facilitates borrowing and lending for various maturities, from overnight to a maximum of one year, in a fully <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateralized</a> environment. The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an authority to the lender to receive the money on that future date. The lender also has the option to transfer his authority to another person for value received.
</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"> Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully collateralized. The collateral provides a safeguard against <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defaultrisk.asp">default risk</a> by the borrower or lender’s failure to make funds available to the borrower. The required value of the collateral must be deposited and held in the custody of the CCIL. After the deposit has been received, the CCIL facilitates trades by matching borrowing and lending orders submitted by its members.
</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>CBLOs are used by financial institutions that do not have access to India’s interbank call money market.</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_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"> Types of financial institutions eligible for CBLO membership include insurance firms, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual funds,</a> nationalized banks, private banks, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp">pension funds</a>, and private dealers. To borrow, members must open a Constituent SGL (CSGL) account with the CCIL, which is used to deposit the collateral.
</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"> Collateral </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The clearing corporation must often specify a list of eligible securities that quality for collateral. That entity may also specify the maximum amount any single security can be contributed. The borrower must ensure that its exposure on the deals are always covered and secured by the collateral it has provided. There may be other collateral requires, for example, as outlined by specific guidance documents by entities such as the Clearing Corporation of India Limited.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<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"> Maturity </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The typical maturity of a CBLO can vary but generally falls within the short-term range. CBLOs are designed for short-term borrowing and lending transactions in the money market. The typical maturities for CBLOs may range from one day to one year, though the most common maturities are in the overnight to about one week.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The specific maturity of a CBLO is determined at the time of issuance and is agreed upon by the parties involved in the transaction. This flexibility allows borrowers and lenders to tailor their CBLO transactions to their short-term funding needs. Some participants may prefer very short-term CBLOs for overnight liquidity, while others may opt for slightly longer maturities to match their specific requirements,
</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-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 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>There is often oversight into CBLOs and their terms. For example, the Reserve Bank of India has outlined a number of maintenance requirements and regulatory precedents.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Interest Rate </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The interest rate specified on a CBLO is typically determined through a negotiation between the borrower and the lender at the time of issuance. The interest rate may be set based on a variety of factors which may include but aren't limited to:
</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><strong>The creditworthiness of the borrower.</strong> Borrowers with stronger credit histories may be able to secure funds at a lower rate. </li><li><strong>Market interest rates.</strong> The prevailing rates mostly established by short-term government securities often set the general direction of rates.</li><li><strong>The competitiveness of issuance. </strong>CBLOs may be issued through a competitive bidding process where multiple borrowers bid to secure funds from lenders. In such cases, the interest rate is determined by the lowest bid that fulfills the lender's requirements.</li><li><strong>Relevant reference rates. </strong>Some CBLOs may use reference rates, such as a benchmark government security yield, as a basis for setting the interest rate. The rate may be quoted as a spread above or below this reference rate.</li><li><strong>The specific agreement. </strong>Once the borrower and lender agree on the interest rate, it is specified in the CBLO documentation, along with other terms and conditions of the transaction. This rate may or may not be related to any bullet above. </li>
</ul>
<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-types-of-collateral-are-accepted-in-cblos"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Types of Collateral Are Accepted in CBLOs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>CBLOs typically use high-quality collateral, with government securities being a common choice. The specific collateral requirements may vary depending on the market and the clearinghouse involved in the transaction. The use of high-quality collateral enhances the safety and reliability of CBLOs.</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-are-cblos-tradable-in-the-secondary-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are CBLOs Tradable in the Secondary Market?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, CBLOs are often tradable in the secondary market, which adds to their liquidity. Investors who hold CBLOs can buy or sell them before their maturity date, allowing them to manage their investments more effectively based on changing market conditions.</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-can-individuals-participate-in-cblo-transactions"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Individuals Participate in CBLO Transactions?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>CBLOs are primarily designed for institutional participants, and individual investors typically do not directly participate in CBLO transactions. They are more commonly used by financial institutions and organizations to manage their short-term funding and investment needs.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-how-do-cblos-compare-to-other-short-term-money-market-instruments"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do CBLOs Compare to Other Short-Term Money Market Instruments?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>CBLOs share similarities with other short-term money market instruments like Treasury bills and commercial paper. However, they differ in terms of collateralization, as CBLOs specifically use collateral to secure transactions. Additionally, CBLOs may have different market conventions and practices depending on the country in which they are traded.</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"> Collateralized borrowing and lending obligations are short-term money market instruments used for borrowing and lending funds. Most popular in India, they involve the issuance of securities backed by high-quality collateral, typically government securities.
</p></div> | ## What Is a Collateralized Borrowing and Lending Obligation (CBLO)?
A collateralized borrowing and lending obligation (CBLO) is a [money market](https://www.investopedia.com/terms/m/moneymarket.asp) instrument that represents an obligation between a borrower and a lender concerning the terms and conditions of a loan. CBLOs allow those restricted from using the [interbank call money market](https://www.investopedia.com/terms/i/interbank_call_money_market.asp) in any given specific country to participate in the short-term money markets.
### Key Takeaways
* CBLO is a money market instrument that represents an obligation between a borrower and a lender.
* The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest.
* The term, the interest rate, and the specifics of the CBLO are often all negotiable between the two parties.
* A CBLO is much like a Treasury bill or very short term market instrument; the primary difference is a CBLO entails collateral in the transaction.
## How a CBLO Works
CBLOs may exist around the world, though they are most common in India. In that context, CBLOs are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI). CBLOs allow short-term loans to be secured by financial institutions, helping to cover their transactions. To access these funds, the institution must provide eligible [securities](https://www.investopedia.com/terms/i/investment-securities.asp) as collateral—such as [Treasury Bills](https://www.investopedia.com/terms/t/treasurybill.asp) that are at least six months from maturity.
The CBLO works like a [bond](https://www.investopedia.com/terms/b/bond.asp)—the lender buys the CBLO and a borrower sells the money market instrument with [interest](https://www.investopedia.com/terms/i/interest.asp). The CBLO facilitates borrowing and lending for various maturities, from overnight to a maximum of one year, in a fully [collateralized](https://www.investopedia.com/terms/c/collateral.asp) environment. The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an authority to the lender to receive the money on that future date. The lender also has the option to transfer his authority to another person for value received.
Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully collateralized. The collateral provides a safeguard against [default risk](https://www.investopedia.com/terms/d/defaultrisk.asp) by the borrower or lender’s failure to make funds available to the borrower. The required value of the collateral must be deposited and held in the custody of the CCIL. After the deposit has been received, the CCIL facilitates trades by matching borrowing and lending orders submitted by its members.
###
CBLOs are used by financial institutions that do not have access to India’s interbank call money market.
## Special Considerations
Types of financial institutions eligible for CBLO membership include insurance firms, [mutual funds,](https://www.investopedia.com/terms/m/mutualfund.asp) nationalized banks, private banks, [pension funds](https://www.investopedia.com/terms/p/pensionplan.asp), and private dealers. To borrow, members must open a Constituent SGL (CSGL) account with the CCIL, which is used to deposit the collateral.
### Collateral
The clearing corporation must often specify a list of eligible securities that quality for collateral. That entity may also specify the maximum amount any single security can be contributed. The borrower must ensure that its exposure on the deals are always covered and secured by the collateral it has provided. There may be other collateral requires, for example, as outlined by specific guidance documents by entities such as the Clearing Corporation of India Limited.
### Maturity
The typical maturity of a CBLO can vary but generally falls within the short-term range. CBLOs are designed for short-term borrowing and lending transactions in the money market. The typical maturities for CBLOs may range from one day to one year, though the most common maturities are in the overnight to about one week.
The specific maturity of a CBLO is determined at the time of issuance and is agreed upon by the parties involved in the transaction. This flexibility allows borrowers and lenders to tailor their CBLO transactions to their short-term funding needs. Some participants may prefer very short-term CBLOs for overnight liquidity, while others may opt for slightly longer maturities to match their specific requirements,
###
There is often oversight into CBLOs and their terms. For example, the Reserve Bank of India has outlined a number of maintenance requirements and regulatory precedents.
### Interest Rate
The interest rate specified on a CBLO is typically determined through a negotiation between the borrower and the lender at the time of issuance. The interest rate may be set based on a variety of factors which may include but aren't limited to:
* **The creditworthiness of the borrower.** Borrowers with stronger credit histories may be able to secure funds at a lower rate.
* **Market interest rates.** The prevailing rates mostly established by short-term government securities often set the general direction of rates.
* **The competitiveness of issuance.** CBLOs may be issued through a competitive bidding process where multiple borrowers bid to secure funds from lenders. In such cases, the interest rate is determined by the lowest bid that fulfills the lender's requirements.
* **Relevant reference rates.** Some CBLOs may use reference rates, such as a benchmark government security yield, as a basis for setting the interest rate. The rate may be quoted as a spread above or below this reference rate.
* **The specific agreement.** Once the borrower and lender agree on the interest rate, it is specified in the CBLO documentation, along with other terms and conditions of the transaction. This rate may or may not be related to any bullet above.
## What Types of Collateral Are Accepted in CBLOs?
CBLOs typically use high-quality collateral, with government securities being a common choice. The specific collateral requirements may vary depending on the market and the clearinghouse involved in the transaction. The use of high-quality collateral enhances the safety and reliability of CBLOs.
## Are CBLOs Tradable in the Secondary Market?
Yes, CBLOs are often tradable in the secondary market, which adds to their liquidity. Investors who hold CBLOs can buy or sell them before their maturity date, allowing them to manage their investments more effectively based on changing market conditions.
## Can Individuals Participate in CBLO Transactions?
CBLOs are primarily designed for institutional participants, and individual investors typically do not directly participate in CBLO transactions. They are more commonly used by financial institutions and organizations to manage their short-term funding and investment needs.
## How Do CBLOs Compare to Other Short-Term Money Market Instruments?
CBLOs share similarities with other short-term money market instruments like Treasury bills and commercial paper. However, they differ in terms of collateralization, as CBLOs specifically use collateral to secure transactions. Additionally, CBLOs may have different market conventions and practices depending on the country in which they are traded.
## The Bottom Line
Collateralized borrowing and lending obligations are short-term money market instruments used for borrowing and lending funds. Most popular in India, they involve the issuance of securities backed by high-quality collateral, typically government securities.
| What Is a Collateralized Borrowing and Lending Obligation (CBLO)?
A collateralized borrowing and lending obligation (CBLO) is a money market instrument that represents an obligation between a borrower and a lender concerning the terms and conditions of a loan. CBLOs allow those restricted from using the interbank call money market in any given specific country to participate in the short-term money markets.
Key Takeaways
CBLO is a money market instrument that represents an obligation between a borrower and a lender.The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest.The term, the interest rate, and the specifics of the CBLO are often all negotiable between the two parties. A CBLO is much like a Treasury bill or very short term market instrument; the primary difference is a CBLO entails collateral in the transaction.
How a CBLO Works
CBLOs may exist around the world, though they are most common in India. In that context, CBLOs are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI). CBLOs allow short-term loans to be secured by financial institutions, helping to cover their transactions. To access these funds, the institution must provide eligible securities as collateral—such as Treasury Bills that are at least six months from maturity.
The CBLO works like a bond—the lender buys the CBLO and a borrower sells the money market instrument with interest. The CBLO facilitates borrowing and lending for various maturities, from overnight to a maximum of one year, in a fully collateralized environment. The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an authority to the lender to receive the money on that future date. The lender also has the option to transfer his authority to another person for value received.
Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully collateralized. The collateral provides a safeguard against default risk by the borrower or lender’s failure to make funds available to the borrower. The required value of the collateral must be deposited and held in the custody of the CCIL. After the deposit has been received, the CCIL facilitates trades by matching borrowing and lending orders submitted by its members.
CBLOs are used by financial institutions that do not have access to India’s interbank call money market.
Special Considerations
Types of financial institutions eligible for CBLO membership include insurance firms, mutual funds, nationalized banks, private banks, pension funds, and private dealers. To borrow, members must open a Constituent SGL (CSGL) account with the CCIL, which is used to deposit the collateral.
Collateral
The clearing corporation must often specify a list of eligible securities that quality for collateral. That entity may also specify the maximum amount any single security can be contributed. The borrower must ensure that its exposure on the deals are always covered and secured by the collateral it has provided. There may be other collateral requires, for example, as outlined by specific guidance documents by entities such as the Clearing Corporation of India Limited.
Maturity
The typical maturity of a CBLO can vary but generally falls within the short-term range. CBLOs are designed for short-term borrowing and lending transactions in the money market. The typical maturities for CBLOs may range from one day to one year, though the most common maturities are in the overnight to about one week.
The specific maturity of a CBLO is determined at the time of issuance and is agreed upon by the parties involved in the transaction. This flexibility allows borrowers and lenders to tailor their CBLO transactions to their short-term funding needs. Some participants may prefer very short-term CBLOs for overnight liquidity, while others may opt for slightly longer maturities to match their specific requirements,
There is often oversight into CBLOs and their terms. For example, the Reserve Bank of India has outlined a number of maintenance requirements and regulatory precedents.
Interest Rate
The interest rate specified on a CBLO is typically determined through a negotiation between the borrower and the lender at the time of issuance. The interest rate may be set based on a variety of factors which may include but aren't limited to:
The creditworthiness of the borrower. Borrowers with stronger credit histories may be able to secure funds at a lower rate. Market interest rates. The prevailing rates mostly established by short-term government securities often set the general direction of rates.The competitiveness of issuance. CBLOs may be issued through a competitive bidding process where multiple borrowers bid to secure funds from lenders. In such cases, the interest rate is determined by the lowest bid that fulfills the lender's requirements.Relevant reference rates. Some CBLOs may use reference rates, such as a benchmark government security yield, as a basis for setting the interest rate. The rate may be quoted as a spread above or below this reference rate.The specific agreement. Once the borrower and lender agree on the interest rate, it is specified in the CBLO documentation, along with other terms and conditions of the transaction. This rate may or may not be related to any bullet above.
What Types of Collateral Are Accepted in CBLOs?
CBLOs typically use high-quality collateral, with government securities being a common choice. The specific collateral requirements may vary depending on the market and the clearinghouse involved in the transaction. The use of high-quality collateral enhances the safety and reliability of CBLOs.
Are CBLOs Tradable in the Secondary Market?
Yes, CBLOs are often tradable in the secondary market, which adds to their liquidity. Investors who hold CBLOs can buy or sell them before their maturity date, allowing them to manage their investments more effectively based on changing market conditions.
Can Individuals Participate in CBLO Transactions?
CBLOs are primarily designed for institutional participants, and individual investors typically do not directly participate in CBLO transactions. They are more commonly used by financial institutions and organizations to manage their short-term funding and investment needs.
How Do CBLOs Compare to Other Short-Term Money Market Instruments?
CBLOs share similarities with other short-term money market instruments like Treasury bills and commercial paper. However, they differ in terms of collateralization, as CBLOs specifically use collateral to secure transactions. Additionally, CBLOs may have different market conventions and practices depending on the country in which they are traded.
The Bottom Line
Collateralized borrowing and lending obligations are short-term money market instruments used for borrowing and lending funds. Most popular in India, they involve the issuance of securities backed by high-quality collateral, typically government securities.
| [
[
"money market",
"https://www.investopedia.com/terms/m/moneymarket.asp"
],
[
"interbank call money market",
"https://www.investopedia.com/terms/i/interbank_call_money_market.asp"
],
[
"securities",
"https://www.investopedia.com/terms/i/investment-securities.asp"
],
[
"Treasury Bills",
"https://www.investopedia.com/terms/t/treasurybill.asp"
],
[
"bond",
"https://www.investopedia.com/terms/b/bond.asp"
],
[
"interest",
"https://www.investopedia.com/terms/i/interest.asp"
],
[
"collateralized",
"https://www.investopedia.com/terms/c/collateral.asp"
],
[
"default risk",
"https://www.investopedia.com/terms/d/defaultrisk.asp"
],
[
"mutual funds,",
"https://www.investopedia.com/terms/m/mutualfund.asp"
],
[
"pension funds",
"https://www.investopedia.com/terms/p/pensionplan.asp"
]
] |
https://www.investopedia.com/terms/i/insurance-premium.asp | Insurance Premium Defined, How It's Calculated, 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-is-an-insurance-premium"></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 Insurance Premium? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
</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 insurance premium is the amount of money an individual or business must pay for an insurance policy.</li><li>Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.</li><li>Failure to pay the premium on the part of the individual or the business may result in the cancellation of the policy and a loss of coverage.</li><li>Some premiums are paid quarterly, monthly, or semi-annually depending on the policy.</li><li>Shopping around for insurance may help you find affordable premiums. </li></ul></div></div></div>
<span class="heading-toc" id="toc-how-an-insurance-premium-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How an Insurance Premium Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> When you sign up for an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/06/insurancecontracts.asp">insurance policy</a>, your insurer will charge you a premium. This is the amount you pay for the policy. Policyholders may choose from several <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fa-profession/091916/what-mode-premium.asp">options for paying their insurance premiums</a>. Some insurers allow the policyholder to pay the insurance premium in installments—monthly or semi-annually—while others may require an upfront payment in full before any coverage starts.
</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 price of the premium <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/05/insurescore.asp">depends on a variety of factors</a>, including:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0">
<li>The type of coverage</li>
<li>Your age</li>
<li>The area in which you live</li>
<li>Any claims filed in the past</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042415/what-difference-between-moral-hazard-and-adverse-selection.asp">Moral hazard and adverse selection</a></li>
</ul>
<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>There may be additional charges payable to the insurer on top of the premium, including taxes or services fees.</p></div></div></div>
<span class="heading-toc" id="toc-auto-insurance"></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"> Auto Insurance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> For example, in an auto insurance policy, the likelihood of a claim being made against a teenage driver living in an urban area may be higher than a teenage driver in a suburban area. In general, the greater the risk associated, the more expensive the insurance policy (and thus, the insurance premiums).
</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-life-insurance"></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"> Life Insurance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> In the case of a life insurance policy, the age at which you begin coverage will determine <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090215/understanding-taxes-life-insurance-premiums.asp">your premium amount</a>, along with other risk factors (such as your current health). The younger you are, the lower your premiums will generally be. Conversely, the older you get, the more you pay in premiums to your insurance company. High-value policies will also carry a higher permium.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> A few insurers may offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-flow-plans.asp">premium cash flow payment plans</a>. These plans allow the policyholder to pay the premium in small intervals. Some policyholders might also use <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insurance/life-insurance-premium-financing-worth-risk/">premium financing</a> to pay for expensive premiums, but there is risk involved with this process.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<span class="heading-toc" id="toc-how-premiums-are-calculated"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> How Premiums Are Calculated </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Insurance premiums may increase after the policy period ends. The insurer may increase the premium for claims made during the previous period if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.<em> </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"> Insurance companies generally employ <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/professionals/090513/day-life-actuary.asp">actuaries</a> to determine risk levels and premium prices for a given insurance policy. The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing how insurance is priced and sold. There is an active debate between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession to a "next level."
</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"> Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. They may also invest in the premium to generate higher returns. This can offset some costs of providing insurance coverage and help an insurer keep its prices competitive.
</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"> While insurance companies may invest in assets with varying levels of liquidity and returns, they are required to maintain a certain level of liquidity at all times. State insurance regulators set the number of liquid assets necessary to ensure insurers can pay claims.
</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-special-considerations"></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"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Most consumers find shopping around to be the best way to find the cheapest insurance premiums. You may choose to shop around on your own with individual insurance companies. And if you are looking for quotes, it's fairly easy to do this by yourself online.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> For example, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/affordable-care-act.asp">Affordable Care Act</a> (ACA) allows uninsured consumers to shop around for health insurance policies on the marketplace. Upon logging in, the site requires some basic information, such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from several options available based on your home state—each with different premiums, deductibles, and copays—the policy coverage changes based on the amount you pay. Providers will base premiums on the enrolee's state, the individual's history, and other factors.
</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 other option is to try going through an insurance agent or broker. They tend to work with a number of different companies and can try to get you the best quote. Many brokers can connect you to life, auto, home, and health insurance policies. However, it's important to remember that some of these brokers may be motivated by commissions.
</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-do-insurers-do-with-the-premiums"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Do Insurers Do With the Premiums?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. Some insurers invest in the premium to generate higher returns. By doing so, the companies can offset some costs of providing insurance coverage and help an insurer keep its prices competitive within the market.</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-are-the-key-factors-affecting-insurance-premiums"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Key Factors Affecting Insurance Premiums?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Insurance <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-insurance-for-transgender-and-nonbinary-people-7548334">premiums depend on a variety of factors</a>, including the type of coverage being purchased by the policyholder, the age of the policyholder, where the policyholder lives, the claim history of the policyholder, and moral hazard and adverse selection. Insurance premiums may increase after the policy period ends or if the risk associated with offering a particular type of insurance increases. It may also change if the amount of coverage changes.</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-an-actuary"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Actuary?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>An actuary assesses and manages the risks of financial investments, insurance policies, and other potentially risky ventures. Actuaries assess particular situations financial risks, primarily using probability, economic theory, and computer science. Most actuaries work at insurance companies, where their risk-management capabilities are particularly applicable in determining risk levels and premium prices for a given insurance policy.</p></div>
</div></div> | ## What Is an Insurance Premium?
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
### Key Takeaways
* An insurance premium is the amount of money an individual or business must pay for an insurance policy.
* Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.
* Failure to pay the premium on the part of the individual or the business may result in the cancellation of the policy and a loss of coverage.
* Some premiums are paid quarterly, monthly, or semi-annually depending on the policy.
* Shopping around for insurance may help you find affordable premiums.
## How an Insurance Premium Works
When you sign up for an [insurance policy](https://www.investopedia.com/articles/pf/06/insurancecontracts.asp), your insurer will charge you a premium. This is the amount you pay for the policy. Policyholders may choose from several [options for paying their insurance premiums](https://www.investopedia.com/articles/fa-profession/091916/what-mode-premium.asp). Some insurers allow the policyholder to pay the insurance premium in installments—monthly or semi-annually—while others may require an upfront payment in full before any coverage starts.
The price of the premium [depends on a variety of factors](https://www.investopedia.com/articles/pf/05/insurescore.asp), including:
* The type of coverage
* Your age
* The area in which you live
* Any claims filed in the past
* [Moral hazard and adverse selection](https://www.investopedia.com/ask/answers/042415/what-difference-between-moral-hazard-and-adverse-selection.asp)
###
There may be additional charges payable to the insurer on top of the premium, including taxes or services fees.
## Auto Insurance
For example, in an auto insurance policy, the likelihood of a claim being made against a teenage driver living in an urban area may be higher than a teenage driver in a suburban area. In general, the greater the risk associated, the more expensive the insurance policy (and thus, the insurance premiums).
## Life Insurance
In the case of a life insurance policy, the age at which you begin coverage will determine [your premium amount](https://www.investopedia.com/articles/personal-finance/090215/understanding-taxes-life-insurance-premiums.asp), along with other risk factors (such as your current health). The younger you are, the lower your premiums will generally be. Conversely, the older you get, the more you pay in premiums to your insurance company. High-value policies will also carry a higher permium.
A few insurers may offer [premium cash flow payment plans](https://www.investopedia.com/terms/c/cash-flow-plans.asp). These plans allow the policyholder to pay the premium in small intervals. Some policyholders might also use [premium financing](https://www.investopedia.com/insurance/life-insurance-premium-financing-worth-risk/) to pay for expensive premiums, but there is risk involved with this process.
## How Premiums Are Calculated
Insurance premiums may increase after the policy period ends. The insurer may increase the premium for claims made during the previous period if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.
Insurance companies generally employ [actuaries](https://www.investopedia.com/articles/professionals/090513/day-life-actuary.asp) to determine risk levels and premium prices for a given insurance policy. The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing how insurance is priced and sold. There is an active debate between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession to a "next level."
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. They may also invest in the premium to generate higher returns. This can offset some costs of providing insurance coverage and help an insurer keep its prices competitive.
While insurance companies may invest in assets with varying levels of liquidity and returns, they are required to maintain a certain level of liquidity at all times. State insurance regulators set the number of liquid assets necessary to ensure insurers can pay claims.
## Special Considerations
Most consumers find shopping around to be the best way to find the cheapest insurance premiums. You may choose to shop around on your own with individual insurance companies. And if you are looking for quotes, it's fairly easy to do this by yourself online.
For example, the [Affordable Care Act](https://www.investopedia.com/terms/a/affordable-care-act.asp) (ACA) allows uninsured consumers to shop around for health insurance policies on the marketplace. Upon logging in, the site requires some basic information, such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from several options available based on your home state—each with different premiums, deductibles, and copays—the policy coverage changes based on the amount you pay. Providers will base premiums on the enrolee's state, the individual's history, and other factors.
The other option is to try going through an insurance agent or broker. They tend to work with a number of different companies and can try to get you the best quote. Many brokers can connect you to life, auto, home, and health insurance policies. However, it's important to remember that some of these brokers may be motivated by commissions.
## What Do Insurers Do With the Premiums?
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. Some insurers invest in the premium to generate higher returns. By doing so, the companies can offset some costs of providing insurance coverage and help an insurer keep its prices competitive within the market.
## What Are the Key Factors Affecting Insurance Premiums?
Insurance [premiums depend on a variety of factors](https://www.investopedia.com/car-insurance-for-transgender-and-nonbinary-people-7548334), including the type of coverage being purchased by the policyholder, the age of the policyholder, where the policyholder lives, the claim history of the policyholder, and moral hazard and adverse selection. Insurance premiums may increase after the policy period ends or if the risk associated with offering a particular type of insurance increases. It may also change if the amount of coverage changes.
## What Is an Actuary?
An actuary assesses and manages the risks of financial investments, insurance policies, and other potentially risky ventures. Actuaries assess particular situations financial risks, primarily using probability, economic theory, and computer science. Most actuaries work at insurance companies, where their risk-management capabilities are particularly applicable in determining risk levels and premium prices for a given insurance policy.
| What Is an Insurance Premium?
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
Key Takeaways
An insurance premium is the amount of money an individual or business must pay for an insurance policy.Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.Failure to pay the premium on the part of the individual or the business may result in the cancellation of the policy and a loss of coverage.Some premiums are paid quarterly, monthly, or semi-annually depending on the policy.Shopping around for insurance may help you find affordable premiums.
How an Insurance Premium Works
When you sign up for an insurance policy, your insurer will charge you a premium. This is the amount you pay for the policy. Policyholders may choose from several options for paying their insurance premiums. Some insurers allow the policyholder to pay the insurance premium in installments—monthly or semi-annually—while others may require an upfront payment in full before any coverage starts.
The price of the premium depends on a variety of factors, including:
The type of coverage
Your age
The area in which you live
Any claims filed in the past
Moral hazard and adverse selection
There may be additional charges payable to the insurer on top of the premium, including taxes or services fees.
Auto Insurance
For example, in an auto insurance policy, the likelihood of a claim being made against a teenage driver living in an urban area may be higher than a teenage driver in a suburban area. In general, the greater the risk associated, the more expensive the insurance policy (and thus, the insurance premiums).
Life Insurance
In the case of a life insurance policy, the age at which you begin coverage will determine your premium amount, along with other risk factors (such as your current health). The younger you are, the lower your premiums will generally be. Conversely, the older you get, the more you pay in premiums to your insurance company. High-value policies will also carry a higher permium.
A few insurers may offer premium cash flow payment plans. These plans allow the policyholder to pay the premium in small intervals. Some policyholders might also use premium financing to pay for expensive premiums, but there is risk involved with this process.
How Premiums Are Calculated
Insurance premiums may increase after the policy period ends. The insurer may increase the premium for claims made during the previous period if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.
Insurance companies generally employ actuaries to determine risk levels and premium prices for a given insurance policy. The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing how insurance is priced and sold. There is an active debate between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession to a "next level."
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. They may also invest in the premium to generate higher returns. This can offset some costs of providing insurance coverage and help an insurer keep its prices competitive.
While insurance companies may invest in assets with varying levels of liquidity and returns, they are required to maintain a certain level of liquidity at all times. State insurance regulators set the number of liquid assets necessary to ensure insurers can pay claims.
Special Considerations
Most consumers find shopping around to be the best way to find the cheapest insurance premiums. You may choose to shop around on your own with individual insurance companies. And if you are looking for quotes, it's fairly easy to do this by yourself online.
For example, the Affordable Care Act (ACA) allows uninsured consumers to shop around for health insurance policies on the marketplace. Upon logging in, the site requires some basic information, such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from several options available based on your home state—each with different premiums, deductibles, and copays—the policy coverage changes based on the amount you pay. Providers will base premiums on the enrolee's state, the individual's history, and other factors.
The other option is to try going through an insurance agent or broker. They tend to work with a number of different companies and can try to get you the best quote. Many brokers can connect you to life, auto, home, and health insurance policies. However, it's important to remember that some of these brokers may be motivated by commissions.
What Do Insurers Do With the Premiums?
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. Some insurers invest in the premium to generate higher returns. By doing so, the companies can offset some costs of providing insurance coverage and help an insurer keep its prices competitive within the market.
What Are the Key Factors Affecting Insurance Premiums?
Insurance premiums depend on a variety of factors, including the type of coverage being purchased by the policyholder, the age of the policyholder, where the policyholder lives, the claim history of the policyholder, and moral hazard and adverse selection. Insurance premiums may increase after the policy period ends or if the risk associated with offering a particular type of insurance increases. It may also change if the amount of coverage changes.
What Is an Actuary?
An actuary assesses and manages the risks of financial investments, insurance policies, and other potentially risky ventures. Actuaries assess particular situations financial risks, primarily using probability, economic theory, and computer science. Most actuaries work at insurance companies, where their risk-management capabilities are particularly applicable in determining risk levels and premium prices for a given insurance policy.
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],
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],
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],
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"https://www.investopedia.com/terms/c/cash-flow-plans.asp"
],
[
"premium financing",
"https://www.investopedia.com/insurance/life-insurance-premium-financing-worth-risk/"
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"https://www.investopedia.com/car-insurance-for-transgender-and-nonbinary-people-7548334"
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https://www.investopedia.com/terms/d/deed_of_release.asp | What Is a Deed of Release? Definition, How It Works, and Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-deed-of-release"></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 Deed of Release? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A deed of release is a legal document that removes a previous claim on an asset. It provides documentation of release from a binding agreement. A deed of release might be included when a lender transfers the title of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/realestate.asp" rel="noopener noreferrer">real estate</a> to the homeowner upon satisfaction of the mortgage. A deed of release literally releases the parties from previous obligations.
</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 deed of release literally releases the parties to a deal from previous obligations, such as payments under the term of a mortgage because the loan has been paid off.</li><li>The lender holds the title to real property until the mortgage’s terms have been satisfied when a deed of release is commonly entered into.</li><li>A deed of release can also free an employer and an employee of any obligations that they had under their employment agreement, such as in the case of a severance package.</li><li>Deed of release forms can also be used to relieve personal guarantee obligations for business loans.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-do-deeds-of-release-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 Do Deeds of Release Work? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A good way to understand how a deed of release works is to consider it in a situation that’s common for many people: homebuying. Most individuals purchase their homes with the help of a mortgage provided by a financial institution. The bank providing the funds for the mortgage doesn’t just lend the money in good faith—it takes a legal claim against the house as collateral until the loan is paid off.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A mortgage deed of release is then created when the borrower meets all mortgage payment terms or makes a full prepayment to satisfy the loan. The lender holds the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/title.asp">title</a> to the property until that time and is formally a lienholder of record on the property until full and final payment is made. The title provides secured collateral for the loan payments for the life of the loan, reducing the default risk for the lender.<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 lending institution’s legal counsel typically creates the deed of release when the loan has been satisfied. It reports that the loan has been paid in full under the terms required. It also states that the lien has been removed and the full title has been transferred to the homeowner.
</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 homeowner owns the asset free and clear after the title and deed of release are provided to her. They are no longer subject to any terms or obligations of the lender. The lending account is closed.
</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>Be sure to have the deed of release recorded with the same agency that recorded the original mortgage, so you can be absolutely sure that any and all liens are removed.</p></div></div></div>
<span class="heading-toc" id="toc-types-of-deeds-of-release"></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"> Types of Deeds of Release </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Employment agreements are another scenario where a deed of release might be used. The document can free both the employer and the employee of any obligations that they had under their employment agreement. In some cases, a deed of release might give an employee a designated payment. This can occur in the case of a severance package.
</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 deed of release can include the terms of the severance, including payment and the length of time that payments will last following the release. It might also identify confidential information that cannot be shared by the employee after termination, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/noncompete-agreement.asp">restraint clauses</a> that prevent a departing employee from forming a similar business or soliciting customers or clients.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>If you’re presented with a deed of release in a workplace setting, be sure to read it through carefully to ensure that you understand what you’re agreeing to.</p></div></div></div>
<span class="heading-toc" id="toc-example-of-deed-of-release"></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 Deed of Release </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The most common example of a deed of release can occur when someone buys a home. When you take out a mortgage to purchase property, the property acts as collateral for the loan. Meanwhile, the lender holds the lien on the home as the entity to which you owe money. When you complete your mortgage terms and pay off the loan in full, a mortgage deed of release can be created.
</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 example of a deed of release is associated with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-guarantee.asp">personal guarantees</a>. A personal guarantee means that you assume personal responsibility for a debt, even if that debt is owed by a business entity that you own. If you agree to end a personal guarantee, whether the loan has been paid in full or not, you could do so through a deed of release.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_4-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Agreeing to a Uniform Commercial Code (UCC) lien for a business loan creates a different set of legal and financial obligations from a personal guarantee.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> It’s possible to find <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.docpreponline.com/customerforms/forms/DEED%20OF%20TRUST%20-%20RELEASE%20DEED.pdf" rel="nofollow">sample deed of release forms online</a>, though you may pay a fee to download them. It’s also important to ensure that any deed of release form that you’re using conforms to your state’s legal guidelines for a release of deed.
</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"> Special Considerations </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Contact 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> (FDIC) if you’ve failed to receive a deed of release because your lending bank failed and went into FDIC receivership. The FDIC indicates that it can usually sort out the problem for you.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The regulator offers an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fdic.gov/bank/individual/failed/lien/">interactive search tool</a> that you can use to find out if your bank was acquired by the government through receivership.
</p></div> | ## What Is a Deed of Release?
A deed of release is a legal document that removes a previous claim on an asset. It provides documentation of release from a binding agreement. A deed of release might be included when a lender transfers the title of [real estate](https://www.investopedia.com/terms/r/realestate.asp) to the homeowner upon satisfaction of the mortgage. A deed of release literally releases the parties from previous obligations.
### Key Takeaways
* A deed of release literally releases the parties to a deal from previous obligations, such as payments under the term of a mortgage because the loan has been paid off.
* The lender holds the title to real property until the mortgage’s terms have been satisfied when a deed of release is commonly entered into.
* A deed of release can also free an employer and an employee of any obligations that they had under their employment agreement, such as in the case of a severance package.
* Deed of release forms can also be used to relieve personal guarantee obligations for business loans.
## How Do Deeds of Release Work?
A good way to understand how a deed of release works is to consider it in a situation that’s common for many people: homebuying. Most individuals purchase their homes with the help of a mortgage provided by a financial institution. The bank providing the funds for the mortgage doesn’t just lend the money in good faith—it takes a legal claim against the house as collateral until the loan is paid off.
A mortgage deed of release is then created when the borrower meets all mortgage payment terms or makes a full prepayment to satisfy the loan. The lender holds the [title](https://www.investopedia.com/terms/t/title.asp) to the property until that time and is formally a lienholder of record on the property until full and final payment is made. The title provides secured collateral for the loan payments for the life of the loan, reducing the default risk for the lender.
The lending institution’s legal counsel typically creates the deed of release when the loan has been satisfied. It reports that the loan has been paid in full under the terms required. It also states that the lien has been removed and the full title has been transferred to the homeowner.
The homeowner owns the asset free and clear after the title and deed of release are provided to her. They are no longer subject to any terms or obligations of the lender. The lending account is closed.
###
Be sure to have the deed of release recorded with the same agency that recorded the original mortgage, so you can be absolutely sure that any and all liens are removed.
## Types of Deeds of Release
Employment agreements are another scenario where a deed of release might be used. The document can free both the employer and the employee of any obligations that they had under their employment agreement. In some cases, a deed of release might give an employee a designated payment. This can occur in the case of a severance package.
The deed of release can include the terms of the severance, including payment and the length of time that payments will last following the release. It might also identify confidential information that cannot be shared by the employee after termination, or [restraint clauses](https://www.investopedia.com/terms/n/noncompete-agreement.asp) that prevent a departing employee from forming a similar business or soliciting customers or clients.
### Tip
If you’re presented with a deed of release in a workplace setting, be sure to read it through carefully to ensure that you understand what you’re agreeing to.
## Example of Deed of Release
The most common example of a deed of release can occur when someone buys a home. When you take out a mortgage to purchase property, the property acts as collateral for the loan. Meanwhile, the lender holds the lien on the home as the entity to which you owe money. When you complete your mortgage terms and pay off the loan in full, a mortgage deed of release can be created.
Another example of a deed of release is associated with [personal guarantees](https://www.investopedia.com/terms/p/personal-guarantee.asp). A personal guarantee means that you assume personal responsibility for a debt, even if that debt is owed by a business entity that you own. If you agree to end a personal guarantee, whether the loan has been paid in full or not, you could do so through a deed of release.
### Note
Agreeing to a Uniform Commercial Code (UCC) lien for a business loan creates a different set of legal and financial obligations from a personal guarantee.
It’s possible to find [sample deed of release forms online](https://www.docpreponline.com/customerforms/forms/DEED%20OF%20TRUST%20-%20RELEASE%20DEED.pdf), though you may pay a fee to download them. It’s also important to ensure that any deed of release form that you’re using conforms to your state’s legal guidelines for a release of deed.
### Special Considerations
Contact the [Federal Deposit Insurance Corp.](https://www.investopedia.com/terms/f/fdic.asp) (FDIC) if you’ve failed to receive a deed of release because your lending bank failed and went into FDIC receivership. The FDIC indicates that it can usually sort out the problem for you.
The regulator offers an [interactive search tool](https://www.fdic.gov/bank/individual/failed/lien/) that you can use to find out if your bank was acquired by the government through receivership.
| What Is a Deed of Release?
A deed of release is a legal document that removes a previous claim on an asset. It provides documentation of release from a binding agreement. A deed of release might be included when a lender transfers the title of real estate to the homeowner upon satisfaction of the mortgage. A deed of release literally releases the parties from previous obligations.
Key Takeaways
A deed of release literally releases the parties to a deal from previous obligations, such as payments under the term of a mortgage because the loan has been paid off.The lender holds the title to real property until the mortgage’s terms have been satisfied when a deed of release is commonly entered into.A deed of release can also free an employer and an employee of any obligations that they had under their employment agreement, such as in the case of a severance package.Deed of release forms can also be used to relieve personal guarantee obligations for business loans.
How Do Deeds of Release Work?
A good way to understand how a deed of release works is to consider it in a situation that’s common for many people: homebuying. Most individuals purchase their homes with the help of a mortgage provided by a financial institution. The bank providing the funds for the mortgage doesn’t just lend the money in good faith—it takes a legal claim against the house as collateral until the loan is paid off.
A mortgage deed of release is then created when the borrower meets all mortgage payment terms or makes a full prepayment to satisfy the loan. The lender holds the title to the property until that time and is formally a lienholder of record on the property until full and final payment is made. The title provides secured collateral for the loan payments for the life of the loan, reducing the default risk for the lender.
The lending institution’s legal counsel typically creates the deed of release when the loan has been satisfied. It reports that the loan has been paid in full under the terms required. It also states that the lien has been removed and the full title has been transferred to the homeowner.
The homeowner owns the asset free and clear after the title and deed of release are provided to her. They are no longer subject to any terms or obligations of the lender. The lending account is closed.
Be sure to have the deed of release recorded with the same agency that recorded the original mortgage, so you can be absolutely sure that any and all liens are removed.
Types of Deeds of Release
Employment agreements are another scenario where a deed of release might be used. The document can free both the employer and the employee of any obligations that they had under their employment agreement. In some cases, a deed of release might give an employee a designated payment. This can occur in the case of a severance package.
The deed of release can include the terms of the severance, including payment and the length of time that payments will last following the release. It might also identify confidential information that cannot be shared by the employee after termination, or restraint clauses that prevent a departing employee from forming a similar business or soliciting customers or clients.
Tip
If you’re presented with a deed of release in a workplace setting, be sure to read it through carefully to ensure that you understand what you’re agreeing to.
Example of Deed of Release
The most common example of a deed of release can occur when someone buys a home. When you take out a mortgage to purchase property, the property acts as collateral for the loan. Meanwhile, the lender holds the lien on the home as the entity to which you owe money. When you complete your mortgage terms and pay off the loan in full, a mortgage deed of release can be created.
Another example of a deed of release is associated with personal guarantees. A personal guarantee means that you assume personal responsibility for a debt, even if that debt is owed by a business entity that you own. If you agree to end a personal guarantee, whether the loan has been paid in full or not, you could do so through a deed of release.
Note
Agreeing to a Uniform Commercial Code (UCC) lien for a business loan creates a different set of legal and financial obligations from a personal guarantee.
It’s possible to find sample deed of release forms online, though you may pay a fee to download them. It’s also important to ensure that any deed of release form that you’re using conforms to your state’s legal guidelines for a release of deed.
Special Considerations
Contact the Federal Deposit Insurance Corp. (FDIC) if you’ve failed to receive a deed of release because your lending bank failed and went into FDIC receivership. The FDIC indicates that it can usually sort out the problem for you.
The regulator offers an interactive search tool that you can use to find out if your bank was acquired by the government through receivership.
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https://www.investopedia.com/data-center-operator-equinix-soars-on-ai-demand-8645937 | Data Center Operator Equinix Soars on AI Demand | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Equinix shares took off in intraday trading Thursday as the data center real estate trust benefited from demand for artificial intelligence (AI) products.</li><li>The company's adjusted EBITDA and AFFO were better than expected.</li><li>CEO Charles Meyers said the "rapidly evolving AI landscape" provides immense potential for Equinix.</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"> Equinix (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=EQIX">EQIX</a>) shares jumped in intraday trading Thursday, a day after the data center <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate trust (REIT)</a> posted strong results on the soaring demand for <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI</a>) products.
</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-adjusted-ebitda-affo-better-than-expected"></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"> Adjusted EBITDA, AFFO Better Than Expected </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The company reported first-quarter adjusted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ebitda.asp">earnings before interest, taxes, depreciation, and amortization (EBITDA)</a> was up 5% year-over-year to $992 million, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/affo.asp">adjusted funds from operations (AFFO)</a> gained 5.1% to $843 million. Both were more than anticipated.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eps.asp">Earnings per share (EPS</a>) of $2.43 missed estimates. Revenue rose 6.5% to $2.13 billion, in line with forecasts.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<span class="heading-toc" id="toc-accelerated-hyperscale-demand"></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"> 'Accelerated Hyperscale Demand' </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Equinix noted it closed 3,800 deals with more than 3,100 customers. It added that “accelerated hyperscale demand” led to increases in leasing in Europe, Middle East, and Africa and Asia-Pacific markets, “as continued cloud and artificial intelligence (AI) activity drives strong demand.”
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/ceo.asp">Chief Executive Officer (CEO</a>) Charles Meyers said the “rapidly evolving AI landscape” remains a catalyst for economic expansion, and that creates immense potential for Equinix "as our customers recognize the importance of digital initiatives in driving long-term revenue growth and operational efficiency.”
</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 predicted full-year revenue to be $8.69 billion to $8.79 billion, with adjusted EBITDA of $4.04 billion to $4.12 billion, and AFFO of $3.29 billion to $3.37 billion.
</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"> Equinix shares were up more than 11% to $771.86 as of 12:17 p.m. ET Thursday but remain in negative territory for the year.<br/>
</p></div> | ### Key Takeaways
* Equinix shares took off in intraday trading Thursday as the data center real estate trust benefited from demand for artificial intelligence (AI) products.
* The company's adjusted EBITDA and AFFO were better than expected.
* CEO Charles Meyers said the "rapidly evolving AI landscape" provides immense potential for Equinix.
Equinix ([EQIX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=EQIX)) shares jumped in intraday trading Thursday, a day after the data center [real estate trust (REIT)](https://www.investopedia.com/terms/r/reit.asp) posted strong results on the soaring demand for [artificial intelligence (AI](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp)) products.
## Adjusted EBITDA, AFFO Better Than Expected
The company reported first-quarter adjusted [earnings before interest, taxes, depreciation, and amortization (EBITDA)](https://www.investopedia.com/terms/e/ebitda.asp) was up 5% year-over-year to $992 million, and [adjusted funds from operations (AFFO)](https://www.investopedia.com/terms/a/affo.asp) gained 5.1% to $843 million. Both were more than anticipated.
[Earnings per share (EPS](https://www.investopedia.com/terms/e/eps.asp)) of $2.43 missed estimates. Revenue rose 6.5% to $2.13 billion, in line with forecasts.
## 'Accelerated Hyperscale Demand'
Equinix noted it closed 3,800 deals with more than 3,100 customers. It added that “accelerated hyperscale demand” led to increases in leasing in Europe, Middle East, and Africa and Asia-Pacific markets, “as continued cloud and artificial intelligence (AI) activity drives strong demand.”
[Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) Charles Meyers said the “rapidly evolving AI landscape” remains a catalyst for economic expansion, and that creates immense potential for Equinix "as our customers recognize the importance of digital initiatives in driving long-term revenue growth and operational efficiency.”
The company predicted full-year revenue to be $8.69 billion to $8.79 billion, with adjusted EBITDA of $4.04 billion to $4.12 billion, and AFFO of $3.29 billion to $3.37 billion.
Equinix shares were up more than 11% to $771.86 as of 12:17 p.m. ET Thursday but remain in negative territory for the year.
| Key Takeaways
Equinix shares took off in intraday trading Thursday as the data center real estate trust benefited from demand for artificial intelligence (AI) products.The company's adjusted EBITDA and AFFO were better than expected.CEO Charles Meyers said the "rapidly evolving AI landscape" provides immense potential for Equinix.
Equinix (EQIX) shares jumped in intraday trading Thursday, a day after the data center real estate trust (REIT) posted strong results on the soaring demand for artificial intelligence (AI) products.
Adjusted EBITDA, AFFO Better Than Expected
The company reported first-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was up 5% year-over-year to $992 million, and adjusted funds from operations (AFFO) gained 5.1% to $843 million. Both were more than anticipated.
Earnings per share (EPS) of $2.43 missed estimates. Revenue rose 6.5% to $2.13 billion, in line with forecasts.
'Accelerated Hyperscale Demand'
Equinix noted it closed 3,800 deals with more than 3,100 customers. It added that “accelerated hyperscale demand” led to increases in leasing in Europe, Middle East, and Africa and Asia-Pacific markets, “as continued cloud and artificial intelligence (AI) activity drives strong demand.”
Chief Executive Officer (CEO) Charles Meyers said the “rapidly evolving AI landscape” remains a catalyst for economic expansion, and that creates immense potential for Equinix "as our customers recognize the importance of digital initiatives in driving long-term revenue growth and operational efficiency.”
The company predicted full-year revenue to be $8.69 billion to $8.79 billion, with adjusted EBITDA of $4.04 billion to $4.12 billion, and AFFO of $3.29 billion to $3.37 billion.
Equinix shares were up more than 11% to $771.86 as of 12:17 p.m. ET Thursday but remain in negative territory for the year.
| [
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https://www.investopedia.com/terms/p/potash.asp | Potash: Meaning, Trading, Reserves and Production | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-potash"></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 Potash? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Potash is the common name for any of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1110/5-things-to-know-about-potash.aspx">several compounds containing potassium</a>, including potassium sulfate (K2SO4), potassium-magnesium sulfate (K2SO4-MgSO4), potassium nitrate (KNO3), potassium carbonate (K<sub>2</sub>CO<sub>3</sub>), potassium oxide (K<sub>2</sub>O), and potassium chloride (KCl).
</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"> All these compounds are used primarily in the manufacturing of fertilizer.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The term potash derives from the Dutch word <em>potaschen</em>, which means "pot ashes".
</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>Farmers around the world rely on potash as a nutrient for their crops.</li><li>It also is used as an ingredient in soap, glass, and ceramics.</li><li>Eastern Europe is currently the largest producer of potash, but Canada has the largest reserves.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-potash"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Understanding Potash </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Potash may refer to any mined or manufactured salt that contains potassium in a water-soluble form. Potash was historically made by saturating wood ashes in water and then heating the mixture in an iron pot until the liquid evaporated, leaving behind a white residue called potash.
</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 ash is still used in the manufacture of fertilizers, soap, glass, and ceramics.
</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"> Potassium is the seventh most commonly found element in our planet's crust but it requires refining before use. Potash has been used since about the year 500 A.D. to make materials such as glass and soap. The American potash industry began in the 18th and 19th centuries when settlers cleared forests to plant crops. They burned the excess wood and sold the ashes to create soap or to boil down into potash.
</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"> Pearl ash, which is created by burning the substance familiar to bakers as cream of tartar, is similar to potash. The burning process produces potassium carbonate, which is a more refined version of potash. Also known as salts of tartar, pearl ash was historically made by burning and refining potash.
</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-trading-in-potash"></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"> Trading in Potash </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Potash contains water-soluble potassium, which helps plants grow. As a fertilizer, this nutrient helps farmers improve the taste, texture, color, yield, and water retention of their crops.
</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"> Common crops that rely on potash include corn, rice, wheat, and cotton, among many others. There is no substitute for potash as a fertilizer. The most common types of potash used include:
</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>Potassium chloride (KCl)</li><li>Potassium sulfate or sulfate of potash (SOP)</li><li>Potassium magnesium sulfate (SOPM)<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_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> According to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.usgs.gov/centers/national-minerals-information-center/mineral-commodity-summaries">U.S. Geological Service</a> (USGS), the 2020 estimated value of marketable potash was $430 million. About 85% of it was used as a fertilizer. Most of the imported potash used in the U.S. came from Canada.<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_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Investors can buy potash through trading companies involved in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/how-does-bitcoin-mining-work/">mining</a> and refining of potash. These companies include Potash Corp. of Saskatchewan (POT), Agrium (AGU), and Mosaic (MOS), all of which trade on the New York Stock Exchange (NYSE).
</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"> Farmers around the globe use potash, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a> are available for potash, listed as potassium chloride.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<span class="heading-toc" id="toc-potash-reserves-and-production"></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"> Potash Reserves and Production </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Potash reserves are common in areas that shallow seas in ancient times. As the earth developed and the water receded, the salts, a mixture of potassium chloride (KCl) and sodium chloride (NaCl), were left behind, forming potash. Over time, the earth's changing surface buried most of these reserves deep in the earth's crust.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> In its raw form, potash deposits exist around the globe. Together, the countries of Belarus, Canada, China, Germany, Israel, Jordan, and Russia produce 93.9% of the world's potash.
</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 number one potash-producing region is Eastern Europe. However, Canada has the largest reserves. In the U.S., potash is produced in New Mexico and Utah.<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_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Several methods can be used to produce potash. However, in large-scale production, two methods have dominated:
</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>The evaporation method requires the addition of hot water to the potash. The potash dissolves and rises to the surface. The excess water is evaporated, creating a concentrated substance. </li><li>In dissolution mining, potash-bearing deposits are recovered from deep-well mines. The potash then goes through a grinding process to turn it into powder.</li>
</ul></div> | ## What Is Potash?
Potash is the common name for any of [several compounds containing potassium](https://www.investopedia.com/financial-edge/1110/5-things-to-know-about-potash.aspx), including potassium sulfate (K2SO4), potassium-magnesium sulfate (K2SO4-MgSO4), potassium nitrate (KNO3), potassium carbonate (K2CO3), potassium oxide (K2O), and potassium chloride (KCl).
All these compounds are used primarily in the manufacturing of fertilizer.
The term potash derives from the Dutch word *potaschen*, which means "pot ashes".
### Key Takeaways
* Farmers around the world rely on potash as a nutrient for their crops.
* It also is used as an ingredient in soap, glass, and ceramics.
* Eastern Europe is currently the largest producer of potash, but Canada has the largest reserves.
## Understanding Potash
Potash may refer to any mined or manufactured salt that contains potassium in a water-soluble form. Potash was historically made by saturating wood ashes in water and then heating the mixture in an iron pot until the liquid evaporated, leaving behind a white residue called potash.
The ash is still used in the manufacture of fertilizers, soap, glass, and ceramics.
Potassium is the seventh most commonly found element in our planet's crust but it requires refining before use. Potash has been used since about the year 500 A.D. to make materials such as glass and soap. The American potash industry began in the 18th and 19th centuries when settlers cleared forests to plant crops. They burned the excess wood and sold the ashes to create soap or to boil down into potash.
Pearl ash, which is created by burning the substance familiar to bakers as cream of tartar, is similar to potash. The burning process produces potassium carbonate, which is a more refined version of potash. Also known as salts of tartar, pearl ash was historically made by burning and refining potash.
## Trading in Potash
Potash contains water-soluble potassium, which helps plants grow. As a fertilizer, this nutrient helps farmers improve the taste, texture, color, yield, and water retention of their crops.
Common crops that rely on potash include corn, rice, wheat, and cotton, among many others. There is no substitute for potash as a fertilizer. The most common types of potash used include:
* Potassium chloride (KCl)
* Potassium sulfate or sulfate of potash (SOP)
* Potassium magnesium sulfate (SOPM)
According to the [U.S. Geological Service](https://www.usgs.gov/centers/national-minerals-information-center/mineral-commodity-summaries) (USGS), the 2020 estimated value of marketable potash was $430 million. About 85% of it was used as a fertilizer. Most of the imported potash used in the U.S. came from Canada.
Investors can buy potash through trading companies involved in the [mining](https://www.investopedia.com/tech/how-does-bitcoin-mining-work/) and refining of potash. These companies include Potash Corp. of Saskatchewan (POT), Agrium (AGU), and Mosaic (MOS), all of which trade on the New York Stock Exchange (NYSE).
Farmers around the globe use potash, and [futures](https://www.investopedia.com/terms/f/futures.asp) are available for potash, listed as potassium chloride.
## Potash Reserves and Production
Potash reserves are common in areas that shallow seas in ancient times. As the earth developed and the water receded, the salts, a mixture of potassium chloride (KCl) and sodium chloride (NaCl), were left behind, forming potash. Over time, the earth's changing surface buried most of these reserves deep in the earth's crust.
In its raw form, potash deposits exist around the globe. Together, the countries of Belarus, Canada, China, Germany, Israel, Jordan, and Russia produce 93.9% of the world's potash.
The number one potash-producing region is Eastern Europe. However, Canada has the largest reserves. In the U.S., potash is produced in New Mexico and Utah.
Several methods can be used to produce potash. However, in large-scale production, two methods have dominated:
* The evaporation method requires the addition of hot water to the potash. The potash dissolves and rises to the surface. The excess water is evaporated, creating a concentrated substance.
* In dissolution mining, potash-bearing deposits are recovered from deep-well mines. The potash then goes through a grinding process to turn it into powder.
| What Is Potash?
Potash is the common name for any of several compounds containing potassium, including potassium sulfate (K2SO4), potassium-magnesium sulfate (K2SO4-MgSO4), potassium nitrate (KNO3), potassium carbonate (K2CO3), potassium oxide (K2O), and potassium chloride (KCl).
All these compounds are used primarily in the manufacturing of fertilizer.
The term potash derives from the Dutch word potaschen, which means "pot ashes".
Key Takeaways
Farmers around the world rely on potash as a nutrient for their crops.It also is used as an ingredient in soap, glass, and ceramics.Eastern Europe is currently the largest producer of potash, but Canada has the largest reserves.
Understanding Potash
Potash may refer to any mined or manufactured salt that contains potassium in a water-soluble form. Potash was historically made by saturating wood ashes in water and then heating the mixture in an iron pot until the liquid evaporated, leaving behind a white residue called potash.
The ash is still used in the manufacture of fertilizers, soap, glass, and ceramics.
Potassium is the seventh most commonly found element in our planet's crust but it requires refining before use. Potash has been used since about the year 500 A.D. to make materials such as glass and soap. The American potash industry began in the 18th and 19th centuries when settlers cleared forests to plant crops. They burned the excess wood and sold the ashes to create soap or to boil down into potash.
Pearl ash, which is created by burning the substance familiar to bakers as cream of tartar, is similar to potash. The burning process produces potassium carbonate, which is a more refined version of potash. Also known as salts of tartar, pearl ash was historically made by burning and refining potash.
Trading in Potash
Potash contains water-soluble potassium, which helps plants grow. As a fertilizer, this nutrient helps farmers improve the taste, texture, color, yield, and water retention of their crops.
Common crops that rely on potash include corn, rice, wheat, and cotton, among many others. There is no substitute for potash as a fertilizer. The most common types of potash used include:
Potassium chloride (KCl)Potassium sulfate or sulfate of potash (SOP)Potassium magnesium sulfate (SOPM)
According to the U.S. Geological Service (USGS), the 2020 estimated value of marketable potash was $430 million. About 85% of it was used as a fertilizer. Most of the imported potash used in the U.S. came from Canada.
Investors can buy potash through trading companies involved in the mining and refining of potash. These companies include Potash Corp. of Saskatchewan (POT), Agrium (AGU), and Mosaic (MOS), all of which trade on the New York Stock Exchange (NYSE).
Farmers around the globe use potash, and futures are available for potash, listed as potassium chloride.
Potash Reserves and Production
Potash reserves are common in areas that shallow seas in ancient times. As the earth developed and the water receded, the salts, a mixture of potassium chloride (KCl) and sodium chloride (NaCl), were left behind, forming potash. Over time, the earth's changing surface buried most of these reserves deep in the earth's crust.
In its raw form, potash deposits exist around the globe. Together, the countries of Belarus, Canada, China, Germany, Israel, Jordan, and Russia produce 93.9% of the world's potash.
The number one potash-producing region is Eastern Europe. However, Canada has the largest reserves. In the U.S., potash is produced in New Mexico and Utah.
Several methods can be used to produce potash. However, in large-scale production, two methods have dominated:
The evaporation method requires the addition of hot water to the potash. The potash dissolves and rises to the surface. The excess water is evaporated, creating a concentrated substance. In dissolution mining, potash-bearing deposits are recovered from deep-well mines. The potash then goes through a grinding process to turn it into powder.
| [
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https://www.investopedia.com/capital-one-launches-new-premium-venture-x-credit-card-5208212 | Capital One Launches New Premium Venture X 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"> Capital One has announced a new premium travel credit card, the Venture X. For a more modest annual fee than other premium cards like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-sapphire-reserve-credit-card-review-4796328">Chase Sapphire Reserve</a> and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/american-express-platinum-card-review-4795813">Platinum Card from American Express</a>, Venture X cardholders can get solid value on top of what regular <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/capital-one-venture-card-review-4795880">Venture</a> cardholders receive. New cardholders can earn 100,000 bonus miles and get a $200 statement credit for Airbnb, Vrbo, and other vacation rentals. The card will be open for applications starting Nov. 9, 2021.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The new Capital One Venture X is a premium travel credit card with the same rewards rate as the standard Venture card but more benefits.</li><li>Cardholders will get annual travel credits, anniversary bonus miles, airport lounge access, and more.</li><li>To celebrate the launch, Capital One is offering a large one-time miles bonus and a statement credit for vacation rentals.</li></ul></div></div></div>
<span class="heading-toc" id="toc-details-on-the-new-capital-one-venture-x"></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"> Details on the New Capital One Venture X </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In recent years, credit card issuers have upped the competition in the premium travel space. American Express, Chase, Citi, and—until recently—U.S. Bank have all offered travel-focused credit cards with luxury perks and annual fees in the hundreds of dollars.
</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"> Capital One is joining the fray with the Venture X. The card's annual fee is low compared with its competitors, but it doesn't skimp on benefits. Here's what you'll get for the card's $395 annual fee:
</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>Up to a $300 credit annually for bookings made on Capital One Travel.</li><li>A 10,000-mile bonus every account anniversary, worth $100 in travel redemptions.</li><li>Unlimited access to Capital One Lounges and the Priority Pass airport lounge network.</li><li>Up to a $100 statement credit toward TSA PreCheck or Global Entry every four years.</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"> Cardholders will also earn 10 miles per dollar on hotels and rental cars booked through Capital One Travel, 5 miles per dollar on flights booked through Capital One Travel, and 2 miles per dollar on all other purchases.
</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"> As a new cardholder, you'll get 100,000 bonus miles after you spend $10,000 in the first six months. Additionally, you can get up to $200 in statement credits for vacation rentals like Airbnb and Vrbo.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<span class="heading-toc" id="toc-is-the-new-capital-one-venture-x-right-for-you"></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"> Is the New Capital One Venture X Right for You? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> There's a lot about the new Capital One Venture X card that's appealing. For avid travelers, it won't be difficult at all to recoup the card's annual fee, and the card issuer has some of the most flexible redemption options of any travel rewards program.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> But tying some of the card's best benefits to Capital One Travel is a bit concerning. While the card issuer touts that customers can save an average of 15% on flights, booking travel through an online travel agency instead of directly with the travel provider, such as an airline or hotel chain, can complicate things.
</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 particular, when the travel industry came to a screeching halt in 2020, thousands of online travel agency customers struggled to get refunds for their canceled flights.<span class="ql-inline-citation" data-cite="1"></span> Also, if you book a hotel stay, you may not earn points with the hotel loyalty program or credit toward elite status. You also won't enjoy any of the elite benefits you're already entitled to if you have elite status.
</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"> That argument also applies to the card's bonus rewards rates on eligible Capital One Travel purchases.
</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 card's airport lounge benefits are impressive, but it's worth noting that there's currently only one Capital One Lounge, located at Dallas/Fort-Worth International Airport—it opened to coincide with the Venture X launch.
</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 bank has plans to open two additional lounges in 2022, at Denver International Airport and Dulles International Airport, but unless you live in one of those cities or travel there frequently, the lounge benefit may not be valuable for a while.
</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 you're considering the new Venture X card, take your time to shop around and compare multiple credit cards to determine if it's the right fit for you. If you decide to get the card, visit Capital One's website on or after Nov. 9, 2021 to apply.<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> | Capital One has announced a new premium travel credit card, the Venture X. For a more modest annual fee than other premium cards like the [Chase Sapphire Reserve](https://www.investopedia.com/chase-sapphire-reserve-credit-card-review-4796328) and the [Platinum Card from American Express](https://www.investopedia.com/american-express-platinum-card-review-4795813), Venture X cardholders can get solid value on top of what regular [Venture](https://www.investopedia.com/capital-one-venture-card-review-4795880) cardholders receive. New cardholders can earn 100,000 bonus miles and get a $200 statement credit for Airbnb, Vrbo, and other vacation rentals. The card will be open for applications starting Nov. 9, 2021.
### Key Takeaways
* The new Capital One Venture X is a premium travel credit card with the same rewards rate as the standard Venture card but more benefits.
* Cardholders will get annual travel credits, anniversary bonus miles, airport lounge access, and more.
* To celebrate the launch, Capital One is offering a large one-time miles bonus and a statement credit for vacation rentals.
## Details on the New Capital One Venture X
In recent years, credit card issuers have upped the competition in the premium travel space. American Express, Chase, Citi, and—until recently—U.S. Bank have all offered travel-focused credit cards with luxury perks and annual fees in the hundreds of dollars.
Capital One is joining the fray with the Venture X. The card's annual fee is low compared with its competitors, but it doesn't skimp on benefits. Here's what you'll get for the card's $395 annual fee:
* Up to a $300 credit annually for bookings made on Capital One Travel.
* A 10,000-mile bonus every account anniversary, worth $100 in travel redemptions.
* Unlimited access to Capital One Lounges and the Priority Pass airport lounge network.
* Up to a $100 statement credit toward TSA PreCheck or Global Entry every four years.
Cardholders will also earn 10 miles per dollar on hotels and rental cars booked through Capital One Travel, 5 miles per dollar on flights booked through Capital One Travel, and 2 miles per dollar on all other purchases.
As a new cardholder, you'll get 100,000 bonus miles after you spend $10,000 in the first six months. Additionally, you can get up to $200 in statement credits for vacation rentals like Airbnb and Vrbo.
## Is the New Capital One Venture X Right for You?
There's a lot about the new Capital One Venture X card that's appealing. For avid travelers, it won't be difficult at all to recoup the card's annual fee, and the card issuer has some of the most flexible redemption options of any travel rewards program.
But tying some of the card's best benefits to Capital One Travel is a bit concerning. While the card issuer touts that customers can save an average of 15% on flights, booking travel through an online travel agency instead of directly with the travel provider, such as an airline or hotel chain, can complicate things.
In particular, when the travel industry came to a screeching halt in 2020, thousands of online travel agency customers struggled to get refunds for their canceled flights. Also, if you book a hotel stay, you may not earn points with the hotel loyalty program or credit toward elite status. You also won't enjoy any of the elite benefits you're already entitled to if you have elite status.
That argument also applies to the card's bonus rewards rates on eligible Capital One Travel purchases.
The card's airport lounge benefits are impressive, but it's worth noting that there's currently only one Capital One Lounge, located at Dallas/Fort-Worth International Airport—it opened to coincide with the Venture X launch.
The bank has plans to open two additional lounges in 2022, at Denver International Airport and Dulles International Airport, but unless you live in one of those cities or travel there frequently, the lounge benefit may not be valuable for a while.
If you're considering the new Venture X card, take your time to shop around and compare multiple credit cards to determine if it's the right fit for you. If you decide to get the card, visit Capital One's website on or after Nov. 9, 2021 to apply.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Capital One has announced a new premium travel credit card, the Venture X. For a more modest annual fee than other premium cards like the Chase Sapphire Reserve and the Platinum Card from American Express, Venture X cardholders can get solid value on top of what regular Venture cardholders receive. New cardholders can earn 100,000 bonus miles and get a $200 statement credit for Airbnb, Vrbo, and other vacation rentals. The card will be open for applications starting Nov. 9, 2021.
Key Takeaways
The new Capital One Venture X is a premium travel credit card with the same rewards rate as the standard Venture card but more benefits.Cardholders will get annual travel credits, anniversary bonus miles, airport lounge access, and more.To celebrate the launch, Capital One is offering a large one-time miles bonus and a statement credit for vacation rentals.
Details on the New Capital One Venture X
In recent years, credit card issuers have upped the competition in the premium travel space. American Express, Chase, Citi, and—until recently—U.S. Bank have all offered travel-focused credit cards with luxury perks and annual fees in the hundreds of dollars.
Capital One is joining the fray with the Venture X. The card's annual fee is low compared with its competitors, but it doesn't skimp on benefits. Here's what you'll get for the card's $395 annual fee:
Up to a $300 credit annually for bookings made on Capital One Travel.A 10,000-mile bonus every account anniversary, worth $100 in travel redemptions.Unlimited access to Capital One Lounges and the Priority Pass airport lounge network.Up to a $100 statement credit toward TSA PreCheck or Global Entry every four years.
Cardholders will also earn 10 miles per dollar on hotels and rental cars booked through Capital One Travel, 5 miles per dollar on flights booked through Capital One Travel, and 2 miles per dollar on all other purchases.
As a new cardholder, you'll get 100,000 bonus miles after you spend $10,000 in the first six months. Additionally, you can get up to $200 in statement credits for vacation rentals like Airbnb and Vrbo.
Is the New Capital One Venture X Right for You?
There's a lot about the new Capital One Venture X card that's appealing. For avid travelers, it won't be difficult at all to recoup the card's annual fee, and the card issuer has some of the most flexible redemption options of any travel rewards program.
But tying some of the card's best benefits to Capital One Travel is a bit concerning. While the card issuer touts that customers can save an average of 15% on flights, booking travel through an online travel agency instead of directly with the travel provider, such as an airline or hotel chain, can complicate things.
In particular, when the travel industry came to a screeching halt in 2020, thousands of online travel agency customers struggled to get refunds for their canceled flights. Also, if you book a hotel stay, you may not earn points with the hotel loyalty program or credit toward elite status. You also won't enjoy any of the elite benefits you're already entitled to if you have elite status.
That argument also applies to the card's bonus rewards rates on eligible Capital One Travel purchases.
The card's airport lounge benefits are impressive, but it's worth noting that there's currently only one Capital One Lounge, located at Dallas/Fort-Worth International Airport—it opened to coincide with the Venture X launch.
The bank has plans to open two additional lounges in 2022, at Denver International Airport and Dulles International Airport, but unless you live in one of those cities or travel there frequently, the lounge benefit may not be valuable for a while.
If you're considering the new Venture X card, take your time to shop around and compare multiple credit cards to determine if it's the right fit for you. If you decide to get the card, visit Capital One's website on or after Nov. 9, 2021 to apply.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
[
"Chase Sapphire Reserve",
"https://www.investopedia.com/chase-sapphire-reserve-credit-card-review-4796328"
],
[
"Platinum Card from American Express",
"https://www.investopedia.com/american-express-platinum-card-review-4795813"
],
[
"Venture",
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https://www.investopedia.com/terms/m/masternote.asp | Master Notes: What It Is, How It Works, Example | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-master-notes"></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 Master Notes? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Master notes are short-term debt instruments issued by the Federal Farm Credit Banks Funding Corporation. They are considered high-quality fixed-income securities and are generally accepted as collateral for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/options-basics-tutorial-4583012">put or call options</a>. Their purpose within the context of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ffcs.asp">Federal Farm Credit System (FFCS)</a> is to provide loans to rural communities and the U.S. agricultural sector.<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_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>Master notes are a short-term debt instrument issued by the Federal Farm Credit Banks Funding Corporation.<span class="ql-inline-citation" data-cite="11"></span></li><li>Their purpose is to extend capital to the U.S. agricultural sector.</li><li>Master notes are issued with a face value of $25 million, making them only feasible for large and sophisticated investors.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-master-notes-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 Master Notes Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Based in Jersey City, N.J., the Federal Farm Credit Banks Funding Corp. manages various debt issuances on behalf of the banks in the FFCS.<span class="ql-inline-citation" data-cite="5"></span> The system is a group of 71 financial institutions in the United States and Puerto Rico designed to provide funding to the U.S. farming and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/091615/how-invest-farming-without-owning-farm.asp">agricultural sectors</a>. The Federal Farm Credit Banks Funding Corp. also provides consulting, accounting, and financial reporting services to banks.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The corporation distributes Farm Credit Debt Securities, such as discount notes,<span class="ql-inline-citation" data-cite="9"></span> designated bonds, floating-rate bonds,<span class="ql-inline-citation" data-cite="8"></span> fixed-rate bonds<span class="ql-inline-citation" data-cite="7"></span> and retail bonds to various investors, including commercial banks, states, municipalities, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp">pension</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-marketfund.asp">money-market funds</a>, insurance companies, investment advisers, corporations, foreign banks and governments, and other investors in the United States and internationally.<span class="ql-inline-citation" data-cite="10"></span> It markets and distributes securities through dealers.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Banks in the system cannot hold deposits, so debt issuances are their main source of funding. Although the debt securities are not guaranteed by the U.S. government, the FFCS possesses a farm credit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deposit-insurance-fund.asp">insurance fund</a>, which would supply principal and interest payments should a system bank go bankrupt. System institutions are federally chartered under the Farm Credit Act and are subject to supervision, examination and regulation by a federal agency, the Farm Credit Administration.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<span class="heading-toc" id="toc-real-world-example-of-master-notes"></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"> Real World Example of Master Notes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The master notes issued by the Federal Farm Credit Banks Funding Corporation are offered with a minimum face value of $25 million. As such, they are typically an appropriate investment only for large money managers. Master notes mature in one year and pay a coupon indexed to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">Fed Funds Rate</a> or another appropriate index. Money managers value these notes highly owing to their high liquidity, as well as the fact that the principal amount can be adjusted 25% in either direction. They can also be used as underlying collateral in put or a call.
</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"> According to the Federal Farm Credit Banks Funding Corporation, investors should have sufficient knowledge and experience in financial and business matters to evaluate the notes, as well as the merits and risks of investing in them. In addition, investors should have access to, and knowledge of, appropriate analytical tools. No investor should purchase a note unless the investor understands and has sufficient financial resources to bear the price, yield, market, liquidity, structure, redemption and other risks associated with it.<span class="ql-inline-citation" data-cite="3"></span>
</p></div> | ## What Are Master Notes?
Master notes are short-term debt instruments issued by the Federal Farm Credit Banks Funding Corporation. They are considered high-quality fixed-income securities and are generally accepted as collateral for [put or call options](https://www.investopedia.com/options-basics-tutorial-4583012). Their purpose within the context of the [Federal Farm Credit System (FFCS)](https://www.investopedia.com/terms/f/ffcs.asp) is to provide loans to rural communities and the U.S. agricultural sector.
### Key Takeaways
* Master notes are a short-term debt instrument issued by the Federal Farm Credit Banks Funding Corporation.
* Their purpose is to extend capital to the U.S. agricultural sector.
* Master notes are issued with a face value of $25 million, making them only feasible for large and sophisticated investors.
## How Master Notes Work
Based in Jersey City, N.J., the Federal Farm Credit Banks Funding Corp. manages various debt issuances on behalf of the banks in the FFCS. The system is a group of 71 financial institutions in the United States and Puerto Rico designed to provide funding to the U.S. farming and [agricultural sectors](https://www.investopedia.com/articles/investing/091615/how-invest-farming-without-owning-farm.asp). The Federal Farm Credit Banks Funding Corp. also provides consulting, accounting, and financial reporting services to banks.
The corporation distributes Farm Credit Debt Securities, such as discount notes, designated bonds, floating-rate bonds, fixed-rate bonds and retail bonds to various investors, including commercial banks, states, municipalities, [pension](https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp) and [money-market funds](https://www.investopedia.com/terms/m/money-marketfund.asp), insurance companies, investment advisers, corporations, foreign banks and governments, and other investors in the United States and internationally. It markets and distributes securities through dealers.
Banks in the system cannot hold deposits, so debt issuances are their main source of funding. Although the debt securities are not guaranteed by the U.S. government, the FFCS possesses a farm credit [insurance fund](https://www.investopedia.com/terms/d/deposit-insurance-fund.asp), which would supply principal and interest payments should a system bank go bankrupt. System institutions are federally chartered under the Farm Credit Act and are subject to supervision, examination and regulation by a federal agency, the Farm Credit Administration.
## Real World Example of Master Notes
The master notes issued by the Federal Farm Credit Banks Funding Corporation are offered with a minimum face value of $25 million. As such, they are typically an appropriate investment only for large money managers. Master notes mature in one year and pay a coupon indexed to the [Fed Funds Rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) or another appropriate index. Money managers value these notes highly owing to their high liquidity, as well as the fact that the principal amount can be adjusted 25% in either direction. They can also be used as underlying collateral in put or a call.
According to the Federal Farm Credit Banks Funding Corporation, investors should have sufficient knowledge and experience in financial and business matters to evaluate the notes, as well as the merits and risks of investing in them. In addition, investors should have access to, and knowledge of, appropriate analytical tools. No investor should purchase a note unless the investor understands and has sufficient financial resources to bear the price, yield, market, liquidity, structure, redemption and other risks associated with it.
| What Are Master Notes?
Master notes are short-term debt instruments issued by the Federal Farm Credit Banks Funding Corporation. They are considered high-quality fixed-income securities and are generally accepted as collateral for put or call options. Their purpose within the context of the Federal Farm Credit System (FFCS) is to provide loans to rural communities and the U.S. agricultural sector.
Key Takeaways
Master notes are a short-term debt instrument issued by the Federal Farm Credit Banks Funding Corporation.Their purpose is to extend capital to the U.S. agricultural sector.Master notes are issued with a face value of $25 million, making them only feasible for large and sophisticated investors.
How Master Notes Work
Based in Jersey City, N.J., the Federal Farm Credit Banks Funding Corp. manages various debt issuances on behalf of the banks in the FFCS. The system is a group of 71 financial institutions in the United States and Puerto Rico designed to provide funding to the U.S. farming and agricultural sectors. The Federal Farm Credit Banks Funding Corp. also provides consulting, accounting, and financial reporting services to banks.
The corporation distributes Farm Credit Debt Securities, such as discount notes, designated bonds, floating-rate bonds, fixed-rate bonds and retail bonds to various investors, including commercial banks, states, municipalities, pension and money-market funds, insurance companies, investment advisers, corporations, foreign banks and governments, and other investors in the United States and internationally. It markets and distributes securities through dealers.
Banks in the system cannot hold deposits, so debt issuances are their main source of funding. Although the debt securities are not guaranteed by the U.S. government, the FFCS possesses a farm credit insurance fund, which would supply principal and interest payments should a system bank go bankrupt. System institutions are federally chartered under the Farm Credit Act and are subject to supervision, examination and regulation by a federal agency, the Farm Credit Administration.
Real World Example of Master Notes
The master notes issued by the Federal Farm Credit Banks Funding Corporation are offered with a minimum face value of $25 million. As such, they are typically an appropriate investment only for large money managers. Master notes mature in one year and pay a coupon indexed to the Fed Funds Rate or another appropriate index. Money managers value these notes highly owing to their high liquidity, as well as the fact that the principal amount can be adjusted 25% in either direction. They can also be used as underlying collateral in put or a call.
According to the Federal Farm Credit Banks Funding Corporation, investors should have sufficient knowledge and experience in financial and business matters to evaluate the notes, as well as the merits and risks of investing in them. In addition, investors should have access to, and knowledge of, appropriate analytical tools. No investor should purchase a note unless the investor understands and has sufficient financial resources to bear the price, yield, market, liquidity, structure, redemption and other risks associated with it.
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https://www.investopedia.com/ask/answers/020915/has-gold-been-good-investment-over-long-term.asp | Has Gold Been a Good Investment Over the Long Term? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Gold is considered a safe investment. It is supposed to act as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/safe-haven.asp">safe haven</a> when markets are in decline, because the price of gold typically doesn’t move with market prices. As a result, gold also can be considered a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialrisk.asp">risky investment</a>, as history has shown that the price of gold does not always go up, particularly when markets are soaring. Investors typically turn to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/gold-4689769">gold</a> when there is fear in the market and they expect prices of stocks to go down.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Furthermore, gold is generally not an income-generating asset, though there are some gold bonds. Unlike stocks and bonds, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">return</a> on gold is typically based entirely on price <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciation</a>. Moreover, an investment in gold carries unique costs. As it is a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/physicalasset.asp">physical asset</a>, it requires storage and insurance costs. And, while gold is traditionally thought of as a safe asset, it can be highly <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatile</a> and drop in price.
</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"> Taking into consideration these factors, gold works best as part of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversified</a> portfolio, particularly when it is acting as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedge</a> against a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearmarket.asp">falling stock market</a>. Let’s take a look at how gold has held up over the long term.
</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>Gold has long been considered a durable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/storeofvalue.asp">store of value</a> and a hedge against inflation.</li>
<li>Over the long run, however, both stocks and bonds have outperformed the price increase in gold on average.</li>
<li>Nevertheless, over certain shorter time spans, gold may come out ahead.</li>
<li>Gold tends to rise during periods of high inflation and geopolitical uncertainty.</li>
<li>Gold reached an all-time high of nearly $2,075 in 2020 as the COVID-19 pandemic spread, and it spiked again above $2,000 per ounce during the Russia-Ukraine conflict in early 2022.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-gold-vs-stocks-and-bonds"></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"> Gold vs. Stocks and Bonds </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_10-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/krBfE/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Price of Gold"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> When evaluating the performance of gold as an investment <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/00/082100.asp">over the long term</a>, it really depends on the time period being analyzed. For example, over certain 30-year periods, stocks have outperformed gold and bonds, but over some 15-year periods, gold has outperformed stocks and bonds.<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_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> From 1990 to 2020, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/031915/what-moves-gold-prices.asp">the price of gold</a> increased by around 360%.<span class="ql-inline-citation" data-cite="1"></span> Over the same period, 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> gained 991%.<span class="ql-inline-citation" data-cite="2"></span> If we look now at the 15-year period from 2005 to 2020, the price of gold increased by 330%, roughly the same as the 30 years considered above.<span class="ql-inline-citation" data-cite="1"></span> Over the same period, the DJIA increased by only 153%.<span class="ql-inline-citation" data-cite="2"></span> Then, if we only consider the years 2021 and 2022, gold has outperformed stocks as geopolitical uncertainty and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> increased worldwide.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through today, stock returns blow gold away.
</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 with-title" id="mntl-sc-block-callout-heading_2-0">$2,075</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Gold reached an all-time high of $2,074.88 per ounce in August 2020 amid the COVID-19 pandemic before cooling off. It again rose above $2,000 in March 2022 in response to the Russian invasion of Ukraine, but it hadn’t yet surpassed the 2020 high as of January 2023.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Turning to bonds, the average annual <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> on investment-grade <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corporatebond.asp">corporate bonds</a> going back to the 1920s through 2020 is around 5%.<span class="ql-inline-citation" data-cite="7"></span> This indicates that over the past 30 years, corporate bonds have returned around 330%, similar to gold. Over a 15-year period, the return on bonds has been lower than that of both stocks and gold.
</p>
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<span class="heading-toc" id="toc-a-historical-perspective"></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"> A Historical Perspective </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> To gain a historical perspective on gold prices, from January 1934, with the introduction of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gold-reserve-act-1934.asp">Gold Reserve Act</a>, to August 1971, when President Richard Nixon <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/gold-standard.asp#toc-the-fall-of-the-gold-standard">closed the U.S. gold purchase window</a>, the price of gold was effectively set at $35 per ounce.<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Prior to the Gold Reserve Act, President Franklin D. Roosevelt had required citizens to surrender gold <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullion.asp">bullion</a>, coins, and notes in exchange for U.S. dollars. This effectively made investing in gold extremely difficult, if not impossible and futile, for those who did manage to hoard or conceal quantities of the precious metal.<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_27-0"> Using the set gold price of $35 and the price of $2,000 per ounce as of the first quarter (Q1) of 2022, a price appreciation of approximately 5,700% can be computed for gold.<span class="ql-inline-citation" data-cite="1"></span> From 1971 to Q1 2022, the DJIA has appreciated in value by around 4,500%.<span class="ql-inline-citation" data-cite="6"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-is-the-average-return-on-gold-investments"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the average return on gold investments?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Gold returns vary depending on the time period under consideration. From January 1971 (when the dollar became unlinked to gold) to December 2019, gold had average annual returns of 10.6%. Over the same period, global stocks returned 11.3%. The annual average return of gold in 2020 was 24.6%, which was the second-highest return among a range of assets that year, followed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/silver.asp">silver</a>, which had the highest.<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_30-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-why-is-there-less-investment-in-gold-when-stocks-generate-high-returns"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why is there less investment in gold when stocks generate high returns?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In general, gold performs relatively poorly when stocks are in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp">bull market</a>. One reason is that gold is not an income-producing asset, nor does it represent growth in a particular company or sector. Rather, it is valued for its relative scarcity and its sociohistorical precedent as something of value. Thus, when the economy is growing and corporations are doing well, stocks tend to be more attractive to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a>.</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-does-cryptocurrency-outperform-gold"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does cryptocurrency outperform gold?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Since <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a> (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTC">BTC</a>) emerged in 2009, it has greatly <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outperform.asp">outperformed</a> most other asset classes, including gold, rising from less than $1 to several thousands of dollars. Due to its scarcity and fixed and diminishing rate of new supply, many have equated Bitcoin and other <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a> with a sort of digital gold. However, if we look at a shorter time span—say, over the past two years—then gold has outperformed cryptocurrencies. This is largely due to the <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-winter-5496605">bear market</a> that hit Bitcoin and other cryptocurrencies throughout 2022.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As with any investment, it’s important to consider the time frame of investing, as well as to study market research to gauge an understanding of how markets are expected to perform. Gold is not a foolproof investment; as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy.
</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"> With all investment portfolios, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/diversify-your-portfolio-beyond-stocks/">diversification</a> is important, and investing in gold can help diversify a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>. This is especially important during market declines, when the price of gold will often increase.
</p></div> | Gold is considered a safe investment. It is supposed to act as a [safe haven](https://www.investopedia.com/terms/s/safe-haven.asp) when markets are in decline, because the price of gold typically doesn’t move with market prices. As a result, gold also can be considered a [risky investment](https://www.investopedia.com/terms/f/financialrisk.asp), as history has shown that the price of gold does not always go up, particularly when markets are soaring. Investors typically turn to [gold](https://www.investopedia.com/gold-4689769) when there is fear in the market and they expect prices of stocks to go down.
Furthermore, gold is generally not an income-generating asset, though there are some gold bonds. Unlike stocks and bonds, the [return](https://www.investopedia.com/terms/r/returnoninvestment.asp) on gold is typically based entirely on price [appreciation](https://www.investopedia.com/terms/a/appreciation.asp). Moreover, an investment in gold carries unique costs. As it is a [physical asset](https://www.investopedia.com/terms/p/physicalasset.asp), it requires storage and insurance costs. And, while gold is traditionally thought of as a safe asset, it can be highly [volatile](https://www.investopedia.com/terms/v/volatility.asp) and drop in price.
Taking into consideration these factors, gold works best as part of a [diversified](https://www.investopedia.com/terms/d/diversification.asp) portfolio, particularly when it is acting as a [hedge](https://www.investopedia.com/terms/h/hedge.asp) against a [falling stock market](https://www.investopedia.com/terms/b/bearmarket.asp). Let’s take a look at how gold has held up over the long term.
### Key Takeaways
* Gold has long been considered a durable [store of value](https://www.investopedia.com/terms/s/storeofvalue.asp) and a hedge against inflation.
* Over the long run, however, both stocks and bonds have outperformed the price increase in gold on average.
* Nevertheless, over certain shorter time spans, gold may come out ahead.
* Gold tends to rise during periods of high inflation and geopolitical uncertainty.
* Gold reached an all-time high of nearly $2,075 in 2020 as the COVID-19 pandemic spread, and it spiked again above $2,000 per ounce during the Russia-Ukraine conflict in early 2022.
## Gold vs. Stocks and Bonds
When evaluating the performance of gold as an investment [over the long term](https://www.investopedia.com/articles/00/082100.asp), it really depends on the time period being analyzed. For example, over certain 30-year periods, stocks have outperformed gold and bonds, but over some 15-year periods, gold has outperformed stocks and bonds.
From 1990 to 2020, [the price of gold](https://www.investopedia.com/articles/active-trading/031915/what-moves-gold-prices.asp) increased by around 360%. Over the same period, the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) gained 991%. If we look now at the 15-year period from 2005 to 2020, the price of gold increased by 330%, roughly the same as the 30 years considered above. Over the same period, the DJIA increased by only 153%. Then, if we only consider the years 2021 and 2022, gold has outperformed stocks as geopolitical uncertainty and [inflation](https://www.investopedia.com/terms/i/inflation.asp) increased worldwide.
So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through today, stock returns blow gold away.
### $2,075
Gold reached an all-time high of $2,074.88 per ounce in August 2020 amid the COVID-19 pandemic before cooling off. It again rose above $2,000 in March 2022 in response to the Russian invasion of Ukraine, but it hadn’t yet surpassed the 2020 high as of January 2023.
Turning to bonds, the average annual [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) on investment-grade [corporate bonds](https://www.investopedia.com/terms/c/corporatebond.asp) going back to the 1920s through 2020 is around 5%. This indicates that over the past 30 years, corporate bonds have returned around 330%, similar to gold. Over a 15-year period, the return on bonds has been lower than that of both stocks and gold.
## A Historical Perspective
To gain a historical perspective on gold prices, from January 1934, with the introduction of the [Gold Reserve Act](https://www.investopedia.com/terms/g/gold-reserve-act-1934.asp), to August 1971, when President Richard Nixon [closed the U.S. gold purchase window](https://www.investopedia.com/ask/answers/09/gold-standard.asp#toc-the-fall-of-the-gold-standard), the price of gold was effectively set at $35 per ounce.
Prior to the Gold Reserve Act, President Franklin D. Roosevelt had required citizens to surrender gold [bullion](https://www.investopedia.com/terms/b/bullion.asp), coins, and notes in exchange for U.S. dollars. This effectively made investing in gold extremely difficult, if not impossible and futile, for those who did manage to hoard or conceal quantities of the precious metal.
Using the set gold price of $35 and the price of $2,000 per ounce as of the first quarter (Q1) of 2022, a price appreciation of approximately 5,700% can be computed for gold. From 1971 to Q1 2022, the DJIA has appreciated in value by around 4,500%.
## What is the average return on gold investments?
Gold returns vary depending on the time period under consideration. From January 1971 (when the dollar became unlinked to gold) to December 2019, gold had average annual returns of 10.6%. Over the same period, global stocks returned 11.3%. The annual average return of gold in 2020 was 24.6%, which was the second-highest return among a range of assets that year, followed by [silver](https://www.investopedia.com/terms/s/silver.asp), which had the highest.
## Why is there less investment in gold when stocks generate high returns?
In general, gold performs relatively poorly when stocks are in a [bull market](https://www.investopedia.com/terms/b/bullmarket.asp). One reason is that gold is not an income-producing asset, nor does it represent growth in a particular company or sector. Rather, it is valued for its relative scarcity and its sociohistorical precedent as something of value. Thus, when the economy is growing and corporations are doing well, stocks tend to be more attractive to [investors](https://www.investopedia.com/terms/i/investor.asp).
## Does cryptocurrency outperform gold?
Since [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp) ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTC)) emerged in 2009, it has greatly [outperformed](https://www.investopedia.com/terms/o/outperform.asp) most other asset classes, including gold, rising from less than $1 to several thousands of dollars. Due to its scarcity and fixed and diminishing rate of new supply, many have equated Bitcoin and other [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp) with a sort of digital gold. However, if we look at a shorter time span—say, over the past two years—then gold has outperformed cryptocurrencies. This is largely due to the [bear market](https://www.investopedia.com/crypto-winter-5496605) that hit Bitcoin and other cryptocurrencies throughout 2022.
## The Bottom Line
As with any investment, it’s important to consider the time frame of investing, as well as to study market research to gauge an understanding of how markets are expected to perform. Gold is not a foolproof investment; as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy.
With all investment portfolios, [diversification](https://www.investopedia.com/investing/diversify-your-portfolio-beyond-stocks/) is important, and investing in gold can help diversify a [portfolio](https://www.investopedia.com/terms/p/portfolio.asp). This is especially important during market declines, when the price of gold will often increase.
| Gold is considered a safe investment. It is supposed to act as a safe haven when markets are in decline, because the price of gold typically doesn’t move with market prices. As a result, gold also can be considered a risky investment, as history has shown that the price of gold does not always go up, particularly when markets are soaring. Investors typically turn to gold when there is fear in the market and they expect prices of stocks to go down.
Furthermore, gold is generally not an income-generating asset, though there are some gold bonds. Unlike stocks and bonds, the return on gold is typically based entirely on price appreciation. Moreover, an investment in gold carries unique costs. As it is a physical asset, it requires storage and insurance costs. And, while gold is traditionally thought of as a safe asset, it can be highly volatile and drop in price.
Taking into consideration these factors, gold works best as part of a diversified portfolio, particularly when it is acting as a hedge against a falling stock market. Let’s take a look at how gold has held up over the long term.
Key Takeaways
Gold has long been considered a durable store of value and a hedge against inflation.
Over the long run, however, both stocks and bonds have outperformed the price increase in gold on average.
Nevertheless, over certain shorter time spans, gold may come out ahead.
Gold tends to rise during periods of high inflation and geopolitical uncertainty.
Gold reached an all-time high of nearly $2,075 in 2020 as the COVID-19 pandemic spread, and it spiked again above $2,000 per ounce during the Russia-Ukraine conflict in early 2022.
Gold vs. Stocks and Bonds
When evaluating the performance of gold as an investment over the long term, it really depends on the time period being analyzed. For example, over certain 30-year periods, stocks have outperformed gold and bonds, but over some 15-year periods, gold has outperformed stocks and bonds.
From 1990 to 2020, the price of gold increased by around 360%. Over the same period, the Dow Jones Industrial Average (DJIA) gained 991%. If we look now at the 15-year period from 2005 to 2020, the price of gold increased by 330%, roughly the same as the 30 years considered above. Over the same period, the DJIA increased by only 153%. Then, if we only consider the years 2021 and 2022, gold has outperformed stocks as geopolitical uncertainty and inflation increased worldwide.
So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through today, stock returns blow gold away.
$2,075
Gold reached an all-time high of $2,074.88 per ounce in August 2020 amid the COVID-19 pandemic before cooling off. It again rose above $2,000 in March 2022 in response to the Russian invasion of Ukraine, but it hadn’t yet surpassed the 2020 high as of January 2023.
Turning to bonds, the average annual rate of return on investment-grade corporate bonds going back to the 1920s through 2020 is around 5%. This indicates that over the past 30 years, corporate bonds have returned around 330%, similar to gold. Over a 15-year period, the return on bonds has been lower than that of both stocks and gold.
A Historical Perspective
To gain a historical perspective on gold prices, from January 1934, with the introduction of the Gold Reserve Act, to August 1971, when President Richard Nixon closed the U.S. gold purchase window, the price of gold was effectively set at $35 per ounce.
Prior to the Gold Reserve Act, President Franklin D. Roosevelt had required citizens to surrender gold bullion, coins, and notes in exchange for U.S. dollars. This effectively made investing in gold extremely difficult, if not impossible and futile, for those who did manage to hoard or conceal quantities of the precious metal.
Using the set gold price of $35 and the price of $2,000 per ounce as of the first quarter (Q1) of 2022, a price appreciation of approximately 5,700% can be computed for gold. From 1971 to Q1 2022, the DJIA has appreciated in value by around 4,500%.
What is the average return on gold investments?
Gold returns vary depending on the time period under consideration. From January 1971 (when the dollar became unlinked to gold) to December 2019, gold had average annual returns of 10.6%. Over the same period, global stocks returned 11.3%. The annual average return of gold in 2020 was 24.6%, which was the second-highest return among a range of assets that year, followed by silver, which had the highest.
Why is there less investment in gold when stocks generate high returns?
In general, gold performs relatively poorly when stocks are in a bull market. One reason is that gold is not an income-producing asset, nor does it represent growth in a particular company or sector. Rather, it is valued for its relative scarcity and its sociohistorical precedent as something of value. Thus, when the economy is growing and corporations are doing well, stocks tend to be more attractive to investors.
Does cryptocurrency outperform gold?
Since Bitcoin (BTC) emerged in 2009, it has greatly outperformed most other asset classes, including gold, rising from less than $1 to several thousands of dollars. Due to its scarcity and fixed and diminishing rate of new supply, many have equated Bitcoin and other cryptocurrencies with a sort of digital gold. However, if we look at a shorter time span—say, over the past two years—then gold has outperformed cryptocurrencies. This is largely due to the bear market that hit Bitcoin and other cryptocurrencies throughout 2022.
The Bottom Line
As with any investment, it’s important to consider the time frame of investing, as well as to study market research to gauge an understanding of how markets are expected to perform. Gold is not a foolproof investment; as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy.
With all investment portfolios, diversification is important, and investing in gold can help diversify a portfolio. This is especially important during market declines, when the price of gold will often increase.
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https://www.investopedia.com/terms/i/isda-master-agreement.asp | ISDA Master Agreement: Definition, What It Does, and Requirements | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-isda-master-agreement"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an ISDA Master Agreement? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An ISDA Master Agreement is the standard document regularly used to govern over-the-counter <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> transactions. The agreement, which is published by the International Swaps and Derivatives Association (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/isda.asp">ISDA</a>), outlines the terms to be applied to a derivatives transaction between two parties, typically a derivatives dealer and a counterparty. The ISDA Master Agreement itself is standard, but it is accompanied by a customized schedule and sometimes a credit support annex, both of which are signed by the two parties in a given transaction.
</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 ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions.</li><li>Over-the-counter (OTC) derivatives are traded between two parties, not through an exchange or intermediary.</li><li>The most significant advantages of an ISDA Master Agreement are improved transparency and higher liquidity.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-an-isda-master-agreement-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How an ISDA Master Agreement Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Over-the-counter (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/otc.asp">OTC</a>) derivatives are traded between two parties, not through an exchange or intermediary. The size of the OTC market means that risk managers must carefully oversee traders and ensure approved transactions are correctly managed. When two parties enter into a transaction, they each receive a confirmation that sets out its details and references the signed agreement. The terms of the ISDA Master Agreement then cover the transaction.
</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 foreign exchange and interest rate swap markets experienced impressive growth over the last several decades. Together, they now account for trillions of dollars in daily trades. The original ISDA Master Agreement was created to standardize these trades in 1985. It was subject to updates and revisions in 1992 and again in 2002, both of which are currently available for use. Banks and other corporations around the world use ISDA Master Agreements. The ISDA Master Agreement also makes transaction closeout and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netting.asp">netting</a> easier, as it bridges the gap between various standards used in different jurisdictions.
</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>ISDA Master Agreements are used by firms around the world.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Most multinational banks have ISDA Master Agreements in place with each other. These agreements usually cover all branches that are active in foreign exchange, interest rate, or options trading. Banks require corporate counterparties to sign an agreement to enter into swaps. Some also demand agreements for foreign exchange transactions. While the ISDA Master Agreement is standard, some of its terms and conditions are amended and defined in the accompanying schedule. The schedule is negotiated to cover either (a) the requirements of a specific hedging transaction or (b) an ongoing trading relationship.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> A Credit Support Annex (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditsupportannex.asp">CSA</a>) sometimes also accompanies the Master. The CSA allows the two parties involved to mitigate their credit risk by stipulating the terms and conditions under which they're required to post <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a> to each other.
</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-benefits-of-an-isda-master-agreement"></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"> Benefits of an ISDA Master Agreement </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The most significant advantages of an ISDA Master Agreement are improved <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transparency.asp">transparency</a> and higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>. Since the agreement is standardized, all parties can study the ISDA Master Agreement to learn how it works. That improves transparency because it reduces the possibilities for obscure provisions and escape clauses. The standardization provided by an ISDA Master Agreement also increases liquidity since the agreement makes it easier for the parties to engage in repeated transactions. The clarification of terms offered by such an agreement saves time and legal fees for everyone involved.
</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-requirements-for-an-isda-master-agreement"></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"> Requirements for an ISDA Master Agreement </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The master agreement and schedule set out the grounds under which one of the parties can force the closeout of covered transactions due to the occurrence of a termination event by the other party. Standard termination events include failure to pay or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>. Other termination events that can be added in the schedule include a credit downgrade below a specified level.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The ISDA Master Agreement stipulates whether the laws of the U.K. or New York state will apply. It also sets out the terms for valuing, closing out, and netting all covered transactions in case of a termination event.
</p></div> | ## What Is an ISDA Master Agreement?
An ISDA Master Agreement is the standard document regularly used to govern over-the-counter [derivatives](https://www.investopedia.com/terms/d/derivative.asp) transactions. The agreement, which is published by the International Swaps and Derivatives Association ([ISDA](https://www.investopedia.com/terms/i/isda.asp)), outlines the terms to be applied to a derivatives transaction between two parties, typically a derivatives dealer and a counterparty. The ISDA Master Agreement itself is standard, but it is accompanied by a customized schedule and sometimes a credit support annex, both of which are signed by the two parties in a given transaction.
### Key Takeaways
* An ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions.
* Over-the-counter (OTC) derivatives are traded between two parties, not through an exchange or intermediary.
* The most significant advantages of an ISDA Master Agreement are improved transparency and higher liquidity.
## How an ISDA Master Agreement Works
Over-the-counter ([OTC](https://www.investopedia.com/terms/o/otc.asp)) derivatives are traded between two parties, not through an exchange or intermediary. The size of the OTC market means that risk managers must carefully oversee traders and ensure approved transactions are correctly managed. When two parties enter into a transaction, they each receive a confirmation that sets out its details and references the signed agreement. The terms of the ISDA Master Agreement then cover the transaction.
The foreign exchange and interest rate swap markets experienced impressive growth over the last several decades. Together, they now account for trillions of dollars in daily trades. The original ISDA Master Agreement was created to standardize these trades in 1985. It was subject to updates and revisions in 1992 and again in 2002, both of which are currently available for use. Banks and other corporations around the world use ISDA Master Agreements. The ISDA Master Agreement also makes transaction closeout and [netting](https://www.investopedia.com/terms/n/netting.asp) easier, as it bridges the gap between various standards used in different jurisdictions.
###
ISDA Master Agreements are used by firms around the world.
Most multinational banks have ISDA Master Agreements in place with each other. These agreements usually cover all branches that are active in foreign exchange, interest rate, or options trading. Banks require corporate counterparties to sign an agreement to enter into swaps. Some also demand agreements for foreign exchange transactions. While the ISDA Master Agreement is standard, some of its terms and conditions are amended and defined in the accompanying schedule. The schedule is negotiated to cover either (a) the requirements of a specific hedging transaction or (b) an ongoing trading relationship.
A Credit Support Annex ([CSA](https://www.investopedia.com/terms/c/creditsupportannex.asp)) sometimes also accompanies the Master. The CSA allows the two parties involved to mitigate their credit risk by stipulating the terms and conditions under which they're required to post [collateral](https://www.investopedia.com/terms/c/collateral.asp) to each other.
## Benefits of an ISDA Master Agreement
The most significant advantages of an ISDA Master Agreement are improved [transparency](https://www.investopedia.com/terms/t/transparency.asp) and higher [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). Since the agreement is standardized, all parties can study the ISDA Master Agreement to learn how it works. That improves transparency because it reduces the possibilities for obscure provisions and escape clauses. The standardization provided by an ISDA Master Agreement also increases liquidity since the agreement makes it easier for the parties to engage in repeated transactions. The clarification of terms offered by such an agreement saves time and legal fees for everyone involved.
## Requirements for an ISDA Master Agreement
The master agreement and schedule set out the grounds under which one of the parties can force the closeout of covered transactions due to the occurrence of a termination event by the other party. Standard termination events include failure to pay or [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp). Other termination events that can be added in the schedule include a credit downgrade below a specified level.
The ISDA Master Agreement stipulates whether the laws of the U.K. or New York state will apply. It also sets out the terms for valuing, closing out, and netting all covered transactions in case of a termination event.
| What Is an ISDA Master Agreement?
An ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions. The agreement, which is published by the International Swaps and Derivatives Association (ISDA), outlines the terms to be applied to a derivatives transaction between two parties, typically a derivatives dealer and a counterparty. The ISDA Master Agreement itself is standard, but it is accompanied by a customized schedule and sometimes a credit support annex, both of which are signed by the two parties in a given transaction.
Key Takeaways
An ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions.Over-the-counter (OTC) derivatives are traded between two parties, not through an exchange or intermediary.The most significant advantages of an ISDA Master Agreement are improved transparency and higher liquidity.
How an ISDA Master Agreement Works
Over-the-counter (OTC) derivatives are traded between two parties, not through an exchange or intermediary. The size of the OTC market means that risk managers must carefully oversee traders and ensure approved transactions are correctly managed. When two parties enter into a transaction, they each receive a confirmation that sets out its details and references the signed agreement. The terms of the ISDA Master Agreement then cover the transaction.
The foreign exchange and interest rate swap markets experienced impressive growth over the last several decades. Together, they now account for trillions of dollars in daily trades. The original ISDA Master Agreement was created to standardize these trades in 1985. It was subject to updates and revisions in 1992 and again in 2002, both of which are currently available for use. Banks and other corporations around the world use ISDA Master Agreements. The ISDA Master Agreement also makes transaction closeout and netting easier, as it bridges the gap between various standards used in different jurisdictions.
ISDA Master Agreements are used by firms around the world.
Most multinational banks have ISDA Master Agreements in place with each other. These agreements usually cover all branches that are active in foreign exchange, interest rate, or options trading. Banks require corporate counterparties to sign an agreement to enter into swaps. Some also demand agreements for foreign exchange transactions. While the ISDA Master Agreement is standard, some of its terms and conditions are amended and defined in the accompanying schedule. The schedule is negotiated to cover either (a) the requirements of a specific hedging transaction or (b) an ongoing trading relationship.
A Credit Support Annex (CSA) sometimes also accompanies the Master. The CSA allows the two parties involved to mitigate their credit risk by stipulating the terms and conditions under which they're required to post collateral to each other.
Benefits of an ISDA Master Agreement
The most significant advantages of an ISDA Master Agreement are improved transparency and higher liquidity. Since the agreement is standardized, all parties can study the ISDA Master Agreement to learn how it works. That improves transparency because it reduces the possibilities for obscure provisions and escape clauses. The standardization provided by an ISDA Master Agreement also increases liquidity since the agreement makes it easier for the parties to engage in repeated transactions. The clarification of terms offered by such an agreement saves time and legal fees for everyone involved.
Requirements for an ISDA Master Agreement
The master agreement and schedule set out the grounds under which one of the parties can force the closeout of covered transactions due to the occurrence of a termination event by the other party. Standard termination events include failure to pay or bankruptcy. Other termination events that can be added in the schedule include a credit downgrade below a specified level.
The ISDA Master Agreement stipulates whether the laws of the U.K. or New York state will apply. It also sets out the terms for valuing, closing out, and netting all covered transactions in case of a termination event.
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[
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https://www.investopedia.com/terms/p/prime-credit.asp | Prime Credit: 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-prime-credit"></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 Prime Credit? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Prime credit refers to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp" rel="noopener noreferrer">credit score</a> that is one level below <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/superprime-credit.asp" rel="noopener noreferrer">super prime</a>, the highest credit rating. Consumers with prime credit have very good credit and pose little risk to lenders and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditor.asp" rel="noopener noreferrer">creditors</a>. Lenders and credit card companies offer some of their top loans and cards with the lowest interest rates and best terms to consumers with prime credit.
</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>Prime credit is a credit score that is one level below super prime, which is the highest credit rating. </li><li>Consumers with prime credit pose little risk to lenders and creditors. </li><li>Consumers with prime credit receive loans with some of the lowest interest rates and best terms.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-prime-credit"></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 Prime Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Although each of the three main credit bureaus—Equifax, Experian, and TransUnion—have the same overall range of credit scores (300 to 850), the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp" rel="noopener noreferrer">credit score</a> range that is considered prime may vary. Consumers with scores at the highest end of these ranges are considered to have super-prime credit, and consumers whose scores fall just below that range are considered to have prime credit. Below that comes near-prime and sub-prime, the lowest score with the least advantageous terms when it comes to loans.
</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"> Although the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp" rel="noopener noreferrer">credit bureaus</a> have four defined ranges, the financial institutions that are the end-users may have different categories for their internal models. For example, a bank may give the best financing for car loans to anyone qualifying as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prime-borrower.asp" rel="noopener noreferrer">prime borrower</a> rather than having separate terms for super-prime borrowers.
</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"> How a Prime Credit Score Affects Lending Rates </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Borrowers with prime credit can expect to pay slightly higher <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 rates</a> than borrowers with super-prime credit since they are considered to have a slightly higher risk of defaulting on their loans. For example, having a prime credit score might mean paying 1% more on an auto loan than a borrower with a super-prime credit score.
</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"> Having prime credit usually means you can get a new loan and retain access to your existing credit lines even when the overall credit market is tight. Even in a strong economy where credit is readily available, prime and super-prime borrowers receive most of the credit that banks issue.
</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>Your credit rating and classification could differ depending on the company and what bureaus they use to assess your credit score.</p></div></div></div>
<span class="heading-toc" id="toc-variations-in-credit-score-classifications"></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"> Variations in Credit Score Classifications </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If you apply for a loan with several different companies, you might be surprised to find that some classify you as having prime credit while others classify you as having super-prime credit. Or, if your score is toward the lower end of the prime range, you might find that some lenders classify you as having prime credit while others classify you as having near-prime credit.
</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"> Because your credit file with each bureau may contain slightly different information, the score range you fall into with each bureau could be different, and lenders might offer you different rates depending on which bureau they pull your credit score from. No matter the source lenders pull from, keeping control of your debt accounts and making regular payments will help 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" rel="noopener noreferrer">improve your current credit score</a>.
</p></div> | ## What Is Prime Credit?
Prime credit refers to a [credit score](https://www.investopedia.com/terms/c/credit_score.asp) that is one level below [super prime](https://www.investopedia.com/terms/s/superprime-credit.asp), the highest credit rating. Consumers with prime credit have very good credit and pose little risk to lenders and [creditors](https://www.investopedia.com/terms/c/creditor.asp). Lenders and credit card companies offer some of their top loans and cards with the lowest interest rates and best terms to consumers with prime credit.
### Key Takeaways:
* Prime credit is a credit score that is one level below super prime, which is the highest credit rating.
* Consumers with prime credit pose little risk to lenders and creditors.
* Consumers with prime credit receive loans with some of the lowest interest rates and best terms.
## Understanding Prime Credit
Although each of the three main credit bureaus—Equifax, Experian, and TransUnion—have the same overall range of credit scores (300 to 850), the [credit score](https://www.investopedia.com/terms/c/credit_score.asp) range that is considered prime may vary. Consumers with scores at the highest end of these ranges are considered to have super-prime credit, and consumers whose scores fall just below that range are considered to have prime credit. Below that comes near-prime and sub-prime, the lowest score with the least advantageous terms when it comes to loans.
Although the [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp) have four defined ranges, the financial institutions that are the end-users may have different categories for their internal models. For example, a bank may give the best financing for car loans to anyone qualifying as a [prime borrower](https://www.investopedia.com/terms/p/prime-borrower.asp) rather than having separate terms for super-prime borrowers.
### How a Prime Credit Score Affects Lending Rates
Borrowers with prime credit can expect to pay slightly higher [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) than borrowers with super-prime credit since they are considered to have a slightly higher risk of defaulting on their loans. For example, having a prime credit score might mean paying 1% more on an auto loan than a borrower with a super-prime credit score.
Having prime credit usually means you can get a new loan and retain access to your existing credit lines even when the overall credit market is tight. Even in a strong economy where credit is readily available, prime and super-prime borrowers receive most of the credit that banks issue.
###
Your credit rating and classification could differ depending on the company and what bureaus they use to assess your credit score.
## Variations in Credit Score Classifications
If you apply for a loan with several different companies, you might be surprised to find that some classify you as having prime credit while others classify you as having super-prime credit. Or, if your score is toward the lower end of the prime range, you might find that some lenders classify you as having prime credit while others classify you as having near-prime credit.
Because your credit file with each bureau may contain slightly different information, the score range you fall into with each bureau could be different, and lenders might offer you different rates depending on which bureau they pull your credit score from. No matter the source lenders pull from, keeping control of your debt accounts and making regular payments will help to [improve your current credit score](https://www.investopedia.com/how-to-improve-your-credit-score-4590097).
| What Is Prime Credit?
Prime credit refers to a credit score that is one level below super prime, the highest credit rating. Consumers with prime credit have very good credit and pose little risk to lenders and creditors. Lenders and credit card companies offer some of their top loans and cards with the lowest interest rates and best terms to consumers with prime credit.
Key Takeaways:
Prime credit is a credit score that is one level below super prime, which is the highest credit rating. Consumers with prime credit pose little risk to lenders and creditors. Consumers with prime credit receive loans with some of the lowest interest rates and best terms.
Understanding Prime Credit
Although each of the three main credit bureaus—Equifax, Experian, and TransUnion—have the same overall range of credit scores (300 to 850), the credit score range that is considered prime may vary. Consumers with scores at the highest end of these ranges are considered to have super-prime credit, and consumers whose scores fall just below that range are considered to have prime credit. Below that comes near-prime and sub-prime, the lowest score with the least advantageous terms when it comes to loans.
Although the credit bureaus have four defined ranges, the financial institutions that are the end-users may have different categories for their internal models. For example, a bank may give the best financing for car loans to anyone qualifying as a prime borrower rather than having separate terms for super-prime borrowers.
How a Prime Credit Score Affects Lending Rates
Borrowers with prime credit can expect to pay slightly higher interest rates than borrowers with super-prime credit since they are considered to have a slightly higher risk of defaulting on their loans. For example, having a prime credit score might mean paying 1% more on an auto loan than a borrower with a super-prime credit score.
Having prime credit usually means you can get a new loan and retain access to your existing credit lines even when the overall credit market is tight. Even in a strong economy where credit is readily available, prime and super-prime borrowers receive most of the credit that banks issue.
Your credit rating and classification could differ depending on the company and what bureaus they use to assess your credit score.
Variations in Credit Score Classifications
If you apply for a loan with several different companies, you might be surprised to find that some classify you as having prime credit while others classify you as having super-prime credit. Or, if your score is toward the lower end of the prime range, you might find that some lenders classify you as having prime credit while others classify you as having near-prime credit.
Because your credit file with each bureau may contain slightly different information, the score range you fall into with each bureau could be different, and lenders might offer you different rates depending on which bureau they pull your credit score from. No matter the source lenders pull from, keeping control of your debt accounts and making regular payments will help to improve your current credit score.
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https://www.investopedia.com/terms/r/rangeaccrual.asp | Range Accrual Options: Types and Calculations | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-range-accrual"></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 Range Accrual? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A range accrual is a structured product based on an underlying index whose returns are maximized if the index stays within the investor's defined range.
</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"> Commonly referred to as a range accrual note, it is a type of financial <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivative</a> that offers investors the potential to earn above-average returns by linking its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon-rate.asp">coupon rate</a> to the performance of a reference index.
</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"> Variations on range accrual notes include accretion bonds, index range notes, corridor bonds, corridor notes, range floaters, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fairwaybond.asp">fairway bonds</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A range accrual is a structured product based on an underlying index whose returns are maximized if that index stays inside a specific price range over the life of the note.</li><li>A range accrual note offers investors the potential to earn above-average returns by linking its coupon rate to the performance of the reference index.</li><li>If the index value stays within a specified range, the investor receives the coupon rate, or the investor earns nothing.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-range-accrual"></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 Range Accrual </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The investor holding the range accrual security desires the reference index to stay within a specified range from the range accrual's issuance to its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturitydate.asp">maturity</a>. This strategy is a bet on stability or low volatility in the index market, as well as an investment in the note. Since cash flow is not guaranteed, the issuer often has to offer a higher stated coupon rate to entice investors. For investors speculating that the underlying index will stay range-bound, it is a way to earn an above-average yield.
</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 reference index could be an <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>, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor.asp">LIBOR</a>. It might also be a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchangerate.asp">currency exchange rate</a>, commodity, or stock index. If the index value falls within a specified range, the coupon accrues or is credited interest. If the index value falls outside the specified range, the coupon rate does not accrue, meaning that the investor earns nothing.
</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"> Typically, the investor bets that the reference index will stay confined to the investor's anticipated ranges and not be swayed by the heightened volatility of other market-moving factors. These factors could be a steepening <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yieldcurve.asp">yield curve</a>, a futures market in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/backwardation.asp">backwardation</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contango.asp">contango</a>, or other geopolitical events. The investor is essentially betting against the market anticipating above-market returns.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Investors in accrual range notes can profit the most during a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sidewaysmarket.asp">sideways market</a>, which is when the price of a security is rangebound without forming any distinct up- or downtrend.</p></div></div></div>
<span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Since it has a fixed coupon rate, a range accrual qualifies as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedincome.asp">fixed-income</a> security, but in name only. Another name for the coupon is a conditional coupon since its yield payment depends on another event or condition. The payment calculation time frame is usually daily. Since actual interest payments can be zero for any given return calculation period, real income is not necessarily fixed.
</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"> No official market exists for range accrual notes trading or valuation. Valuations become even trickier with range accruals which include call features and dual-range accruals. A dual-range accrual uses two indexes based on, for example, an <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> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rate</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<span class="heading-toc" id="toc-calculating-range-accrual"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Calculating Range Accrual </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Range accrual notes start with the same calculations used on any fixed-income security, matched with the payment period. Payment periods may be monthly, semi-annually, or annually. The inclusion of a yes or no type of modifier is the main difference between the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</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"> For example, say an investor holds a 3% coupon, a one-year note with a monthly payout. The index base for the security is the price of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crude-oil.asp">crude oil</a> trading in New York, with a range between $60.00-$61.00 per barrel. Annualized monthly payments range from 0.00% to a maximum of 3.00%.
</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>For January, payable on Feb. 1, assume that crude oil traded in that price range for 15 of the 31 days of the month.</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"> <span data-value="3.00\% \times \frac{15}{31} = 0.01451 = 1.451\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mn>
3.00
</mn>
<mi>
%
</mi>
<mo>
×
</mo>
<mfrac>
<mn>
15
</mn>
<mn>
31
</mn>
</mfrac>
<mo>
=
</mo>
<mn>
0.01451
</mn>
<mo>
=
</mo>
<mn>
1.451
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
3.00\% \times \frac{15}{31} = 0.01451 = 1.451\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord">3.00%</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">31</span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">15</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="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">0.01451</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">1.451%</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"> The interest payment made on Feb. 1 would be 1.45% times the principal value divided by 12.
</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>For February, payable on March 1, with the index within range for 20 days, it would be as follows:</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"> <span data-value="3.00\% \times \frac{20}{28} = 0.0214 = 2.142\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mn>
3.00
</mn>
<mi>
%
</mi>
<mo>
×
</mo>
<mfrac>
<mn>
20
</mn>
<mn>
28
</mn>
</mfrac>
<mo>
=
</mo>
<mn>
0.0214
</mn>
<mo>
=
</mo>
<mn>
2.142
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
3.00\% \times \frac{20}{28} = 0.0214 = 2.142\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord">3.00%</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">28</span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">20</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="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">0.0214</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">2.142%</span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <li>The interest payment made on March 1 would be 2.14% times the principal value divided by 12. If the index remains in range the entire month:</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> <span data-value="3.00\% \times 1 = 0.03 = 3.0\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mn>
3.00
</mn>
<mi>
%
</mi>
<mo>
×
</mo>
<mn>
1
</mn>
<mo>
=
</mo>
<mn>
0.03
</mn>
<mo>
=
</mo>
<mn>
3.0
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
3.00\% \times 1 = 0.03 = 3.0\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord">3.00%</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">1</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">0.03</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">3.0%</span></span></span></span></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The interest payment made on the first day of the next month would be 3.0% times the principal value divided by 12; repeat the calculation for all other months.
</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-range-accrual-notes-and-interest-rate-options"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-heading__text"> Range Accrual Notes and Interest Rate Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Accrual range notes may carry either a short-term floating interest or have an embedded <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest-rate-derivative.asp">interest rate option</a>. A floating, or variable, interest rate moves up and down with the rest of the market or along with an index, and why some range accrual notes like fairway bonds are also known as index floaters.
</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"> An interest rate option is a financial <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivative</a> that allows the holder to benefit from changes in interest rates. It is similar to an equity option and can be either a put or a call. Typically, the movement follows an underlying benchmark rate, such as the yield on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10-yeartreasury.asp">10-year Treasury note</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"> <em>Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.</em>
</p></div> | ## What Is a Range Accrual?
A range accrual is a structured product based on an underlying index whose returns are maximized if the index stays within the investor's defined range.
Commonly referred to as a range accrual note, it is a type of financial [derivative](https://www.investopedia.com/terms/d/derivative.asp) that offers investors the potential to earn above-average returns by linking its [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp) to the performance of a reference index.
Variations on range accrual notes include accretion bonds, index range notes, corridor bonds, corridor notes, range floaters, and [fairway bonds](https://www.investopedia.com/terms/f/fairwaybond.asp).
### Key Takeaways
* A range accrual is a structured product based on an underlying index whose returns are maximized if that index stays inside a specific price range over the life of the note.
* A range accrual note offers investors the potential to earn above-average returns by linking its coupon rate to the performance of the reference index.
* If the index value stays within a specified range, the investor receives the coupon rate, or the investor earns nothing.
## Understanding Range Accrual
The investor holding the range accrual security desires the reference index to stay within a specified range from the range accrual's issuance to its [maturity](https://www.investopedia.com/terms/m/maturitydate.asp). This strategy is a bet on stability or low volatility in the index market, as well as an investment in the note. Since cash flow is not guaranteed, the issuer often has to offer a higher stated coupon rate to entice investors. For investors speculating that the underlying index will stay range-bound, it is a way to earn an above-average yield.
The reference index could be an [interest rate](https://www.investopedia.com/terms/i/interestrate.asp), such as [LIBOR](https://www.investopedia.com/terms/l/libor.asp). It might also be a [currency exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp), commodity, or stock index. If the index value falls within a specified range, the coupon accrues or is credited interest. If the index value falls outside the specified range, the coupon rate does not accrue, meaning that the investor earns nothing.
Typically, the investor bets that the reference index will stay confined to the investor's anticipated ranges and not be swayed by the heightened volatility of other market-moving factors. These factors could be a steepening [yield curve](https://www.investopedia.com/terms/y/yieldcurve.asp), a futures market in [backwardation](https://www.investopedia.com/terms/b/backwardation.asp) or [contango](https://www.investopedia.com/terms/c/contango.asp), or other geopolitical events. The investor is essentially betting against the market anticipating above-market returns.
###
Investors in accrual range notes can profit the most during a [sideways market](https://www.investopedia.com/terms/s/sidewaysmarket.asp), which is when the price of a security is rangebound without forming any distinct up- or downtrend.
## Special Considerations
Since it has a fixed coupon rate, a range accrual qualifies as a [fixed-income](https://www.investopedia.com/terms/f/fixedincome.asp) security, but in name only. Another name for the coupon is a conditional coupon since its yield payment depends on another event or condition. The payment calculation time frame is usually daily. Since actual interest payments can be zero for any given return calculation period, real income is not necessarily fixed.
No official market exists for range accrual notes trading or valuation. Valuations become even trickier with range accruals which include call features and dual-range accruals. A dual-range accrual uses two indexes based on, for example, an [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp) and [interest rate](https://www.investopedia.com/terms/i/interestrate.asp).
## Calculating Range Accrual
Range accrual notes start with the same calculations used on any fixed-income security, matched with the payment period. Payment periods may be monthly, semi-annually, or annually. The inclusion of a yes or no type of modifier is the main difference between the [securities](https://www.investopedia.com/terms/s/security.asp).
For example, say an investor holds a 3% coupon, a one-year note with a monthly payout. The index base for the security is the price of [crude oil](https://www.investopedia.com/terms/c/crude-oil.asp) trading in New York, with a range between $60.00-$61.00 per barrel. Annualized monthly payments range from 0.00% to a maximum of 3.00%.
* For January, payable on Feb. 1, assume that crude oil traded in that price range for 15 of the 31 days of the month.
3.00
%
×
15
31
=
0.01451
=
1.451
%
3.00\% \times \frac{15}{31} = 0.01451 = 1.451\%
3.00%×3115=0.01451=1.451%
The interest payment made on Feb. 1 would be 1.45% times the principal value divided by 12.
* For February, payable on March 1, with the index within range for 20 days, it would be as follows:
3.00
%
×
20
28
=
0.0214
=
2.142
%
3.00\% \times \frac{20}{28} = 0.0214 = 2.142\%
3.00%×2820=0.0214=2.142%
* The interest payment made on March 1 would be 2.14% times the principal value divided by 12. If the index remains in range the entire month:
3.00
%
×
1
=
0.03
=
3.0
%
3.00\% \times 1 = 0.03 = 3.0\%
3.00%×1=0.03=3.0%
The interest payment made on the first day of the next month would be 3.0% times the principal value divided by 12; repeat the calculation for all other months.
## Range Accrual Notes and Interest Rate Options
Accrual range notes may carry either a short-term floating interest or have an embedded [interest rate option](https://www.investopedia.com/terms/i/interest-rate-derivative.asp). A floating, or variable, interest rate moves up and down with the rest of the market or along with an index, and why some range accrual notes like fairway bonds are also known as index floaters.
An interest rate option is a financial [derivative](https://www.investopedia.com/terms/d/derivative.asp) that allows the holder to benefit from changes in interest rates. It is similar to an equity option and can be either a put or a call. Typically, the movement follows an underlying benchmark rate, such as the yield on the [10-year Treasury note](https://www.investopedia.com/terms/1/10-yeartreasury.asp).
*Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.*
| What Is a Range Accrual?
A range accrual is a structured product based on an underlying index whose returns are maximized if the index stays within the investor's defined range.
Commonly referred to as a range accrual note, it is a type of financial derivative that offers investors the potential to earn above-average returns by linking its coupon rate to the performance of a reference index.
Variations on range accrual notes include accretion bonds, index range notes, corridor bonds, corridor notes, range floaters, and fairway bonds.
Key Takeaways
A range accrual is a structured product based on an underlying index whose returns are maximized if that index stays inside a specific price range over the life of the note.A range accrual note offers investors the potential to earn above-average returns by linking its coupon rate to the performance of the reference index.If the index value stays within a specified range, the investor receives the coupon rate, or the investor earns nothing.
Understanding Range Accrual
The investor holding the range accrual security desires the reference index to stay within a specified range from the range accrual's issuance to its maturity. This strategy is a bet on stability or low volatility in the index market, as well as an investment in the note. Since cash flow is not guaranteed, the issuer often has to offer a higher stated coupon rate to entice investors. For investors speculating that the underlying index will stay range-bound, it is a way to earn an above-average yield.
The reference index could be an interest rate, such as LIBOR. It might also be a currency exchange rate, commodity, or stock index. If the index value falls within a specified range, the coupon accrues or is credited interest. If the index value falls outside the specified range, the coupon rate does not accrue, meaning that the investor earns nothing.
Typically, the investor bets that the reference index will stay confined to the investor's anticipated ranges and not be swayed by the heightened volatility of other market-moving factors. These factors could be a steepening yield curve, a futures market in backwardation or contango, or other geopolitical events. The investor is essentially betting against the market anticipating above-market returns.
Investors in accrual range notes can profit the most during a sideways market, which is when the price of a security is rangebound without forming any distinct up- or downtrend.
Special Considerations
Since it has a fixed coupon rate, a range accrual qualifies as a fixed-income security, but in name only. Another name for the coupon is a conditional coupon since its yield payment depends on another event or condition. The payment calculation time frame is usually daily. Since actual interest payments can be zero for any given return calculation period, real income is not necessarily fixed.
No official market exists for range accrual notes trading or valuation. Valuations become even trickier with range accruals which include call features and dual-range accruals. A dual-range accrual uses two indexes based on, for example, an exchange rate and interest rate.
Calculating Range Accrual
Range accrual notes start with the same calculations used on any fixed-income security, matched with the payment period. Payment periods may be monthly, semi-annually, or annually. The inclusion of a yes or no type of modifier is the main difference between the securities.
For example, say an investor holds a 3% coupon, a one-year note with a monthly payout. The index base for the security is the price of crude oil trading in New York, with a range between $60.00-$61.00 per barrel. Annualized monthly payments range from 0.00% to a maximum of 3.00%.
For January, payable on Feb. 1, assume that crude oil traded in that price range for 15 of the 31 days of the month.
3.00
%
×
15
31
=
0.01451
=
1.451
%
3.00\% \times \frac{15}{31} = 0.01451 = 1.451\%
3.00%×3115=0.01451=1.451%
The interest payment made on Feb. 1 would be 1.45% times the principal value divided by 12.
For February, payable on March 1, with the index within range for 20 days, it would be as follows:
3.00
%
×
20
28
=
0.0214
=
2.142
%
3.00\% \times \frac{20}{28} = 0.0214 = 2.142\%
3.00%×2820=0.0214=2.142%
The interest payment made on March 1 would be 2.14% times the principal value divided by 12. If the index remains in range the entire month:
3.00
%
×
1
=
0.03
=
3.0
%
3.00\% \times 1 = 0.03 = 3.0\%
3.00%×1=0.03=3.0%
The interest payment made on the first day of the next month would be 3.0% times the principal value divided by 12; repeat the calculation for all other months.
Range Accrual Notes and Interest Rate Options
Accrual range notes may carry either a short-term floating interest or have an embedded interest rate option. A floating, or variable, interest rate moves up and down with the rest of the market or along with an index, and why some range accrual notes like fairway bonds are also known as index floaters.
An interest rate option is a financial derivative that allows the holder to benefit from changes in interest rates. It is similar to an equity option and can be either a put or a call. Typically, the movement follows an underlying benchmark rate, such as the yield on the 10-year Treasury note.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.
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https://www.investopedia.com/agricultural-etfs-8425680 | Agricultural ETFs: What You Need to Know | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-agricultural-etfs"></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 Agricultural ETFs? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Agricultural <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> offer a convenient way to gain exposure to the agricultural <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sector</a>. These funds track the performance of agricultural commodities, companies, and indexes.
</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"> Unlike buying individual commodities or stocks, investing in an agricultural ETF gives you a diversified <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> in this sector with shares that trade like stocks. These ETFs can provide a basket of different agricultural assets, from corn and wheat to companies specializing in farm equipment.
</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>Agricultural exchange-traded funds (ETFs) expose investors to the agricultural sector and its potential for long-term growth.</li><li>There are two types of agricultural ETFs: those for agribusiness stocks and those for sector-specific commodities.</li><li>When investing in agricultural ETFs, you’ll need to review their expense ratios, liquidity, underlying assets, and performance history.</li><li>Top agricultural ETFs include the Invesco DB Agriculture Fund (DBA), VanEck Vectors Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI).</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-agricultural-etfs"></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 Agricultural ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Agricultural ETFs work by pooling investor capital to buy a range of assets related to farming and agriculture. These ETFs then track the price movements of those assets.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> When you invest in an agricultural ETF, you’re essentially buying shares in this portfolio. The value of your shares goes up or down with the fund’s performance. The fund is managed by authorized participants, who are there to ensure the ETF’s price reflects the value of its underlying assets.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> There are two main types of agricultural ETFs:
</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>Those that invest in the stocks of agribusiness companies listed on stock exchanges, known as agribusiness ETFs.</li><li>Those that invest in one or more agricultural commodities (either directly or indirectly using derivatives contracts).</li>
</ol>
<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-agribusiness-etfs"></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"> Agribusiness ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The first type of agricultural ETF focuses on investing in the stocks of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/agribusiness.asp">agribusiness</a> companies. These companies are involved in all or part of the agriculture <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/supplychain.asp">supply chain</a>, including production, processing, distribution, and retail.
</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"> Investing in these ETFs exposes investors to seed and fertilizer manufacturers, farm machinery producers, food-processing companies, and large-scale farming operations. Agribusiness ETFs offer a way to invest in the business side of agriculture, leveraging the potential growth of these companies.
</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"> These ETFs typically track an index comprising agribusiness stocks. Investors benefit from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversification</a> that these ETFs offer since they are not tied to the performance of a single company but the collective performance of several.
</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, it’s important to note that investing in agribusiness stock ETFs also means exposure to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risks</a> typical in the stock market, including market volatility and company-specific risks.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="6"></span> These ETFs generally suit investors who are interested in the agricultural sector’s growth potential but prefer publicly traded companies’ stability and established nature.<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-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>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="7">Agribusiness ETFs Compared</th>
</tr>
<tr>
<th>Symbol</th>
<th>ETF Name</th>
<th>Mandate</th>
<th>Expense Ratio</th>
<th>Total Assets ($Million)</th>
<th>Average Volume (30 days)</th>
<th>Dividend Yield</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MOO" rel="noopener noreferrer">MOO</a></td>
<td>VanEck Agribusiness ETF</td>
<td>Selects <a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/play.asp#:~:text=A%20pure%2Dplay%20company%20is,business%20focus%20on%20selling%20coffee." rel="noopener noreferrer">pure-play</a> agribusiness stocks whose revenues are more than 50% derived from agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, cultivation, plantations, and trading of agricultural products</td>
<td>0.53%</td>
<td>$824</td>
<td>81.4k</td>
<td>3.15%</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=VEGI" rel="noopener noreferrer">VEGI</a></td>
<td>iShares MSCI Agriculture Producers ETF</td>
<td>Includes stocks of companies in both the developed and emerging markets involved in the production of fertilizers, agricultural chemicals and products, farm machinery, and parts, or in packaged food and meats</td>
<td>0.39%</td>
<td>$149</td>
<td>40.4k</td>
<td>2.70%</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FTAG" rel="noopener noreferrer">FTAG</a></td>
<td>First Trust Indxx Global Agriculture ETF</td>
<td>Consists of the following sub-industries: chemicals and fertilizers, seed manufacturers, irrigation equipment providers, and farm machinery companies. The portfolio also includes farmland companies, a unique feature in global agriculture.</td>
<td>0.70%</td>
<td>$9.4</td>
<td>3.0k</td>
<td>3.95%</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IVEG" rel="noopener noreferrer">IVEG</a></td>
<td>iShares Emergent Food and AgTech Multisector ETF</td>
<td>Tracks an index of companies that are expected to benefit from the integration of new agricultural technologies or food products or services</td>
<td>0.47%</td>
<td>$4.7</td>
<td>1.7k</td>
<td>2.18%</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=KROP" rel="noopener noreferrer">KROP</a></td>
<td>Global X AgTech & Food Innovation ETF</td>
<td>Passively invests in global companies working on advancing technologies in the agricultural and food industry spaces</td>
<td>0.50%</td>
<td>$4.4</td>
<td>4.8k</td>
<td>1.42%</td>
</tr>
</tbody>
</table>
<figcaption>Source: TradingView (figures as of Feb. 1, 2024)</figcaption>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Risks and Benefits of Agribusiness ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The primary advantage of these ETFs lies in their diversification within the stock market, tapping into the growth potential of agribusiness companies driven by global food demand and technological advances. Investors can expect more stability than direct commodity investments, as these ETFs are tied to the performance of established companies.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> However, they are not without risks, including 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> and sector- and company-specific issues. These ETFs are best suited for investors seeking exposure to the agricultural sector through a traditional stock market approach, combining the potential for growth with the stability of established companies.
</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-comparisonlist mntl-block" id="mntl-sc-block_33-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_34-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Agribusiness ETFs 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>Allow profiting from production, distribution, and processing</p></li>
<li><p>Diversification within the sector</p></li>
<li><p>Professionally managed portfolios</p></li>
</ul>
</div>
<div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Limited direct commodity exposure</p></li>
<li><p>Exposed to input cost inflation, food safety issues, and changing consumer preferences</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<span class="heading-toc" id="toc-agricultural-commodity-etfs"></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"> Agricultural Commodity ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The second type of agricultural ETF invests in agricultural commodities. These ETFs offer exposure to physical commodities like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/corn-soy-wheat-for-investors-8546787">corn, soybeans, wheat</a>, and cattle. Some invest directly in these commodities, but most use derivatives contracts such as futures and options to gain exposure. This approach allows investors to invest in the price moves of these commodities without the need to hold the physical goods.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/agriculture-etfs/.">Commodity-based agricultural ETFs</a> are an excellent tool for investors looking to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedge</a> against inflation or diversify their portfolios beyond traditional stocks and bonds. Since the performance of commodities is often not correlated to stock markets, they can provide a cushion during market downturns.
</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"> However, these ETFs also come with their own risks. Commodity prices can be extremely volatile, influenced by weather conditions, geopolitical tensions, and changes in supply and demand.<span class="ql-inline-citation" data-cite="7"></span> Additionally, investors need to be aware of the complexities of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> trading, such as the potential for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contango.asp">contango</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/backwardation.asp">backwardation</a> in the fund’s performance.
</p>
<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-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_43-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="6">Agricultural Commodity ETFs Compared</th>
</tr>
<tr>
<th>Symbol</th>
<th>ETF Name</th>
<th>Mandate</th>
<th>Expense Ratio</th>
<th>Total Assets ($Million)</th>
<th>Average Volume (30 days)</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="waffle-rich-text-link" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DBA" rel="noopener noreferrer">DBA</a></td>
<td>Invesco DB Agriculture Fund</td>
<td>Tracks an index of 10 agricultural commodity futures. This index includes corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle, and lean hogs.</td>
<td>0.93%</td>
<td>$698</td>
<td>535k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=WEAT" rel="noopener noreferrer">WEAT</a></td>
<td>Teucrium Wheat Fund</td>
<td>Tracks an index of wheat futures contracts, excluding front-month contracts</td>
<td>2.80%</td>
<td>$175</td>
<td>553k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CORN" rel="noopener noreferrer">CORN</a></td>
<td>Teucrium Corn Fund</td>
<td>Tracks an index of corn futures contracts, excluding front-month contracts</td>
<td>2.71%</td>
<td>$72</td>
<td>52k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SOYB" rel="noopener noreferrer">SOYB</a></td>
<td>Teucrium Soybean Fund</td>
<td>Tracks an index of soybean futures contracts, excluding front-month contracts</td>
<td>2.73%</td>
<td>$28</td>
<td>19k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CANE" rel="noopener noreferrer">CANE</a></td>
<td>Teucrium Sugar Fund</td>
<td>Tracks an index of sugarcane futures contracts, excluding front-month contracts</td>
<td>2.80%</td>
<td>$18</td>
<td>45k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TAGS" rel="noopener noreferrer">TAGS</a></td>
<td>Teucrium Agricultural Fund</td>
<td>A <a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundsoffunds.asp" rel="noopener noreferrer">fund of funds</a> that invests directly in the four Teucrium commodity funds. The fund rebalances daily to provide equal exposure to corn, wheat, sugar, and soybeans.</td>
<td>0.13%</td>
<td>$17.6</td>
<td>2.6k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=OAIA" rel="noopener noreferrer">OAIA</a></td>
<td>Teucrium AiLA Long-Short Agriculture Strategy ETF</td>
<td>Actively traded fund that provides broad long/short exposure to one to nine commodity futures contracts</td>
<td>1.63%</td>
<td>$5.5</td>
<td>1.7k</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TILL" rel="noopener noreferrer">TILL</a></td>
<td>Teucrium Agricultural Strategy No K-1 ETF</td>
<td>Actively managed portfolio that holds four agricultural commodities futures contracts: corn, wheat, soybeans, and sugar. The contract selection is at the fund advisor’s discretion.</td>
<td>1.03%</td>
<td>$2.8</td>
<td>1.27k</td>
</tr>
</tbody>
</table>
<figcaption>Source: TradingView (figures as of Feb. 1, 2024)</figcaption>
</div></figure>
<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"> Risks and Benefits of Agricultural Commodity ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Agricultural commodity ETFs offer more direct exposure to the commodities markets, specifically targeting agricultural products like grains, livestock, and related products. Their main benefit is providing a hedge against inflation and a diversification option that’s not typically correlated with the performance of the stock market. These ETFs can be attractive for their potential for high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/return.asp">returns</a>, especially during times of commodity scarcity or increased demand.
</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"> However, they come with inherent risks, such as high volatility because of weather conditions and geopolitical events. Additionally, the use of derivatives in these ETFs adds a layer of complexity and risk, including the effects of contango and backwardation.
</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"> Agricultural commodity ETFs are suitable for investors looking for direct exposure to the commodities market and willing to navigate the higher volatility for potentially greater returns.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_52-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_53-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Agricultural Commodity ETFs 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>More direct tracking of specific commodity prices</p></li>
<li><p>Easier than trading directly in the commodities or derivatives markets directly</p></li>
<li><p>Could be a more effective inflation hedge</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>Use derivatives, which can be complex and carry additional risks like contango and backwardation</p></li>
<li><p>Face more direct risks from bad weather, natural disasters, and sudden shifts in the supply and demand balance for the specific commodity</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<span class="heading-toc" id="toc-things-to-consider-when-investing-in-agriculture-etfs"></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"> Things to Consider When Investing in Agriculture ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Here are some key factors to consider when evaluating agricultural ETFs:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0">
<li><strong>Commodity exposure</strong>: Some agriculture ETFs focus on farming equipment, fertilizer producers, distributors, etc. Others directly or indirectly hold agricultural commodities. The latter tend to have more volatility.</li>
<li><strong>Global diversification</strong>: Look for ETFs exposed to agriculture across geographies, including emerging markets with strong population growth. This mitigates weather effects or natural disasters that can impact production or distribution.</li>
<li><strong>Supply chain positioning</strong>: ETFs focused on upstream producers face more weather risks vs. downstream processors and distributors with more diversified input sources.</li>
<li><strong><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">Dividend</a> potential</strong>: Some agribusiness companies offer attractive dividends that contribute to total returns. Commodities-based ETFs, however, do not pay dividends.</li>
<li><strong><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">Environmental, social, and governance (ESG)</a> criteria</strong>: Sustainable farming practices and other ESG criteria are increasingly important to many investors.</li>
<li><strong>Costs</strong>: Compare expense ratios between ETFs with similar exposures. All else equal, funds with higher <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> will eat more into net returns.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Liquidity</strong>: Check that an ETF has enough <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management</a>, reasonable <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">bid-ask spreads</a>, and daily trading volumes for easy purchases and sales.</li>
<li><strong>Index methods</strong>: Evaluate how the ETF’s <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying.asp">underlying</a> index is weighted among subsectors, market caps, geographies, etc.</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Incorporating these factors into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duediligence.asp">due diligence</a> will help identify well-structured agricultural ETFs suited to an investor’s specific objectives and risk tolerance. Periodic rebalancing is also recommended to maintain target allocations over time.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-subheading__text"> Tax Considerations </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Some commodity exchange-traded products are structured as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitedpartnership.asp">limited partnerships (LPs)</a>. Investors in these ETFs might receive a Schedule K-1 for tax purposes, which can complicate tax filings as LPs pass through their income, gains, losses, and deductions to their investors.<span class="ql-inline-citation" data-cite="8"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Investments in certain types of commodity ETFs could also generate “unrelated business taxable income,” which can be an issue for tax-exempt investors like individual retirement account (IRA) holders.<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_66-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Commodity ETFs that hold futures may generate income subject to the blended 60/40 tax rates applied to Section 1256 contracts. This blend aims to balance short- and long-term rates.<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_68-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Investing in commodities is complicated, and tax rules and laws are constantly changing. Always consult with your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxadvisor.asp">tax professional</a> for any questions about the taxation of ETFs.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div>
<span class="heading-toc" id="toc-investing-in-agricultural-etfs-vs-individual-agricultural-stocks-vs-agribusiness-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> Investing in Agricultural ETFs vs. Individual Agricultural Stocks vs. Agribusiness ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> This table offers a snapshot comparison of investing in individual agricultural stocks compared with agriculture commodity ETFs and agribusiness ETFs. When considering such an investment, it’s important to review each option in terms of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/">financial goals</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a>, and market conditions.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_74-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Aspect</b></th>
<th><b>Individual Agricultural Stocks</b></th>
<th><b>Agribusiness ETFs</b></th>
<th><b>Agricultural Commodity ETFs</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<th><b>Investment Focus</b></th>
<td>Specific agricultural companies</td>
<td>Range of companies in the agribusiness sector</td>
<td>Agricultural commodities directly or via derivatives</td>
</tr>
<tr>
<th><b>Diversification</b></th>
<td>Low, focused on individual companies</td>
<td>Higher, across various companies in the sector</td>
<td>Moderate, across different commodities</td>
</tr>
<tr>
<th><b>Market Exposure</b></th>
<td>Direct exposure to company performance</td>
<td>Exposure to the broader agribusiness sector</td>
<td>Exposure to commodity market dynamics</td>
</tr>
<tr>
<th><b>Volatility</b></th>
<td>Higher, subject to company-specific risks</td>
<td>Moderate, diversified across multiple stocks</td>
<td>High, subject to commodity market fluctuations</td>
</tr>
<tr>
<th><b>Potential for Growth</b></th>
<td>Depends on individual company growth</td>
<td>Depends on overall sector growth</td>
<td>Depends on commodity market trends</td>
</tr>
<tr>
<th><b>Complexity</b></th>
<td>Moderate, requires research on individual companies</td>
<td>Lower, due to managed portfolio</td>
<td>Higher, especially if ETF is using derivatives</td>
</tr>
<tr>
<th><b>Suitability</b></th>
<td>For investors with specific knowledge or interest in a company</td>
<td>For those seeking broad exposure to agribusiness</td>
<td>For those looking to invest directly in commodities</td>
</tr>
<tr>
<th><b>Risk Management</b></th>
<td>Requires active management and research</td>
<td>Generally lower risk due to diversification within the sector</td>
<td>Requires understanding of commodities and derivatives</td>
</tr>
<tr>
<th><b>Income Potential</b></th>
<td>Dividends from individual companies</td>
<td>Dividends based on the fund’s holdings</td>
<td>Typically does not focus on income generation</td>
</tr>
<tr>
<th><b>Liquidity</b></th>
<td>Varies based on the market involved</td>
<td>Generally high, as ETFs are traded like stocks</td>
<td>Generally moderate to high, but can vary based on the ETF</td>
</tr>
</tbody>
</table>
</div></figure>
<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-is-there-an-etf-that-invests-in-farmland"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is There an ETF that Invests in Farmland?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While there’s no specific ETF for investing exclusively in farmland, the First Trust Indxx Global Agriculture ETF (FTAG) comprises farmland companies and firms involved in chemicals and fertilizers, seeds, irrigation equipment, and farm machinery.<span class="ql-inline-citation" data-cite="1"></span> Other agribusiness or agricultural commodity ETFs like MOO or DBA can give indirect exposure to farmland through the crops they produce or the equipment that farms them. This is mainly because ETFs are structured to hold securities like stocks and bonds rather than direct land holdings.</p><p>That said, at least two <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate investment trusts (REITs)</a> hold primarily farmland. Like ETFs, REITs trade like shares on stock exchanges but own and manage real property on behalf of shareholders:</p><ul><li>Gladstone Land Corp. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LAND">LAND</a>): With farmland and farm facilities across the United States, primarily targeting fruit and vegetable cropland<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="3"></span></li><li>Farmland Partners Inc. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FPI">FPI</a>): Purchases, leases, and manages farmland throughout North America, comprising more than 178,000 acres<span class="ql-inline-citation" data-cite="12"></span></li></ul></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-are-agriculture-etfs-a-good-long-term-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Agriculture ETFs a Good Long-Term Investment?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Whether agriculture ETFs have been a good investment in the past often depends on the specific time frame and the type of ETF. Historically, agriculture as a sector has shown mixed results.</p><p>Their performance is closely tied to the agricultural commodities market, which can be highly volatile. Weather patterns, geopolitical events, global supply-demand dynamics, and economic trends significantly influence this sector. For instance, periods of commodity scarcity or booming global demand can lead to impressive returns, while oversupply or reduced demand can lead to underperformance.</p><p>Still, as the world population increases, so does the demand for food and related businesses. This fundamental need can drive long-term growth in the agriculture sector. Innovation in agricultural practices and sustainability measures can also boost productivity and efficiency in the industry, potentially benefiting agribusiness companies’ profitability.</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-is-agriculture-a-good-inflation-hedge"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Agriculture a Good Inflation Hedge?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Agriculture is often considered a good <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation-hedge.asp">hedge against inflation</a>, primarily because it involves tangible assets whose value can rise with increasing prices. The essential nature of agricultural products further ensures steady demand, which tends to remain resilient or even grow during inflationary periods, potentially leading to higher commodity prices.</p><p>Additionally, supply constraints in agriculture, such as limited land and water resources, can further elevate prices when demand outstrips supply, especially during inflation.</p><p>Research shows that agricultural products historically have had the highest correlation with inflation compared with energy and industrial commodities, with grain commodities like barley, oats, and wheat exhibiting especially high inflation hedging capacity over the centuries.</p><p>However, since the second half of the 20th century, the correlation between agricultural commodities and inflation fell from the 0.6 range to just around 0.2, while energy commodities became a more effective hedge. The declining hedging capacity of agricultural commodities over time was attributed to the rising importance of industrial and energy commodities and greater diversity in consumption baskets determining <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a>.<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_81-0"></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_82-0"> <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_83-0"> Investing in agricultural ETFs offers a balanced mix of risk and potential reward. It allows investors to tap into the vital agricultural sector’s growth while providing diversification to stabilize their portfolio.
</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"> Agribusiness ETFs invest in diversified portfolios of stocks related to the agriculture and farming industries, while commodities ETFs invest in one or more agricultural products like corn or wheat using derivatives contracts. Understanding the nuances, from expense ratios to global market influences, is key to making informed investment decisions in this field.
</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"> <em>The comments, opinions, and analyses expressed herein 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. While 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.</em>
</p></div> | ## What Are Agricultural ETFs?
Agricultural [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) offer a convenient way to gain exposure to the agricultural [sector](https://www.investopedia.com/terms/s/sector.asp). These funds track the performance of agricultural commodities, companies, and indexes.
Unlike buying individual commodities or stocks, investing in an agricultural ETF gives you a diversified [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) in this sector with shares that trade like stocks. These ETFs can provide a basket of different agricultural assets, from corn and wheat to companies specializing in farm equipment.
### Key Takeaways
* Agricultural exchange-traded funds (ETFs) expose investors to the agricultural sector and its potential for long-term growth.
* There are two types of agricultural ETFs: those for agribusiness stocks and those for sector-specific commodities.
* When investing in agricultural ETFs, you’ll need to review their expense ratios, liquidity, underlying assets, and performance history.
* Top agricultural ETFs include the Invesco DB Agriculture Fund (DBA), VanEck Vectors Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI).
## Understanding Agricultural ETFs
Agricultural ETFs work by pooling investor capital to buy a range of assets related to farming and agriculture. These ETFs then track the price movements of those assets.
When you invest in an agricultural ETF, you’re essentially buying shares in this portfolio. The value of your shares goes up or down with the fund’s performance. The fund is managed by authorized participants, who are there to ensure the ETF’s price reflects the value of its underlying assets.
There are two main types of agricultural ETFs:
1. Those that invest in the stocks of agribusiness companies listed on stock exchanges, known as agribusiness ETFs.
2. Those that invest in one or more agricultural commodities (either directly or indirectly using derivatives contracts).
## Agribusiness ETFs
The first type of agricultural ETF focuses on investing in the stocks of [agribusiness](https://www.investopedia.com/terms/a/agribusiness.asp) companies. These companies are involved in all or part of the agriculture [supply chain](https://www.investopedia.com/terms/s/supplychain.asp), including production, processing, distribution, and retail.
Investing in these ETFs exposes investors to seed and fertilizer manufacturers, farm machinery producers, food-processing companies, and large-scale farming operations. Agribusiness ETFs offer a way to invest in the business side of agriculture, leveraging the potential growth of these companies.
These ETFs typically track an index comprising agribusiness stocks. Investors benefit from the [diversification](https://www.investopedia.com/terms/d/diversification.asp) that these ETFs offer since they are not tied to the performance of a single company but the collective performance of several.
However, it’s important to note that investing in agribusiness stock ETFs also means exposure to [risks](https://www.investopedia.com/terms/r/risk.asp) typical in the stock market, including market volatility and company-specific risks. These ETFs generally suit investors who are interested in the agricultural sector’s growth potential but prefer publicly traded companies’ stability and established nature.
| Agribusiness ETFs Compared | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| Symbol | ETF Name | Mandate | Expense Ratio | Total Assets ($Million) | Average Volume (30 days) | Dividend Yield |
| [MOO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MOO) | VanEck Agribusiness ETF | Selects [pure-play](https://www.investopedia.com/terms/p/play.asp#:~:text=A%20pure%2Dplay%20company%20is,business%20focus%20on%20selling%20coffee.) agribusiness stocks whose revenues are more than 50% derived from agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, cultivation, plantations, and trading of agricultural products | 0.53% | $824 | 81.4k | 3.15% |
| [VEGI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=VEGI) | iShares MSCI Agriculture Producers ETF | Includes stocks of companies in both the developed and emerging markets involved in the production of fertilizers, agricultural chemicals and products, farm machinery, and parts, or in packaged food and meats | 0.39% | $149 | 40.4k | 2.70% |
| [FTAG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FTAG) | First Trust Indxx Global Agriculture ETF | Consists of the following sub-industries: chemicals and fertilizers, seed manufacturers, irrigation equipment providers, and farm machinery companies. The portfolio also includes farmland companies, a unique feature in global agriculture. | 0.70% | $9.4 | 3.0k | 3.95% |
| [IVEG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IVEG) | iShares Emergent Food and AgTech Multisector ETF | Tracks an index of companies that are expected to benefit from the integration of new agricultural technologies or food products or services | 0.47% | $4.7 | 1.7k | 2.18% |
| [KROP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=KROP) | Global X AgTech & Food Innovation ETF | Passively invests in global companies working on advancing technologies in the agricultural and food industry spaces | 0.50% | $4.4 | 4.8k | 1.42% |
Source: TradingView (figures as of Feb. 1, 2024)
### Risks and Benefits of Agribusiness ETFs
The primary advantage of these ETFs lies in their diversification within the stock market, tapping into the growth potential of agribusiness companies driven by global food demand and technological advances. Investors can expect more stability than direct commodity investments, as these ETFs are tied to the performance of established companies.
However, they are not without risks, including market [volatility](https://www.investopedia.com/terms/v/volatility.asp) and sector- and company-specific issues. These ETFs are best suited for investors seeking exposure to the agricultural sector through a traditional stock market approach, combining the potential for growth with the stability of established companies.
### Agribusiness ETFs Pros & Cons
Pros
* Allow profiting from production, distribution, and processing
* Diversification within the sector
* Professionally managed portfolios
Cons
* Limited direct commodity exposure
* Exposed to input cost inflation, food safety issues, and changing consumer preferences
## Agricultural Commodity ETFs
The second type of agricultural ETF invests in agricultural commodities. These ETFs offer exposure to physical commodities like [corn, soybeans, wheat](https://www.investopedia.com/corn-soy-wheat-for-investors-8546787), and cattle. Some invest directly in these commodities, but most use derivatives contracts such as futures and options to gain exposure. This approach allows investors to invest in the price moves of these commodities without the need to hold the physical goods.
[Commodity-based agricultural ETFs](https://www.investopedia.com/investing/agriculture-etfs/.) are an excellent tool for investors looking to [hedge](https://www.investopedia.com/terms/h/hedge.asp) against inflation or diversify their portfolios beyond traditional stocks and bonds. Since the performance of commodities is often not correlated to stock markets, they can provide a cushion during market downturns.
However, these ETFs also come with their own risks. Commodity prices can be extremely volatile, influenced by weather conditions, geopolitical tensions, and changes in supply and demand. Additionally, investors need to be aware of the complexities of [derivatives](https://www.investopedia.com/terms/d/derivative.asp) trading, such as the potential for [contango](https://www.investopedia.com/terms/c/contango.asp) and [backwardation](https://www.investopedia.com/terms/b/backwardation.asp) in the fund’s performance.
| Agricultural Commodity ETFs Compared | | | | | |
| --- | --- | --- | --- | --- | --- |
| Symbol | ETF Name | Mandate | Expense Ratio | Total Assets ($Million) | Average Volume (30 days) |
| [DBA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DBA) | Invesco DB Agriculture Fund | Tracks an index of 10 agricultural commodity futures. This index includes corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle, and lean hogs. | 0.93% | $698 | 535k |
| [WEAT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WEAT) | Teucrium Wheat Fund | Tracks an index of wheat futures contracts, excluding front-month contracts | 2.80% | $175 | 553k |
| [CORN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CORN) | Teucrium Corn Fund | Tracks an index of corn futures contracts, excluding front-month contracts | 2.71% | $72 | 52k |
| [SOYB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SOYB) | Teucrium Soybean Fund | Tracks an index of soybean futures contracts, excluding front-month contracts | 2.73% | $28 | 19k |
| [CANE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CANE) | Teucrium Sugar Fund | Tracks an index of sugarcane futures contracts, excluding front-month contracts | 2.80% | $18 | 45k |
| [TAGS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TAGS) | Teucrium Agricultural Fund | A [fund of funds](https://www.investopedia.com/terms/f/fundsoffunds.asp) that invests directly in the four Teucrium commodity funds. The fund rebalances daily to provide equal exposure to corn, wheat, sugar, and soybeans. | 0.13% | $17.6 | 2.6k |
| [OAIA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=OAIA) | Teucrium AiLA Long-Short Agriculture Strategy ETF | Actively traded fund that provides broad long/short exposure to one to nine commodity futures contracts | 1.63% | $5.5 | 1.7k |
| [TILL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TILL) | Teucrium Agricultural Strategy No K-1 ETF | Actively managed portfolio that holds four agricultural commodities futures contracts: corn, wheat, soybeans, and sugar. The contract selection is at the fund advisor’s discretion. | 1.03% | $2.8 | 1.27k |
Source: TradingView (figures as of Feb. 1, 2024)
### Risks and Benefits of Agricultural Commodity ETFs
Agricultural commodity ETFs offer more direct exposure to the commodities markets, specifically targeting agricultural products like grains, livestock, and related products. Their main benefit is providing a hedge against inflation and a diversification option that’s not typically correlated with the performance of the stock market. These ETFs can be attractive for their potential for high [returns](https://www.investopedia.com/terms/r/return.asp), especially during times of commodity scarcity or increased demand.
However, they come with inherent risks, such as high volatility because of weather conditions and geopolitical events. Additionally, the use of derivatives in these ETFs adds a layer of complexity and risk, including the effects of contango and backwardation.
Agricultural commodity ETFs are suitable for investors looking for direct exposure to the commodities market and willing to navigate the higher volatility for potentially greater returns.
### Agricultural Commodity ETFs Pros & Cons
Pros
* More direct tracking of specific commodity prices
* Easier than trading directly in the commodities or derivatives markets directly
* Could be a more effective inflation hedge
Cons
* Use derivatives, which can be complex and carry additional risks like contango and backwardation
* Face more direct risks from bad weather, natural disasters, and sudden shifts in the supply and demand balance for the specific commodity
## Things to Consider When Investing in Agriculture ETFs
Here are some key factors to consider when evaluating agricultural ETFs:
* **Commodity exposure**: Some agriculture ETFs focus on farming equipment, fertilizer producers, distributors, etc. Others directly or indirectly hold agricultural commodities. The latter tend to have more volatility.
* **Global diversification**: Look for ETFs exposed to agriculture across geographies, including emerging markets with strong population growth. This mitigates weather effects or natural disasters that can impact production or distribution.
* **Supply chain positioning**: ETFs focused on upstream producers face more weather risks vs. downstream processors and distributors with more diversified input sources.
* **[Dividend](https://www.investopedia.com/terms/d/dividend.asp) potential**: Some agribusiness companies offer attractive dividends that contribute to total returns. Commodities-based ETFs, however, do not pay dividends.
* **[Environmental, social, and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) criteria**: Sustainable farming practices and other ESG criteria are increasingly important to many investors.
* **Costs**: Compare expense ratios between ETFs with similar exposures. All else equal, funds with higher [expense ratios](https://www.investopedia.com/terms/e/expenseratio.asp) will eat more into net returns.
* **Liquidity**: Check that an ETF has enough [assets under management](https://www.investopedia.com/terms/a/aum.asp), reasonable [bid-ask spreads](https://www.investopedia.com/terms/b/bid-askspread.asp), and daily trading volumes for easy purchases and sales.
* **Index methods**: Evaluate how the ETF’s [underlying](https://www.investopedia.com/terms/u/underlying.asp) index is weighted among subsectors, market caps, geographies, etc.
Incorporating these factors into [due diligence](https://www.investopedia.com/terms/d/duediligence.asp) will help identify well-structured agricultural ETFs suited to an investor’s specific objectives and risk tolerance. Periodic rebalancing is also recommended to maintain target allocations over time.
### Tax Considerations
Some commodity exchange-traded products are structured as [limited partnerships (LPs)](https://www.investopedia.com/terms/l/limitedpartnership.asp). Investors in these ETFs might receive a Schedule K-1 for tax purposes, which can complicate tax filings as LPs pass through their income, gains, losses, and deductions to their investors.
Investments in certain types of commodity ETFs could also generate “unrelated business taxable income,” which can be an issue for tax-exempt investors like individual retirement account (IRA) holders.
Commodity ETFs that hold futures may generate income subject to the blended 60/40 tax rates applied to Section 1256 contracts. This blend aims to balance short- and long-term rates.
Investing in commodities is complicated, and tax rules and laws are constantly changing. Always consult with your [tax professional](https://www.investopedia.com/terms/t/taxadvisor.asp) for any questions about the taxation of ETFs.
## Investing in Agricultural ETFs vs. Individual Agricultural Stocks vs. Agribusiness ETFs
This table offers a snapshot comparison of investing in individual agricultural stocks compared with agriculture commodity ETFs and agribusiness ETFs. When considering such an investment, it’s important to review each option in terms of your [financial goals](https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/), [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), and market conditions.
| **Aspect** | **Individual Agricultural Stocks** | **Agribusiness ETFs** | **Agricultural Commodity ETFs** |
| --- | --- | --- | --- |
| **Investment Focus** | Specific agricultural companies | Range of companies in the agribusiness sector | Agricultural commodities directly or via derivatives |
| **Diversification** | Low, focused on individual companies | Higher, across various companies in the sector | Moderate, across different commodities |
| **Market Exposure** | Direct exposure to company performance | Exposure to the broader agribusiness sector | Exposure to commodity market dynamics |
| **Volatility** | Higher, subject to company-specific risks | Moderate, diversified across multiple stocks | High, subject to commodity market fluctuations |
| **Potential for Growth** | Depends on individual company growth | Depends on overall sector growth | Depends on commodity market trends |
| **Complexity** | Moderate, requires research on individual companies | Lower, due to managed portfolio | Higher, especially if ETF is using derivatives |
| **Suitability** | For investors with specific knowledge or interest in a company | For those seeking broad exposure to agribusiness | For those looking to invest directly in commodities |
| **Risk Management** | Requires active management and research | Generally lower risk due to diversification within the sector | Requires understanding of commodities and derivatives |
| **Income Potential** | Dividends from individual companies | Dividends based on the fund’s holdings | Typically does not focus on income generation |
| **Liquidity** | Varies based on the market involved | Generally high, as ETFs are traded like stocks | Generally moderate to high, but can vary based on the ETF |
## Is There an ETF that Invests in Farmland?
While there’s no specific ETF for investing exclusively in farmland, the First Trust Indxx Global Agriculture ETF (FTAG) comprises farmland companies and firms involved in chemicals and fertilizers, seeds, irrigation equipment, and farm machinery. Other agribusiness or agricultural commodity ETFs like MOO or DBA can give indirect exposure to farmland through the crops they produce or the equipment that farms them. This is mainly because ETFs are structured to hold securities like stocks and bonds rather than direct land holdings.
That said, at least two [real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp) hold primarily farmland. Like ETFs, REITs trade like shares on stock exchanges but own and manage real property on behalf of shareholders:
* Gladstone Land Corp. ([LAND](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LAND)): With farmland and farm facilities across the United States, primarily targeting fruit and vegetable cropland
* Farmland Partners Inc. ([FPI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FPI)): Purchases, leases, and manages farmland throughout North America, comprising more than 178,000 acres
## Are Agriculture ETFs a Good Long-Term Investment?
Whether agriculture ETFs have been a good investment in the past often depends on the specific time frame and the type of ETF. Historically, agriculture as a sector has shown mixed results.
Their performance is closely tied to the agricultural commodities market, which can be highly volatile. Weather patterns, geopolitical events, global supply-demand dynamics, and economic trends significantly influence this sector. For instance, periods of commodity scarcity or booming global demand can lead to impressive returns, while oversupply or reduced demand can lead to underperformance.
Still, as the world population increases, so does the demand for food and related businesses. This fundamental need can drive long-term growth in the agriculture sector. Innovation in agricultural practices and sustainability measures can also boost productivity and efficiency in the industry, potentially benefiting agribusiness companies’ profitability.
## Is Agriculture a Good Inflation Hedge?
Agriculture is often considered a good [hedge against inflation](https://www.investopedia.com/terms/i/inflation-hedge.asp), primarily because it involves tangible assets whose value can rise with increasing prices. The essential nature of agricultural products further ensures steady demand, which tends to remain resilient or even grow during inflationary periods, potentially leading to higher commodity prices.
Additionally, supply constraints in agriculture, such as limited land and water resources, can further elevate prices when demand outstrips supply, especially during inflation.
Research shows that agricultural products historically have had the highest correlation with inflation compared with energy and industrial commodities, with grain commodities like barley, oats, and wheat exhibiting especially high inflation hedging capacity over the centuries.
However, since the second half of the 20th century, the correlation between agricultural commodities and inflation fell from the 0.6 range to just around 0.2, while energy commodities became a more effective hedge. The declining hedging capacity of agricultural commodities over time was attributed to the rising importance of industrial and energy commodities and greater diversity in consumption baskets determining [inflation](https://www.investopedia.com/terms/i/inflation.asp).
## The Bottom Line
Investing in agricultural ETFs offers a balanced mix of risk and potential reward. It allows investors to tap into the vital agricultural sector’s growth while providing diversification to stabilize their portfolio.
Agribusiness ETFs invest in diversified portfolios of stocks related to the agriculture and farming industries, while commodities ETFs invest in one or more agricultural products like corn or wheat using derivatives contracts. Understanding the nuances, from expense ratios to global market influences, is key to making informed investment decisions in this field.
*The comments, opinions, and analyses expressed herein 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. While 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.*
| What Are Agricultural ETFs?
Agricultural exchange-traded funds (ETFs) offer a convenient way to gain exposure to the agricultural sector. These funds track the performance of agricultural commodities, companies, and indexes.
Unlike buying individual commodities or stocks, investing in an agricultural ETF gives you a diversified portfolio in this sector with shares that trade like stocks. These ETFs can provide a basket of different agricultural assets, from corn and wheat to companies specializing in farm equipment.
Key Takeaways
Agricultural exchange-traded funds (ETFs) expose investors to the agricultural sector and its potential for long-term growth.There are two types of agricultural ETFs: those for agribusiness stocks and those for sector-specific commodities.When investing in agricultural ETFs, you’ll need to review their expense ratios, liquidity, underlying assets, and performance history.Top agricultural ETFs include the Invesco DB Agriculture Fund (DBA), VanEck Vectors Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI).
Understanding Agricultural ETFs
Agricultural ETFs work by pooling investor capital to buy a range of assets related to farming and agriculture. These ETFs then track the price movements of those assets.
When you invest in an agricultural ETF, you’re essentially buying shares in this portfolio. The value of your shares goes up or down with the fund’s performance. The fund is managed by authorized participants, who are there to ensure the ETF’s price reflects the value of its underlying assets.
There are two main types of agricultural ETFs:
Those that invest in the stocks of agribusiness companies listed on stock exchanges, known as agribusiness ETFs.Those that invest in one or more agricultural commodities (either directly or indirectly using derivatives contracts).
Agribusiness ETFs
The first type of agricultural ETF focuses on investing in the stocks of agribusiness companies. These companies are involved in all or part of the agriculture supply chain, including production, processing, distribution, and retail.
Investing in these ETFs exposes investors to seed and fertilizer manufacturers, farm machinery producers, food-processing companies, and large-scale farming operations. Agribusiness ETFs offer a way to invest in the business side of agriculture, leveraging the potential growth of these companies.
These ETFs typically track an index comprising agribusiness stocks. Investors benefit from the diversification that these ETFs offer since they are not tied to the performance of a single company but the collective performance of several.
However, it’s important to note that investing in agribusiness stock ETFs also means exposure to risks typical in the stock market, including market volatility and company-specific risks. These ETFs generally suit investors who are interested in the agricultural sector’s growth potential but prefer publicly traded companies’ stability and established nature.
Agribusiness ETFs Compared
Symbol
ETF Name
Mandate
Expense Ratio
Total Assets ($Million)
Average Volume (30 days)
Dividend Yield
MOO
VanEck Agribusiness ETF
Selects pure-play agribusiness stocks whose revenues are more than 50% derived from agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, cultivation, plantations, and trading of agricultural products
0.53%
$824
81.4k
3.15%
VEGI
iShares MSCI Agriculture Producers ETF
Includes stocks of companies in both the developed and emerging markets involved in the production of fertilizers, agricultural chemicals and products, farm machinery, and parts, or in packaged food and meats
0.39%
$149
40.4k
2.70%
FTAG
First Trust Indxx Global Agriculture ETF
Consists of the following sub-industries: chemicals and fertilizers, seed manufacturers, irrigation equipment providers, and farm machinery companies. The portfolio also includes farmland companies, a unique feature in global agriculture.
0.70%
$9.4
3.0k
3.95%
IVEG
iShares Emergent Food and AgTech Multisector ETF
Tracks an index of companies that are expected to benefit from the integration of new agricultural technologies or food products or services
0.47%
$4.7
1.7k
2.18%
KROP
Global X AgTech & Food Innovation ETF
Passively invests in global companies working on advancing technologies in the agricultural and food industry spaces
0.50%
$4.4
4.8k
1.42%
Source: TradingView (figures as of Feb. 1, 2024)
Risks and Benefits of Agribusiness ETFs
The primary advantage of these ETFs lies in their diversification within the stock market, tapping into the growth potential of agribusiness companies driven by global food demand and technological advances. Investors can expect more stability than direct commodity investments, as these ETFs are tied to the performance of established companies.
However, they are not without risks, including market volatility and sector- and company-specific issues. These ETFs are best suited for investors seeking exposure to the agricultural sector through a traditional stock market approach, combining the potential for growth with the stability of established companies.
Agribusiness ETFs Pros & Cons
Pros
Allow profiting from production, distribution, and processing
Diversification within the sector
Professionally managed portfolios
Cons
Limited direct commodity exposure
Exposed to input cost inflation, food safety issues, and changing consumer preferences
Agricultural Commodity ETFs
The second type of agricultural ETF invests in agricultural commodities. These ETFs offer exposure to physical commodities like corn, soybeans, wheat, and cattle. Some invest directly in these commodities, but most use derivatives contracts such as futures and options to gain exposure. This approach allows investors to invest in the price moves of these commodities without the need to hold the physical goods.
Commodity-based agricultural ETFs are an excellent tool for investors looking to hedge against inflation or diversify their portfolios beyond traditional stocks and bonds. Since the performance of commodities is often not correlated to stock markets, they can provide a cushion during market downturns.
However, these ETFs also come with their own risks. Commodity prices can be extremely volatile, influenced by weather conditions, geopolitical tensions, and changes in supply and demand. Additionally, investors need to be aware of the complexities of derivatives trading, such as the potential for contango and backwardation in the fund’s performance.
Agricultural Commodity ETFs Compared
Symbol
ETF Name
Mandate
Expense Ratio
Total Assets ($Million)
Average Volume (30 days)
DBA
Invesco DB Agriculture Fund
Tracks an index of 10 agricultural commodity futures. This index includes corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle, and lean hogs.
0.93%
$698
535k
WEAT
Teucrium Wheat Fund
Tracks an index of wheat futures contracts, excluding front-month contracts
2.80%
$175
553k
CORN
Teucrium Corn Fund
Tracks an index of corn futures contracts, excluding front-month contracts
2.71%
$72
52k
SOYB
Teucrium Soybean Fund
Tracks an index of soybean futures contracts, excluding front-month contracts
2.73%
$28
19k
CANE
Teucrium Sugar Fund
Tracks an index of sugarcane futures contracts, excluding front-month contracts
2.80%
$18
45k
TAGS
Teucrium Agricultural Fund
A fund of funds that invests directly in the four Teucrium commodity funds. The fund rebalances daily to provide equal exposure to corn, wheat, sugar, and soybeans.
0.13%
$17.6
2.6k
OAIA
Teucrium AiLA Long-Short Agriculture Strategy ETF
Actively traded fund that provides broad long/short exposure to one to nine commodity futures contracts
1.63%
$5.5
1.7k
TILL
Teucrium Agricultural Strategy No K-1 ETF
Actively managed portfolio that holds four agricultural commodities futures contracts: corn, wheat, soybeans, and sugar. The contract selection is at the fund advisor’s discretion.
1.03%
$2.8
1.27k
Source: TradingView (figures as of Feb. 1, 2024)
Risks and Benefits of Agricultural Commodity ETFs
Agricultural commodity ETFs offer more direct exposure to the commodities markets, specifically targeting agricultural products like grains, livestock, and related products. Their main benefit is providing a hedge against inflation and a diversification option that’s not typically correlated with the performance of the stock market. These ETFs can be attractive for their potential for high returns, especially during times of commodity scarcity or increased demand.
However, they come with inherent risks, such as high volatility because of weather conditions and geopolitical events. Additionally, the use of derivatives in these ETFs adds a layer of complexity and risk, including the effects of contango and backwardation.
Agricultural commodity ETFs are suitable for investors looking for direct exposure to the commodities market and willing to navigate the higher volatility for potentially greater returns.
Agricultural Commodity ETFs Pros & Cons
Pros
More direct tracking of specific commodity prices
Easier than trading directly in the commodities or derivatives markets directly
Could be a more effective inflation hedge
Cons
Use derivatives, which can be complex and carry additional risks like contango and backwardation
Face more direct risks from bad weather, natural disasters, and sudden shifts in the supply and demand balance for the specific commodity
Things to Consider When Investing in Agriculture ETFs
Here are some key factors to consider when evaluating agricultural ETFs:
Commodity exposure: Some agriculture ETFs focus on farming equipment, fertilizer producers, distributors, etc. Others directly or indirectly hold agricultural commodities. The latter tend to have more volatility.
Global diversification: Look for ETFs exposed to agriculture across geographies, including emerging markets with strong population growth. This mitigates weather effects or natural disasters that can impact production or distribution.
Supply chain positioning: ETFs focused on upstream producers face more weather risks vs. downstream processors and distributors with more diversified input sources.
Dividend potential: Some agribusiness companies offer attractive dividends that contribute to total returns. Commodities-based ETFs, however, do not pay dividends.
Environmental, social, and governance (ESG) criteria: Sustainable farming practices and other ESG criteria are increasingly important to many investors.
Costs: Compare expense ratios between ETFs with similar exposures. All else equal, funds with higher expense ratios will eat more into net returns.
Liquidity: Check that an ETF has enough assets under management, reasonable bid-ask spreads, and daily trading volumes for easy purchases and sales.
Index methods: Evaluate how the ETF’s underlying index is weighted among subsectors, market caps, geographies, etc.
Incorporating these factors into due diligence will help identify well-structured agricultural ETFs suited to an investor’s specific objectives and risk tolerance. Periodic rebalancing is also recommended to maintain target allocations over time.
Tax Considerations
Some commodity exchange-traded products are structured as limited partnerships (LPs). Investors in these ETFs might receive a Schedule K-1 for tax purposes, which can complicate tax filings as LPs pass through their income, gains, losses, and deductions to their investors.
Investments in certain types of commodity ETFs could also generate “unrelated business taxable income,” which can be an issue for tax-exempt investors like individual retirement account (IRA) holders.
Commodity ETFs that hold futures may generate income subject to the blended 60/40 tax rates applied to Section 1256 contracts. This blend aims to balance short- and long-term rates.
Investing in commodities is complicated, and tax rules and laws are constantly changing. Always consult with your tax professional for any questions about the taxation of ETFs.
Investing in Agricultural ETFs vs. Individual Agricultural Stocks vs. Agribusiness ETFs
This table offers a snapshot comparison of investing in individual agricultural stocks compared with agriculture commodity ETFs and agribusiness ETFs. When considering such an investment, it’s important to review each option in terms of your financial goals, risk tolerance, and market conditions.
Aspect
Individual Agricultural Stocks
Agribusiness ETFs
Agricultural Commodity ETFs
Investment Focus
Specific agricultural companies
Range of companies in the agribusiness sector
Agricultural commodities directly or via derivatives
Diversification
Low, focused on individual companies
Higher, across various companies in the sector
Moderate, across different commodities
Market Exposure
Direct exposure to company performance
Exposure to the broader agribusiness sector
Exposure to commodity market dynamics
Volatility
Higher, subject to company-specific risks
Moderate, diversified across multiple stocks
High, subject to commodity market fluctuations
Potential for Growth
Depends on individual company growth
Depends on overall sector growth
Depends on commodity market trends
Complexity
Moderate, requires research on individual companies
Lower, due to managed portfolio
Higher, especially if ETF is using derivatives
Suitability
For investors with specific knowledge or interest in a company
For those seeking broad exposure to agribusiness
For those looking to invest directly in commodities
Risk Management
Requires active management and research
Generally lower risk due to diversification within the sector
Requires understanding of commodities and derivatives
Income Potential
Dividends from individual companies
Dividends based on the fund’s holdings
Typically does not focus on income generation
Liquidity
Varies based on the market involved
Generally high, as ETFs are traded like stocks
Generally moderate to high, but can vary based on the ETF
Is There an ETF that Invests in Farmland?
While there’s no specific ETF for investing exclusively in farmland, the First Trust Indxx Global Agriculture ETF (FTAG) comprises farmland companies and firms involved in chemicals and fertilizers, seeds, irrigation equipment, and farm machinery. Other agribusiness or agricultural commodity ETFs like MOO or DBA can give indirect exposure to farmland through the crops they produce or the equipment that farms them. This is mainly because ETFs are structured to hold securities like stocks and bonds rather than direct land holdings.That said, at least two real estate investment trusts (REITs) hold primarily farmland. Like ETFs, REITs trade like shares on stock exchanges but own and manage real property on behalf of shareholders:Gladstone Land Corp. (LAND): With farmland and farm facilities across the United States, primarily targeting fruit and vegetable croplandFarmland Partners Inc. (FPI): Purchases, leases, and manages farmland throughout North America, comprising more than 178,000 acres
Are Agriculture ETFs a Good Long-Term Investment?
Whether agriculture ETFs have been a good investment in the past often depends on the specific time frame and the type of ETF. Historically, agriculture as a sector has shown mixed results.Their performance is closely tied to the agricultural commodities market, which can be highly volatile. Weather patterns, geopolitical events, global supply-demand dynamics, and economic trends significantly influence this sector. For instance, periods of commodity scarcity or booming global demand can lead to impressive returns, while oversupply or reduced demand can lead to underperformance.Still, as the world population increases, so does the demand for food and related businesses. This fundamental need can drive long-term growth in the agriculture sector. Innovation in agricultural practices and sustainability measures can also boost productivity and efficiency in the industry, potentially benefiting agribusiness companies’ profitability.
Is Agriculture a Good Inflation Hedge?
Agriculture is often considered a good hedge against inflation, primarily because it involves tangible assets whose value can rise with increasing prices. The essential nature of agricultural products further ensures steady demand, which tends to remain resilient or even grow during inflationary periods, potentially leading to higher commodity prices.Additionally, supply constraints in agriculture, such as limited land and water resources, can further elevate prices when demand outstrips supply, especially during inflation.Research shows that agricultural products historically have had the highest correlation with inflation compared with energy and industrial commodities, with grain commodities like barley, oats, and wheat exhibiting especially high inflation hedging capacity over the centuries.However, since the second half of the 20th century, the correlation between agricultural commodities and inflation fell from the 0.6 range to just around 0.2, while energy commodities became a more effective hedge. The declining hedging capacity of agricultural commodities over time was attributed to the rising importance of industrial and energy commodities and greater diversity in consumption baskets determining inflation.
The Bottom Line
Investing in agricultural ETFs offers a balanced mix of risk and potential reward. It allows investors to tap into the vital agricultural sector’s growth while providing diversification to stabilize their portfolio.
Agribusiness ETFs invest in diversified portfolios of stocks related to the agriculture and farming industries, while commodities ETFs invest in one or more agricultural products like corn or wheat using derivatives contracts. Understanding the nuances, from expense ratios to global market influences, is key to making informed investment decisions in this field.
The comments, opinions, and analyses expressed herein 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. While 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/articles/personal-finance/082214/get-best-savings-interest-rates-you.asp | CDs vs. MMAs vs. Savings Accounts | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Choosing the right type of savings account can be confusing. Are you better off with a certificate of deposit (CD)? A traditional savings account? A money market account (MMA)? In some ways, these three types of savings accounts are similar.
</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"> They're all taxable accounts you can open at a bank or credit union, and are protected by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a> or <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>.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span> Each account has pros and cons, and the right choice will be different depending on how much money you have and your personal needs.
</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>MMAs and CDs both offer higher interest rates than traditional savings accounts on average, but the best savings account rates are competitive.</li><li>MMAs typically have higher initial deposit and monthly balance requirements than savings accounts.</li><li>CDs require that you leave your money untouched for a fixed amount of time.</li><li>The right choice for you depends on how frequently you need to access your savings, how much you have to save, and your financial goals.</li></ul></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_7-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">Comparison: Average Features of Accounts for Saving</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td> </td>
<td> Savings Accounts</td>
<td>Money Market Accounts </td>
<td>Certificates of Deposit</td>
</tr>
<tr>
<td>Average interest rates</td>
<td>Lower</td>
<td>Higher</td>
<td>Highest</td>
</tr>
<tr>
<td>Rate type</td>
<td>Variable</td>
<td>Variable</td>
<td>Fixed</td>
</tr>
<tr>
<td>FDIC or NCUA insured for up to $250,000</td>
<td>Yes</td>
<td>Yes</td>
<td>Yes</td>
</tr>
<tr>
<td>On-demand partial or full deposits and withdrawals</td>
<td>Yes</td>
<td>Yes</td>
<td>No</td>
</tr>
<tr>
<td>Check-writing privileges</td>
<td>No</td>
<td>Yes</td>
<td>No</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<span class="heading-toc" id="toc-savings-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"> Savings Accounts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> These simple accounts are one of the most basic ways to bank your money. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings account</a> is a good choice for a young person’s first bank account or anyone needing easy cash access.
</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"> Most banks don’t require a large deposit to open a savings account. Often, $25 is sufficient. You may need to keep a minimum balance in the account to avoid a monthly fee, ranging from $25 to $1,000, depending on the bank and the account. You may be given an ATM card to make withdrawals but could also be limited in how often you can use the card, and must be careful not to go below the minimum balance required.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> If your savings and checking accounts are with the same bank, you'll likely be able to quickly transfer money between the accounts or use your savings account for overdraft protection. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/linked-savings-account.asp">linked savings account</a> makes moving cash from savings to checking especially easy. However, some banks and credit unions may charge a fee for such a transfer.<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"> On average, you usually won’t earn that much interest—savings account rates are lower, on average, compared to most other savings vehicles.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> However, some exceptions exist. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings account</a> (HYSA) usually offers significantly higher interest rates. These are typically at online-only banks and offer some of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best savings account rates</a> that beat even money market account rates. There are no federal restrictions on how many accounts or banks you store your money in.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<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"> Who Savings Accounts Are Good for </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li>Students and children beginning their relationship with a bank</li><li>Anyone who wants unfettered access to their cash without penalty</li><li>Savers who worry a money market account's check-writing feature may be too tempting</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_24-0"> <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>Can open a basic savings account with a small amount</p></li>
<li><p>Often no fees charged if you maintain a minimum balance</p></li>
<li><p>Easy to transfer money to a linked checking account</p></li>
<li><p>FDIC or NCUA protected for up to $250,000</p></li>
</ul>
</div>
<div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Lower interest rates on average compared to all other savings vehicles</p></li>
<li><p>Getting the best rate may require shopping around for a new bank or credit union</p></li>
<li><p>Low interest rates may not keep up with inflation</p></li>
<li><p>High-yield savings accounts may feature extra requirements</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<span class="heading-toc" id="toc-money-market-accounts-mmas"></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"> Money Market Accounts (MMAs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Banks and credit unions also offer another type of savings account, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market account (MMA)</a>. MMAs are similar to traditional savings accounts but offer higher interest rates, on average.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> However, there can be a few catches. You may also need a larger deposit to open the account—$1,000 is common—and maintain a higher balance to avoid fees.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> A money market account can require a higher deposit amount to earn<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917"> a higher interest rate</a>.<span class="ql-inline-citation" data-cite="5"></span> Unlike traditional savings accounts, which pay a flat annual interest rate, many MMAs have a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tiered-rate-account.asp">tiered interest rate</a>, with higher rates for larger balances. This makes them desirable if you can maintain a high daily account balance.
</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>Money market accounts are not the same as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-marketfund.asp">money market mutual funds</a>, which are a type of low-volatility, lower-risk investment vehicle.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> MMAs also offer the ability to write checks from the account or use an ATM card for withdrawals and payments. However, because the institution may limit your transactions and withdrawals, a money market account isn't as suitable for daily expenses as a checking account.
</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"> Money market accounts differ widely—you'll need to closely review terms and account disclosures. The MMA offered by your credit union or bank may not offer tiered savings, minimum balances, or monthly fees.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Who MMAs Are Good for </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <li>Individuals with large amounts of cash to deposit </li><li>People who want the ability to write checks from their money market account</li><li>Individuals who want to save emergency funds in an account earning higher interest, on average </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-comparisonlist mntl-block" id="mntl-sc-block_42-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_43-0"> <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>Higher interest rates than a traditional savings account</p></li>
<li><p>Often have the ability to write checks</p></li>
<li><p>No-penalty withdrawals and additions</p></li>
<li><p>FDIC or NCUA protected for up to $250,000</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>Higher balance needed to avoid monthly fees</p></li>
<li><p>Potential limits on the number of monthly withdrawals</p></li>
<li><p>Lower interest rates if balance drops out of higher tiers</p></li>
</ul>
</div>
</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-certificates-of-deposit-cds"></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"> Certificates of Deposit (CDs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> When opening 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> account, you allow the bank to use a lump sum of your money for a fixed period—as short as a month or as long as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-10-year-cd-rates-4783528">ten years</a>, as you choose. At the maturity date, you can withdraw your funds and close the account or renew the CD at current rates.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> CD interest rates can be higher than for traditional savings accounts or MMAs. CDs can therefore be desirable for savers making large deposits without needing access to the money during the CD’s term. CDs are FDIC-or NCUA-insured for up to $250,000.<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_49-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> However, there's a trade-off. You will face a steep fine for early withdrawals, typically several months' interest. You usually can't add to your CD, although some banks and credit unions offer CDs with this option.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_52-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_53-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646">types of specialized CDs</a> available can be overwhelming at times. Types include:</p>
<p><br/></p>
<ul>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp">No-penalty CDs</a>: No penalty for early withdrawal.</li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169">Add-on CDs</a>: You can add amounts to your CD.</li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bumpupcd.asp">Bump-up</a>, raise-your-rate or <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/step-up-certificate-of-deposit-5271710">step-up CDs</a>: CDs with rates that can increase if interest rates go up.</li>
</ul>
<p><br/></p>
<p>The tradeoff for these CD types is often a lower interest rate and fewer term choices compared to the most-competitive, most-restrictive rates.<br/></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> While many institutions offer CDs with a $0 opening balance, the best CD rates can often be found with institutions requiring larger deposits, ranging from $500 to $10,000.
</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"> As with MMAs, higher balances on CDs tend to offer higher rates. CDs generally have fixed interest rates, which could leave you stuck at a lower interest rate if overall rates keep increasing.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> The particular bank and term length you choose can significantly impact your interest rate. Shop around to find <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">the top CD rates</a>, which change frequently.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_60-0"> <span class="mntl-sc-block-subheading__text"> Who CDs Are Good for </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0">
<li>Individuals who don't need access to any portion of funds for several months to several years </li>
<li>Those who don't want to add to their savings bucket over time</li>
<li>Larger (or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/jumbocd.asp">jumbo</a>) CDs often get higher interest rates, so individuals with a larger deposit amount will see a better return</li>
</ul>
<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-comparisonlist mntl-block" id="mntl-sc-block_63-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_64-0"> <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>Higher average interest rates than traditional savings accounts or MMAs</p></li>
<li><p>FDIC or NCUA protected for up to $250,000 per depositor per institution</p></li>
<li><p>Easy to open online, with plenty of terms and types available, including bump-up and variable-rate CDs</p></li>
</ul>
</div>
<div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Cons</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Steep penalties for early withdrawals in some cases and no partial withdrawals</p></li>
<li><p>A fixed interest rate could prevent benefiting from future interest rate increases</p></li>
<li><p>Remembering to manage your CD at maturity could take some work</p></li>
</ul>
</div>
</div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-what-are-the-main-differences-between-cds-and-mmas"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Main Differences Between CDs and MMAs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>MMAs are similar to traditional savings accounts but often require a large deposit to open the account, such as $1,000. You can add to or withdraw from your MMA. A high minimum balance can help you avoid fees and provide for higher interest rates than savings accounts. CDs require owners to leave their money untouched for a fixed amount of time and usually pay higher rates than MMAs. Penalties for early withdrawal are steep and effectively close the account.<br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-who-should-be-investing-in-mmas-or-cds"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Should Be Investing in MMAs or CDs?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>MMAs are good for those with large amounts of cash to deposit, but not needing daily or weekly access to those funds. MMAs can also be for those adding to their accounts. CDs can be better for those who want to lock up funds for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-month-cd-rates-5272288">several months</a> to several years at a time. By doing so, CD account holders save at higher interest rates for a time-defined, specific goal—such as a car or home in 12 to 18 months</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_70-0"><span class="heading-toc" id="toc-which-is-more-liquid-a-cd-or-a-money-market-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Is More Liquid: A CD or a Money Market Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In general, a money market account is more liquid than a CD. In fact, most CDs have early withdrawal penalties, while money markets do not. That said, a CD will often pay a higher interest rate, because your funds are committed to that bank or credit union. Some no-penalty CD types don't come with fees, but you may earn a lower interest rate.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></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_72-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:67.5%;">
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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>
</figcaption></figure>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_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"> When deciding if a traditional savings account, MMA, or CD is best for you, you’ll need to consider how much you can deposit initially, how frequently you need access to your savings, and how much you’d like to earn in interest. Due to competition among some financial institutions for deposits, you may find higher rates in surprising places—whether as a CD, high-yield savings account, or money market account—and not necessarily at your current bank or credit union.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> If you need money for bills or emergencies or want to add to your funds, a traditional savings account or MMA is the best choice. If you can afford to leave a larger sum of money untouched for a long stretch of time, a CD may be the better option.
</p></div> | Choosing the right type of savings account can be confusing. Are you better off with a certificate of deposit (CD)? A traditional savings account? A money market account (MMA)? In some ways, these three types of savings accounts are similar.
They're all taxable accounts you can open at a bank or credit union, and are protected by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) or [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp). Each account has pros and cons, and the right choice will be different depending on how much money you have and your personal needs.
### Key Takeaways
* MMAs and CDs both offer higher interest rates than traditional savings accounts on average, but the best savings account rates are competitive.
* MMAs typically have higher initial deposit and monthly balance requirements than savings accounts.
* CDs require that you leave your money untouched for a fixed amount of time.
* The right choice for you depends on how frequently you need to access your savings, how much you have to save, and your financial goals.
| Comparison: Average Features of Accounts for Saving | | | |
| --- | --- | --- | --- |
| | Savings Accounts | Money Market Accounts | Certificates of Deposit |
| Average interest rates | Lower | Higher | Highest |
| Rate type | Variable | Variable | Fixed |
| FDIC or NCUA insured for up to $250,000 | Yes | Yes | Yes |
| On-demand partial or full deposits and withdrawals | Yes | Yes | No |
| Check-writing privileges | No | Yes | No |
## Savings Accounts
These simple accounts are one of the most basic ways to bank your money. A [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp) is a good choice for a young person’s first bank account or anyone needing easy cash access.
Most banks don’t require a large deposit to open a savings account. Often, $25 is sufficient. You may need to keep a minimum balance in the account to avoid a monthly fee, ranging from $25 to $1,000, depending on the bank and the account. You may be given an ATM card to make withdrawals but could also be limited in how often you can use the card, and must be careful not to go below the minimum balance required.
If your savings and checking accounts are with the same bank, you'll likely be able to quickly transfer money between the accounts or use your savings account for overdraft protection. A [linked savings account](https://www.investopedia.com/terms/l/linked-savings-account.asp) makes moving cash from savings to checking especially easy. However, some banks and credit unions may charge a fee for such a transfer.
On average, you usually won’t earn that much interest—savings account rates are lower, on average, compared to most other savings vehicles.
However, some exceptions exist. A [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) (HYSA) usually offers significantly higher interest rates. These are typically at online-only banks and offer some of the [best savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) that beat even money market account rates. There are no federal restrictions on how many accounts or banks you store your money in.
### Who Savings Accounts Are Good for
* Students and children beginning their relationship with a bank
* Anyone who wants unfettered access to their cash without penalty
* Savers who worry a money market account's check-writing feature may be too tempting
Pros
* Can open a basic savings account with a small amount
* Often no fees charged if you maintain a minimum balance
* Easy to transfer money to a linked checking account
* FDIC or NCUA protected for up to $250,000
Cons
* Lower interest rates on average compared to all other savings vehicles
* Getting the best rate may require shopping around for a new bank or credit union
* Low interest rates may not keep up with inflation
* High-yield savings accounts may feature extra requirements
## Money Market Accounts (MMAs)
Banks and credit unions also offer another type of savings account, the [money market account (MMA)](https://www.investopedia.com/terms/m/moneymarketaccount.asp). MMAs are similar to traditional savings accounts but offer higher interest rates, on average.
However, there can be a few catches. You may also need a larger deposit to open the account—$1,000 is common—and maintain a higher balance to avoid fees.
A money market account can require a higher deposit amount to earn [a higher interest rate](https://www.investopedia.com/best-money-market-accounts-5096917). Unlike traditional savings accounts, which pay a flat annual interest rate, many MMAs have a [tiered interest rate](https://www.investopedia.com/terms/t/tiered-rate-account.asp), with higher rates for larger balances. This makes them desirable if you can maintain a high daily account balance.
###
Money market accounts are not the same as [money market mutual funds](https://www.investopedia.com/terms/m/money-marketfund.asp), which are a type of low-volatility, lower-risk investment vehicle.
MMAs also offer the ability to write checks from the account or use an ATM card for withdrawals and payments. However, because the institution may limit your transactions and withdrawals, a money market account isn't as suitable for daily expenses as a checking account.
Money market accounts differ widely—you'll need to closely review terms and account disclosures. The MMA offered by your credit union or bank may not offer tiered savings, minimum balances, or monthly fees.
### Who MMAs Are Good for
* Individuals with large amounts of cash to deposit
* People who want the ability to write checks from their money market account
* Individuals who want to save emergency funds in an account earning higher interest, on average
Pros
* Higher interest rates than a traditional savings account
* Often have the ability to write checks
* No-penalty withdrawals and additions
* FDIC or NCUA protected for up to $250,000
Cons
* Higher balance needed to avoid monthly fees
* Potential limits on the number of monthly withdrawals
* Lower interest rates if balance drops out of higher tiers
## Certificates of Deposit (CDs)
When opening a [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) account, you allow the bank to use a lump sum of your money for a fixed period—as short as a month or as long as [ten years](https://www.investopedia.com/best-10-year-cd-rates-4783528), as you choose. At the maturity date, you can withdraw your funds and close the account or renew the CD at current rates.
CD interest rates can be higher than for traditional savings accounts or MMAs. CDs can therefore be desirable for savers making large deposits without needing access to the money during the CD’s term. CDs are FDIC-or NCUA-insured for up to $250,000.
However, there's a trade-off. You will face a steep fine for early withdrawals, typically several months' interest. You usually can't add to your CD, although some banks and credit unions offer CDs with this option.
###
The [types of specialized CDs](https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646) available can be overwhelming at times. Types include:
* [No-penalty CDs](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp): No penalty for early withdrawal.
* [Add-on CDs](https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169): You can add amounts to your CD.
* [Bump-up](https://www.investopedia.com/terms/b/bumpupcd.asp), raise-your-rate or [step-up CDs](https://www.investopedia.com/step-up-certificate-of-deposit-5271710): CDs with rates that can increase if interest rates go up.
The tradeoff for these CD types is often a lower interest rate and fewer term choices compared to the most-competitive, most-restrictive rates.
While many institutions offer CDs with a $0 opening balance, the best CD rates can often be found with institutions requiring larger deposits, ranging from $500 to $10,000.
As with MMAs, higher balances on CDs tend to offer higher rates. CDs generally have fixed interest rates, which could leave you stuck at a lower interest rate if overall rates keep increasing.
The particular bank and term length you choose can significantly impact your interest rate. Shop around to find [the top CD rates](https://www.investopedia.com/best-cd-rates-4770214), which change frequently.
### Who CDs Are Good for
* Individuals who don't need access to any portion of funds for several months to several years
* Those who don't want to add to their savings bucket over time
* Larger (or [jumbo](https://www.investopedia.com/terms/j/jumbocd.asp)) CDs often get higher interest rates, so individuals with a larger deposit amount will see a better return
Pros
* Higher average interest rates than traditional savings accounts or MMAs
* FDIC or NCUA protected for up to $250,000 per depositor per institution
* Easy to open online, with plenty of terms and types available, including bump-up and variable-rate CDs
Cons
* Steep penalties for early withdrawals in some cases and no partial withdrawals
* A fixed interest rate could prevent benefiting from future interest rate increases
* Remembering to manage your CD at maturity could take some work
## What Are the Main Differences Between CDs and MMAs?
MMAs are similar to traditional savings accounts but often require a large deposit to open the account, such as $1,000. You can add to or withdraw from your MMA. A high minimum balance can help you avoid fees and provide for higher interest rates than savings accounts. CDs require owners to leave their money untouched for a fixed amount of time and usually pay higher rates than MMAs. Penalties for early withdrawal are steep and effectively close the account.
## Who Should Be Investing in MMAs or CDs?
MMAs are good for those with large amounts of cash to deposit, but not needing daily or weekly access to those funds. MMAs can also be for those adding to their accounts. CDs can be better for those who want to lock up funds for [several months](https://www.investopedia.com/best-3-month-cd-rates-5272288) to several years at a time. By doing so, CD account holders save at higher interest rates for a time-defined, specific goal—such as a car or home in 12 to 18 months
## Which Is More Liquid: A CD or a Money Market Account?
In general, a money market account is more liquid than a CD. In fact, most CDs have early withdrawal penalties, while money markets do not. That said, a CD will often pay a higher interest rate, because your funds are committed to that bank or credit union. Some no-penalty CD types don't come with fees, but you may earn a lower interest rate.
![CDs vs. MMAs vs. Savings Accounts]()
:max_bytes(150000):strip_icc()/get-best-savings-interest-rates-you.asp-final-cfe36548c2c94dc997bd585fa879de67.png)
Investopedia / Zoe Hansen
## The Bottom Line
When deciding if a traditional savings account, MMA, or CD is best for you, you’ll need to consider how much you can deposit initially, how frequently you need access to your savings, and how much you’d like to earn in interest. Due to competition among some financial institutions for deposits, you may find higher rates in surprising places—whether as a CD, high-yield savings account, or money market account—and not necessarily at your current bank or credit union.
If you need money for bills or emergencies or want to add to your funds, a traditional savings account or MMA is the best choice. If you can afford to leave a larger sum of money untouched for a long stretch of time, a CD may be the better option.
| Choosing the right type of savings account can be confusing. Are you better off with a certificate of deposit (CD)? A traditional savings account? A money market account (MMA)? In some ways, these three types of savings accounts are similar.
They're all taxable accounts you can open at a bank or credit union, and are protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Each account has pros and cons, and the right choice will be different depending on how much money you have and your personal needs.
Key Takeaways
MMAs and CDs both offer higher interest rates than traditional savings accounts on average, but the best savings account rates are competitive.MMAs typically have higher initial deposit and monthly balance requirements than savings accounts.CDs require that you leave your money untouched for a fixed amount of time.The right choice for you depends on how frequently you need to access your savings, how much you have to save, and your financial goals.
Comparison: Average Features of Accounts for Saving
Savings Accounts
Money Market Accounts
Certificates of Deposit
Average interest rates
Lower
Higher
Highest
Rate type
Variable
Variable
Fixed
FDIC or NCUA insured for up to $250,000
Yes
Yes
Yes
On-demand partial or full deposits and withdrawals
Yes
Yes
No
Check-writing privileges
No
Yes
No
Savings Accounts
These simple accounts are one of the most basic ways to bank your money. A savings account is a good choice for a young person’s first bank account or anyone needing easy cash access.
Most banks don’t require a large deposit to open a savings account. Often, $25 is sufficient. You may need to keep a minimum balance in the account to avoid a monthly fee, ranging from $25 to $1,000, depending on the bank and the account. You may be given an ATM card to make withdrawals but could also be limited in how often you can use the card, and must be careful not to go below the minimum balance required.
If your savings and checking accounts are with the same bank, you'll likely be able to quickly transfer money between the accounts or use your savings account for overdraft protection. A linked savings account makes moving cash from savings to checking especially easy. However, some banks and credit unions may charge a fee for such a transfer.
On average, you usually won’t earn that much interest—savings account rates are lower, on average, compared to most other savings vehicles.
However, some exceptions exist. A high-yield savings account (HYSA) usually offers significantly higher interest rates. These are typically at online-only banks and offer some of the best savings account rates that beat even money market account rates. There are no federal restrictions on how many accounts or banks you store your money in.
Who Savings Accounts Are Good for
Students and children beginning their relationship with a bankAnyone who wants unfettered access to their cash without penaltySavers who worry a money market account's check-writing feature may be too tempting
Pros
Can open a basic savings account with a small amount
Often no fees charged if you maintain a minimum balance
Easy to transfer money to a linked checking account
FDIC or NCUA protected for up to $250,000
Cons
Lower interest rates on average compared to all other savings vehicles
Getting the best rate may require shopping around for a new bank or credit union
Low interest rates may not keep up with inflation
High-yield savings accounts may feature extra requirements
Money Market Accounts (MMAs)
Banks and credit unions also offer another type of savings account, the money market account (MMA). MMAs are similar to traditional savings accounts but offer higher interest rates, on average.
However, there can be a few catches. You may also need a larger deposit to open the account—$1,000 is common—and maintain a higher balance to avoid fees.
A money market account can require a higher deposit amount to earn a higher interest rate. Unlike traditional savings accounts, which pay a flat annual interest rate, many MMAs have a tiered interest rate, with higher rates for larger balances. This makes them desirable if you can maintain a high daily account balance.
Money market accounts are not the same as money market mutual funds, which are a type of low-volatility, lower-risk investment vehicle.
MMAs also offer the ability to write checks from the account or use an ATM card for withdrawals and payments. However, because the institution may limit your transactions and withdrawals, a money market account isn't as suitable for daily expenses as a checking account.
Money market accounts differ widely—you'll need to closely review terms and account disclosures. The MMA offered by your credit union or bank may not offer tiered savings, minimum balances, or monthly fees.
Who MMAs Are Good for
Individuals with large amounts of cash to deposit People who want the ability to write checks from their money market accountIndividuals who want to save emergency funds in an account earning higher interest, on average
Pros
Higher interest rates than a traditional savings account
Often have the ability to write checks
No-penalty withdrawals and additions
FDIC or NCUA protected for up to $250,000
Cons
Higher balance needed to avoid monthly fees
Potential limits on the number of monthly withdrawals
Lower interest rates if balance drops out of higher tiers
Certificates of Deposit (CDs)
When opening a certificate of deposit (CD) account, you allow the bank to use a lump sum of your money for a fixed period—as short as a month or as long as ten years, as you choose. At the maturity date, you can withdraw your funds and close the account or renew the CD at current rates.
CD interest rates can be higher than for traditional savings accounts or MMAs. CDs can therefore be desirable for savers making large deposits without needing access to the money during the CD’s term. CDs are FDIC-or NCUA-insured for up to $250,000.
However, there's a trade-off. You will face a steep fine for early withdrawals, typically several months' interest. You usually can't add to your CD, although some banks and credit unions offer CDs with this option.
The types of specialized CDs available can be overwhelming at times. Types include:
No-penalty CDs: No penalty for early withdrawal.
Add-on CDs: You can add amounts to your CD.
Bump-up, raise-your-rate or step-up CDs: CDs with rates that can increase if interest rates go up.
The tradeoff for these CD types is often a lower interest rate and fewer term choices compared to the most-competitive, most-restrictive rates.
While many institutions offer CDs with a $0 opening balance, the best CD rates can often be found with institutions requiring larger deposits, ranging from $500 to $10,000.
As with MMAs, higher balances on CDs tend to offer higher rates. CDs generally have fixed interest rates, which could leave you stuck at a lower interest rate if overall rates keep increasing.
The particular bank and term length you choose can significantly impact your interest rate. Shop around to find the top CD rates, which change frequently.
Who CDs Are Good for
Individuals who don't need access to any portion of funds for several months to several years
Those who don't want to add to their savings bucket over time
Larger (or jumbo) CDs often get higher interest rates, so individuals with a larger deposit amount will see a better return
Pros
Higher average interest rates than traditional savings accounts or MMAs
FDIC or NCUA protected for up to $250,000 per depositor per institution
Easy to open online, with plenty of terms and types available, including bump-up and variable-rate CDs
Cons
Steep penalties for early withdrawals in some cases and no partial withdrawals
A fixed interest rate could prevent benefiting from future interest rate increases
Remembering to manage your CD at maturity could take some work
What Are the Main Differences Between CDs and MMAs?
MMAs are similar to traditional savings accounts but often require a large deposit to open the account, such as $1,000. You can add to or withdraw from your MMA. A high minimum balance can help you avoid fees and provide for higher interest rates than savings accounts. CDs require owners to leave their money untouched for a fixed amount of time and usually pay higher rates than MMAs. Penalties for early withdrawal are steep and effectively close the account.
Who Should Be Investing in MMAs or CDs?
MMAs are good for those with large amounts of cash to deposit, but not needing daily or weekly access to those funds. MMAs can also be for those adding to their accounts. CDs can be better for those who want to lock up funds for several months to several years at a time. By doing so, CD account holders save at higher interest rates for a time-defined, specific goal—such as a car or home in 12 to 18 months
Which Is More Liquid: A CD or a Money Market Account?
In general, a money market account is more liquid than a CD. In fact, most CDs have early withdrawal penalties, while money markets do not. That said, a CD will often pay a higher interest rate, because your funds are committed to that bank or credit union. Some no-penalty CD types don't come with fees, but you may earn a lower interest rate.
Investopedia / Zoe Hansen
The Bottom Line
When deciding if a traditional savings account, MMA, or CD is best for you, you’ll need to consider how much you can deposit initially, how frequently you need access to your savings, and how much you’d like to earn in interest. Due to competition among some financial institutions for deposits, you may find higher rates in surprising places—whether as a CD, high-yield savings account, or money market account—and not necessarily at your current bank or credit union.
If you need money for bills or emergencies or want to add to your funds, a traditional savings account or MMA is the best choice. If you can afford to leave a larger sum of money untouched for a long stretch of time, a CD may be the better option.
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"tiered interest rate",
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https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/ | How Much Do I Need to Save to Retire? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 key part of retirement planning is to answer the question: How much do I need to save to retire? The answer varies by individual, and it depends largely on your income now and the lifestyle you want and can afford in retirement.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Knowing how much you need to save based on how old you are now is just the first step, but it starts you on the path to help you reach your retirement goals. There are a few simple formulas that you can use to come up with the numbers.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>How much you need to save for retirement depends on your current income and the lifestyle you want when you retire.</li><li>Knowing how much you need to save “by age” can help you stay on track and reach your retirement goals.</li><li>Coming up with specific amounts involves using some easy formulas.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-much-do-i-need-to-save-to-retire"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> How Much Do I Need to Save to Retire? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Many retirement experts recommend strategies such as saving 10 times your pre-retirement salary and planning on living on 80% of your pre-retirement annual income.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> This amount can be adjusted up or down depending on additional sources of income, such as <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>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp">pensions</a>, and part-time employment, as well as factors like your health and desired lifestyle.
</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>Order your copy of the print edition of <a data-component="amazon" data-ordinal="1" data-source="affiliate" data-type="externalLink" href="https://www.amazon.com/dp/B0CKKSVGP6" rel="sponsored nofollow">Investopedia's Retirement Guide</a> for more assistance in building the best plan for your retirement.</p></div></div></div>
<span class="heading-toc" id="toc-the-4-rule"></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"> The 4% Rule </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> To determine just how much you will need to save to generate the income that you need, one easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/four-percent-rule.asp">4% rule</a>.
</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 an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04). This strategy assumes a 5% <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">return on investments</a>, after taxes and inflation, no additional retirement income, such as Social Security, and a lifestyle similar to the one you would be living at the time you retire.
</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 general, the 4% rule assumes that you will live for 30 years in retirement. Retired adults who live longer need their portfolios to last longer, in part because medical costs and other expenses can increase as you age.<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>
<span class="heading-toc" id="toc-retirement-savings-by-age"></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"> Retirement Savings by Age </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are a few useful formulas that can help you set age-based savings goals on the road to retirement.
</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"> Percentage of Your Salary </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> To figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.
</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"> Fidelity Investments suggests saving 15% of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossincome.asp">gross salary</a> starting in your 20s and continuing throughout the course of your working life. This should include savings across various retirement accounts as well as any employer contributions you receive to those accounts, assuming you have access to 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> or another employer-sponsored plan.<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_30-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> How Much to Save for Retirement by Age </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Fidelity also recommends the following benchmarks—based on a multiple of your annual earnings—for how much you should have saved for retirement by the time you reach the following ages.<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_33-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_34-0"> <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">Target Retirement Savings by Age</th>
</tr>
<tr>
<th> <b>Age</b></th>
<th> <b>Annual Salary</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td> 30</td>
<td> 1x annual salary</td>
</tr>
<tr>
<td> 40</td>
<td> 3x annual salary</td>
</tr>
<tr>
<td> 50</td>
<td> 6x annual salary</td>
</tr>
<tr>
<td> 60</td>
<td> 8x annual salary</td>
</tr>
<tr>
<td> 67</td>
<td> 10x annual salary</td>
</tr>
</tbody>
</table>
<figcaption>Source: Fidelity</figcaption>
</div></figure>
<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"> An Alternative Formula </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Another, more heuristic formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But don't forget that it includes not only 401(k) holdings and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/matchingcontribution.asp">matching contributions</a> from your employer, but also other types of retirement savings.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield 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>Age 35—two times annual salary</li><li>Age 40—three times annual salary</li><li>Age 45—four times annual salary</li><li>Age 50—five times annual salary</li><li>Age 55—six times annual salary</li><li>Age 60—seven times annual salary</li><li>Age 65—eight times annual salary</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-warning" 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>Whether or not you try to follow the 15% or the 25% savings guideline, chances are your actual ability to save will be affected by life events such as the job loss many experienced during the COVID-19 pandemic.</p></div></div></div>
<span class="heading-toc" id="toc-retirement-savings-confidence-by-age"></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"> Retirement Savings Confidence by Age </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Anxious that you aren't saving enough for retirement? You're not alone. As of Sept. 30, 2023, there were roughly 70 million active 401(k) participants, in addition to former employees and retired adults.<span class="ql-inline-citation" data-cite="8"></span> And while they may be active participants, people’s feelings toward retirement vary widely based on age.
</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"> According the the Northwestern Mutual Planning & Progress Study 2023, the majority of adults (52%) believe they will be prepared for retirement, but many are worried that they won't be. Among those surveyed, 55% of Generation X, 48% of Boomers, 46% of Millennials, and 35% of Generation Z have those fears.<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_49-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> These concerns also affect the age when members of the different generations expect to retire. The same study found that Boomers plan to work until age 71 while Gen Z expects to retire more than a decade earlier at 60. Millennials and Gen Xers plan to work to age 63 and 65, respectively.
</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"> Those numbers are a bit less rosy than the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-literacy-survey-5223919">2022 Investopedia Financial Literacy Study</a>, which found that Boomers expect to work until age 68; Gen Xers, 64; Millennials, 61; and Gen Z, the most <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retire-by-40-here-s-how-to-do-it-4770878">optimistic about retiring early</a>, said they believe they will retire by age 57—three years younger than Gen Z respondents in the 2023 Northwestern Mutual study.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> In Investopedia’s study, not all adults are particularly confident in their understanding of retirement planning. Behind digital currencies and investing, retirement was the third least-understood concept. And retirement was the top personal finance concern for about one-sixth of all those surveyed.<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-callout mntl-block" id="mntl-sc-block_56-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_57-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. That's a good time to take some of the risks that allow you to earn more with your investments.</p></div></div></div>
<span class="heading-toc" id="toc-how-to-calculate-retirement-savings"></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"> How to Calculate Retirement Savings </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 using the above methods to determine what you should have saved and by what age, online calculators can be a useful tool to help you reach your <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">retirement savings goals</a>. For example, they can help you understand how changing savings and withdrawal rates can impact your retirement nest egg.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Although there are many online retirement savings calculators to choose from, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/011216/3-best-retirement-calculators-2016.asp">some are much better than others</a>. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www3.troweprice.com/ric/ricweb/public/ric.do" rel="sponsored nofollow">T. Rowe Price Retirement Income Calculator</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://maxifiplanner.com/esplanner-basic-now-maxifi" rel="nofollow">MaxiFi ESPlanner</a> are two worth trying.
</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-how-much-does-a-couple-need-to-retire"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does a Couple Need to Retire?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Much like an individual, how much a couple needs to save to retire comfortably will depend on their current annual income and the lifestyle they want to have when they retire. Many experts maintain that retirement income should be about 80% of a couple’s final pre-retirement annual earnings. Fidelity Investments recommends that you should save 10 times your annual income by age 67.</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-is-the-4-rule"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the 4% Rule?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The 4% rule is a guideline used to determine how much a retiree can withdraw annually from a retirement account. It is intended to make retirement savings last for 30 years.<br/></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-how-much-should-i-save-for-retirement-each-year"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Should I Save for Retirement Each Year?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>One rule of thumb is to save 15% of your annual earnings. In a perfect world, savings would begin in your 20s and last throughout your working years.<br/></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"> Sometimes you'll be able to save more for retirement—and sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/07/retirement-questions.asp">make sure you're staying on track</a>.
</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"> A 401(k) might be a good place to start—if you have access to one. If not, consider an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account (IRA)</a>. Because the importance of saving for retirement is so great, we've made lists of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-roth-iras-4587878">brokers for Roth IRAs</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-iras-4587879">IRAs</a> so you can find the best places to create these retirement accounts.
</p></div> | A key part of retirement planning is to answer the question: How much do I need to save to retire? The answer varies by individual, and it depends largely on your income now and the lifestyle you want and can afford in retirement.
Knowing how much you need to save based on how old you are now is just the first step, but it starts you on the path to help you reach your retirement goals. There are a few simple formulas that you can use to come up with the numbers.
### Key Takeaways
* How much you need to save for retirement depends on your current income and the lifestyle you want when you retire.
* Knowing how much you need to save “by age” can help you stay on track and reach your retirement goals.
* Coming up with specific amounts involves using some easy formulas.
## How Much Do I Need to Save to Retire?
Many retirement experts recommend strategies such as saving 10 times your pre-retirement salary and planning on living on 80% of your pre-retirement annual income.
That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.
This amount can be adjusted up or down depending on additional sources of income, such as [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp), [pensions](https://www.investopedia.com/terms/p/pensionplan.asp), and part-time employment, as well as factors like your health and desired lifestyle.
###
Order your copy of the print edition of [Investopedia's Retirement Guide](https://www.amazon.com/dp/B0CKKSVGP6) for more assistance in building the best plan for your retirement.
## The 4% Rule
To determine just how much you will need to save to generate the income that you need, one easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the [4% rule](https://www.investopedia.com/terms/f/four-percent-rule.asp).
For an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04). This strategy assumes a 5% [return on investments](https://www.investopedia.com/terms/r/returnoninvestment.asp), after taxes and inflation, no additional retirement income, such as Social Security, and a lifestyle similar to the one you would be living at the time you retire.
In general, the 4% rule assumes that you will live for 30 years in retirement. Retired adults who live longer need their portfolios to last longer, in part because medical costs and other expenses can increase as you age.
## Retirement Savings by Age
Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are a few useful formulas that can help you set age-based savings goals on the road to retirement.
### Percentage of Your Salary
To figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.
Fidelity Investments suggests saving 15% of your [gross salary](https://www.investopedia.com/terms/g/grossincome.asp) starting in your 20s and continuing throughout the course of your working life. This should include savings across various retirement accounts as well as any employer contributions you receive to those accounts, assuming you have access to a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) or another employer-sponsored plan.
### How Much to Save for Retirement by Age
Fidelity also recommends the following benchmarks—based on a multiple of your annual earnings—for how much you should have saved for retirement by the time you reach the following ages.
| Target Retirement Savings by Age | |
| --- | --- |
| **Age** | **Annual Salary** |
| 30 | 1x annual salary |
| 40 | 3x annual salary |
| 50 | 6x annual salary |
| 60 | 8x annual salary |
| 67 | 10x annual salary |
Source: Fidelity
### An Alternative Formula
Another, more heuristic formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But don't forget that it includes not only 401(k) holdings and [matching contributions](https://www.investopedia.com/terms/m/matchingcontribution.asp) from your employer, but also other types of retirement savings.
If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:
* Age 35—two times annual salary
* Age 40—three times annual salary
* Age 45—four times annual salary
* Age 50—five times annual salary
* Age 55—six times annual salary
* Age 60—seven times annual salary
* Age 65—eight times annual salary
###
Whether or not you try to follow the 15% or the 25% savings guideline, chances are your actual ability to save will be affected by life events such as the job loss many experienced during the COVID-19 pandemic.
## Retirement Savings Confidence by Age
Anxious that you aren't saving enough for retirement? You're not alone. As of Sept. 30, 2023, there were roughly 70 million active 401(k) participants, in addition to former employees and retired adults. And while they may be active participants, people’s feelings toward retirement vary widely based on age.
According the the Northwestern Mutual Planning & Progress Study 2023, the majority of adults (52%) believe they will be prepared for retirement, but many are worried that they won't be. Among those surveyed, 55% of Generation X, 48% of Boomers, 46% of Millennials, and 35% of Generation Z have those fears.
These concerns also affect the age when members of the different generations expect to retire. The same study found that Boomers plan to work until age 71 while Gen Z expects to retire more than a decade earlier at 60. Millennials and Gen Xers plan to work to age 63 and 65, respectively.
Those numbers are a bit less rosy than the [2022 Investopedia Financial Literacy Study](https://www.investopedia.com/financial-literacy-survey-5223919), which found that Boomers expect to work until age 68; Gen Xers, 64; Millennials, 61; and Gen Z, the most [optimistic about retiring early](https://www.investopedia.com/retire-by-40-here-s-how-to-do-it-4770878), said they believe they will retire by age 57—three years younger than Gen Z respondents in the 2023 Northwestern Mutual study.
In Investopedia’s study, not all adults are particularly confident in their understanding of retirement planning. Behind digital currencies and investing, retirement was the third least-understood concept. And retirement was the top personal finance concern for about one-sixth of all those surveyed.
###
In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. That's a good time to take some of the risks that allow you to earn more with your investments.
## How to Calculate Retirement Savings
In addition to using the above methods to determine what you should have saved and by what age, online calculators can be a useful tool to help you reach your [retirement savings goals](https://www.investopedia.com/articles/financial-advisors/122815/how-much-millennials-should-save-retire-comfortably.asp). For example, they can help you understand how changing savings and withdrawal rates can impact your retirement nest egg.
Although there are many online retirement savings calculators to choose from, [some are much better than others](https://www.investopedia.com/articles/personal-finance/011216/3-best-retirement-calculators-2016.asp). The [T. Rowe Price Retirement Income Calculator](https://www3.troweprice.com/ric/ricweb/public/ric.do) and [MaxiFi ESPlanner](https://maxifiplanner.com/esplanner-basic-now-maxifi) are two worth trying.
## How Much Does a Couple Need to Retire?
Much like an individual, how much a couple needs to save to retire comfortably will depend on their current annual income and the lifestyle they want to have when they retire. Many experts maintain that retirement income should be about 80% of a couple’s final pre-retirement annual earnings. Fidelity Investments recommends that you should save 10 times your annual income by age 67.
## What Is the 4% Rule?
The 4% rule is a guideline used to determine how much a retiree can withdraw annually from a retirement account. It is intended to make retirement savings last for 30 years.
## How Much Should I Save for Retirement Each Year?
One rule of thumb is to save 15% of your annual earnings. In a perfect world, savings would begin in your 20s and last throughout your working years.
## The Bottom Line
Sometimes you'll be able to save more for retirement—and sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to [make sure you're staying on track](https://www.investopedia.com/articles/retirement/07/retirement-questions.asp).
A 401(k) might be a good place to start—if you have access to one. If not, consider an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp). Because the importance of saving for retirement is so great, we've made lists of [brokers for Roth IRAs](https://www.investopedia.com/best-brokers-for-roth-iras-4587878) and [IRAs](https://www.investopedia.com/best-brokers-for-iras-4587879) so you can find the best places to create these retirement accounts.
| A key part of retirement planning is to answer the question: How much do I need to save to retire? The answer varies by individual, and it depends largely on your income now and the lifestyle you want and can afford in retirement.
Knowing how much you need to save based on how old you are now is just the first step, but it starts you on the path to help you reach your retirement goals. There are a few simple formulas that you can use to come up with the numbers.
Key Takeaways
How much you need to save for retirement depends on your current income and the lifestyle you want when you retire.Knowing how much you need to save “by age” can help you stay on track and reach your retirement goals.Coming up with specific amounts involves using some easy formulas.
How Much Do I Need to Save to Retire?
Many retirement experts recommend strategies such as saving 10 times your pre-retirement salary and planning on living on 80% of your pre-retirement annual income.
That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.
This amount can be adjusted up or down depending on additional sources of income, such as Social Security, pensions, and part-time employment, as well as factors like your health and desired lifestyle.
Order your copy of the print edition of Investopedia's Retirement Guide for more assistance in building the best plan for your retirement.
The 4% Rule
To determine just how much you will need to save to generate the income that you need, one easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule.
For an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04). This strategy assumes a 5% return on investments, after taxes and inflation, no additional retirement income, such as Social Security, and a lifestyle similar to the one you would be living at the time you retire.
In general, the 4% rule assumes that you will live for 30 years in retirement. Retired adults who live longer need their portfolios to last longer, in part because medical costs and other expenses can increase as you age.
Retirement Savings by Age
Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are a few useful formulas that can help you set age-based savings goals on the road to retirement.
Percentage of Your Salary
To figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.
Fidelity Investments suggests saving 15% of your gross salary starting in your 20s and continuing throughout the course of your working life. This should include savings across various retirement accounts as well as any employer contributions you receive to those accounts, assuming you have access to a 401(k) or another employer-sponsored plan.
How Much to Save for Retirement by Age
Fidelity also recommends the following benchmarks—based on a multiple of your annual earnings—for how much you should have saved for retirement by the time you reach the following ages.
Target Retirement Savings by Age
Age
Annual Salary
30
1x annual salary
40
3x annual salary
50
6x annual salary
60
8x annual salary
67
10x annual salary
Source: Fidelity
An Alternative Formula
Another, more heuristic formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But don't forget that it includes not only 401(k) holdings and matching contributions from your employer, but also other types of retirement savings.
If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:
Age 35—two times annual salaryAge 40—three times annual salaryAge 45—four times annual salaryAge 50—five times annual salaryAge 55—six times annual salaryAge 60—seven times annual salaryAge 65—eight times annual salary
Whether or not you try to follow the 15% or the 25% savings guideline, chances are your actual ability to save will be affected by life events such as the job loss many experienced during the COVID-19 pandemic.
Retirement Savings Confidence by Age
Anxious that you aren't saving enough for retirement? You're not alone. As of Sept. 30, 2023, there were roughly 70 million active 401(k) participants, in addition to former employees and retired adults. And while they may be active participants, people’s feelings toward retirement vary widely based on age.
According the the Northwestern Mutual Planning & Progress Study 2023, the majority of adults (52%) believe they will be prepared for retirement, but many are worried that they won't be. Among those surveyed, 55% of Generation X, 48% of Boomers, 46% of Millennials, and 35% of Generation Z have those fears.
These concerns also affect the age when members of the different generations expect to retire. The same study found that Boomers plan to work until age 71 while Gen Z expects to retire more than a decade earlier at 60. Millennials and Gen Xers plan to work to age 63 and 65, respectively.
Those numbers are a bit less rosy than the 2022 Investopedia Financial Literacy Study, which found that Boomers expect to work until age 68; Gen Xers, 64; Millennials, 61; and Gen Z, the most optimistic about retiring early, said they believe they will retire by age 57—three years younger than Gen Z respondents in the 2023 Northwestern Mutual study.
In Investopedia’s study, not all adults are particularly confident in their understanding of retirement planning. Behind digital currencies and investing, retirement was the third least-understood concept. And retirement was the top personal finance concern for about one-sixth of all those surveyed.
In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. That's a good time to take some of the risks that allow you to earn more with your investments.
How to Calculate Retirement Savings
In addition to using the above methods to determine what you should have saved and by what age, online calculators can be a useful tool to help you reach your retirement savings goals. For example, they can help you understand how changing savings and withdrawal rates can impact your retirement nest egg.
Although there are many online retirement savings calculators to choose from, some are much better than others. The T. Rowe Price Retirement Income Calculator and MaxiFi ESPlanner are two worth trying.
How Much Does a Couple Need to Retire?
Much like an individual, how much a couple needs to save to retire comfortably will depend on their current annual income and the lifestyle they want to have when they retire. Many experts maintain that retirement income should be about 80% of a couple’s final pre-retirement annual earnings. Fidelity Investments recommends that you should save 10 times your annual income by age 67.
What Is the 4% Rule?
The 4% rule is a guideline used to determine how much a retiree can withdraw annually from a retirement account. It is intended to make retirement savings last for 30 years.
How Much Should I Save for Retirement Each Year?
One rule of thumb is to save 15% of your annual earnings. In a perfect world, savings would begin in your 20s and last throughout your working years.
The Bottom Line
Sometimes you'll be able to save more for retirement—and sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to make sure you're staying on track.
A 401(k) might be a good place to start—if you have access to one. If not, consider an individual retirement account (IRA). Because the importance of saving for retirement is so great, we've made lists of brokers for Roth IRAs and IRAs so you can find the best places to create these retirement accounts.
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https://www.investopedia.com/cryptocurrency-market-news-april-1-2024-8622848 | Cryptocurrency Market News: Spot Bitcoin ETF’s Q1 Haul, Bankman-Fried’s Prison Sentence | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Spot bitcoin ETFs amassed over $12 billion in net inflows by the end of the Q1, less than three months since the first such products began trading in January.</li><li>Former FTX co-founder and CEO Sam Bankman-Fried was sentenced to 25 years in prison due to fraud-related charges related to his time at the crypto exchange.</li><li>Crypto exchange KuCoin has been charged with violations of U.S. anti-money laundering rules.</li><li>Coinbase failed in a bid to have the SEC's lawsuit against it dismissed, and the case will go to trial.</li><li>Solana was down sharply after reports that FTX is unloading its Solana holdings as part of its bankruptcy proceedings.</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>) began the week trading in the red, below $70,000, after staying above that level most of the previous week. The cryptocurrency closed the first quarter of the year with gains of roughly 68%, driven in large part by <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</a> that amassed over $12 billion of net inflows since January.
</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"> Last week was a massive one for legal battles involving cryptocurrency companies. Former FTX CEO <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/who-is-sam-bankman-fried-6830274">Sam Bankman-Fried</a> has been sentenced to 25 years in prison roughly 18 months after the collapse of the defunct crypto exchange, while KuCoin is the latest exchange to face charges related to anti-money laundering laws. Additionally, Coinbase (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN">COIN</a>) failed in a bid to have a lawsuit by the U.S. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission (SEC)</a> against it dismissed.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></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"> Spot Bitcoin ETF Net Inflows Top $12 Billion </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Eleven spot bitcoin ETFs approved by the SEC in January saw about <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etf-winners-and-losers-as-net-inflows-top-usd12b-in-q1-2024-8621721">$12.1 billion in net inflows</a> by the end of the first quarter. 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>) was the big winner of the spot bitcoin ETF inflows race with roughly $13.9 billion coming into the fund.
</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"> Higher fees led to a massive exodus from Grayscale's Bitcoin Trust (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC">GBTC</a>) with investors pulling out almost $14.7 billion from the fund. GBTC is the oldest and the largest bitcoin fund, that was converted into an ETF in January.<span class="ql-inline-citation" data-cite="8"></span> Grayscale has filed for a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/grayscale-wants-to-launch-a-mini-bitcoin-fund-amid-gbtc-outflows-8607872">mini bitcoin ETF</a> with a lower fee plan to stem some of those outflows.
</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"> Hashdex's DEFI ETF, formerly a bitcoin futures ETF and one of the eleven approved by the SEC, finally converted to a spot bitcoin ETF and began trading on March 27.<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_13-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_14-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/5oXEF/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Big Money Flowed Into Spot Bitcoin ETFs in Q1"></iframe></div>
<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"> Sam Bankman-Fried Sentenced for FTX Fraud </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Bankman-Fried has been <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sam-bankman-fried-former-ftx-ceo-sentenced-25-years-in-prison-for-crypto-fraud-8621556">handed a 25-year prison term</a> for his involvement in a monumental fraud scheme that led to the platform's downfall in November 2022. Alongside the prison sentence, Bankman-Fried will undergo three years of monitored release and is ordered to surrender more than $11 billion. This massive forfeiture is intended to reimburse defrauded FTX customers.<span class="ql-inline-citation" data-cite="10"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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/what-went-wrong-with-ftx-6828447">collapse of FTX</a> was precipitated by a liquidity crisis in November 2022 and unveiled a tangled web of financial mismanagement, including the improper mingling of funds with its sister firm, Alameda Research. This misuse of funds led to the exchange's inability to fulfill customer withdrawal requests, causing significant losses estimated at around $8 billion.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> While a bankruptcy plan promises FTX users a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-ftx-plan-to-refund-90-percent-of-recovered-assets-doesnt-add-up-to-90-percent-of-what-customers-lost-8362556">return of up to 90% of their lost funds</a>, the compensation will reflect the value of their assets at the time of the exchange's collapse, not accounting for any potential increases in cryptocurrency values since then. Despite arguments from Bankman-Fried’s defense for a more lenient sentence based on the possibility of full restitution, the judge maintained that the focus should be on the severity of the fraud committed.
</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"> Crypto Exchange KuCoin Charged with Violations Of Anti-Money Laundering Rules </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Crypto exchange KuCoin and its founding members face charges by the U.S. Attorney's Office in the Southern District of New York for violating anti-money laundering rules and operating an unlicensed money transmission business. The charges bring to light the exchange's significant role in the suspicious movement of funds, with more than $5 billion allegedly laundered through deposits and another $4 billion through withdrawals.<br>
</br></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 platform was allegedly negligent in verifying customer identities and reporting potentially illicit activities. Such actions place KuCoin in a similar predicament to that previously experienced by other crypto exchanges such as BitMEX and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-exchange-binance-charged-with-money-laundering-fined-usd4-3-billion-8405545">Binance</a>, which have also faced legal challenges for similar reasons. KuCoin founders Chun Gan and Ke Tang are specifically accused of disguising the platform's engagement with American users, thereby facilitating an unchecked expansion and securing billions in daily transactions without adhering to U.S. financial laws.<br/>
</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 indictment underscores the deliberate efforts by KuCoin and its founders to evade global financial regulatory measures by concealing the significant involvement of U.S. traders on their platform. This strategy has purportedly enabled KuCoin to amass over 30 million customers worldwide and handle billions in daily trade volumes.<span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<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"> Coinbase Fails Bid to Have SEC Lawsuit Dismissed </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> In a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/coinbase-loses-bid-to-dismiss-sec-lawsuit-against-it-stock-slips-8620971">big blow to Coinbase</a>, a U.S. District Court judge denied the crypto exchange's bid to have the SEC's lawsuit against it dismissed. The <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">SEC's lawsuit alleges</a> that Coinbase violated securities laws by offering unregistered securities through its exchange and staking services.<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"> Coinbase Chief Legal Officer Paul Grewal expressed readiness for the court's decision in a thread on X, indicating the crypto exchange's intention to continue challenging the SEC's claims.<span class="ql-inline-citation" data-cite="2"></span> Grewal also called on Congress to continue making progress in crypto-specific legislation. Meanwhile, the SEC welcomed the decision, emphasizing the continuity of traditional securities regulatory frameworks in the face of new technological domains like cryptocurrency.<span class="ql-inline-citation" data-cite="3"></span><br>
</br></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 lawsuit centers on the SEC's accusation that Coinbase enabled the trading of crypto tokens, which should have been registered as securities, without proper authorization. This case represents a critical juncture in the SEC's broader campaign to apply traditional securities law to digital asset companies, testing the boundaries of regulatory oversight in the crypto industry. The outcome of this legal battle could have far-reaching consequences for how crypto assets are classified and regulated in the United States.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div>
<span class="heading-toc" id="toc-what-to-expect-in-the-markets-this-week"></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"> What to Expect in the Markets This Week </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> All eyes will remain on spot bitcoin ETFs that investors seem to have found a renewed appetite for. Additionally, the potential for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-spot-ether-etfs-could-face-a-difficult-path-to-approval-8609104">spot ether ETF</a> approval this year is still being tracked, with Bitwise's chief investment officer, Matt Hougan, now revealing a preference for approval to take place in December, according to an interview with <em>Forbes</em>.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The odds of approval by the end of May have continued to drop, now sitting at 20%, according to prediction market Polymarket.<span class="ql-inline-citation" data-cite="5"></span> While the SEC is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cryptocurrency-market-news-sec-wants-to-define-ether-as-a-security-bitcoin-plummets-8619749">reportedly</a> looking into the legal classification of ether (ETH) as a security, Blackrock (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK">BLK</a>) CEO Larry Fink has said such a categorization would not prevent the approval of a spot ether ETF.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Elsewhere, it has been reported that FTX has started unloading its roughly $7.5 billion worth of Solana (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=solusd">SOL</a>) as part of its bankruptcy process.<span class="ql-inline-citation" data-cite="7"></span> Solana was trading sharply lower Monday.
</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
* Spot bitcoin ETFs amassed over $12 billion in net inflows by the end of the Q1, less than three months since the first such products began trading in January.
* Former FTX co-founder and CEO Sam Bankman-Fried was sentenced to 25 years in prison due to fraud-related charges related to his time at the crypto exchange.
* Crypto exchange KuCoin has been charged with violations of U.S. anti-money laundering rules.
* Coinbase failed in a bid to have the SEC's lawsuit against it dismissed, and the case will go to trial.
* Solana was down sharply after reports that FTX is unloading its Solana holdings as part of its bankruptcy proceedings.
Bitcoin ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD)) began the week trading in the red, below $70,000, after staying above that level most of the previous week. The cryptocurrency closed the first quarter of the year with gains of roughly 68%, driven in large part by [spot bitcoin exchange-traded funds](https://www.investopedia.com/spot-bitcoin-etfs-8358373) that amassed over $12 billion of net inflows since January.
Last week was a massive one for legal battles involving cryptocurrency companies. Former FTX CEO [Sam Bankman-Fried](https://www.investopedia.com/who-is-sam-bankman-fried-6830274) has been sentenced to 25 years in prison roughly 18 months after the collapse of the defunct crypto exchange, while KuCoin is the latest exchange to face charges related to anti-money laundering laws. Additionally, Coinbase ([COIN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN)) failed in a bid to have a lawsuit by the U.S. [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) against it dismissed.
### Spot Bitcoin ETF Net Inflows Top $12 Billion
Eleven spot bitcoin ETFs approved by the SEC in January saw about [$12.1 billion in net inflows](https://www.investopedia.com/spot-bitcoin-etf-winners-and-losers-as-net-inflows-top-usd12b-in-q1-2024-8621721) by the end of the first quarter. Blackrock's iShares Bitcoin Trust ([IBIT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IBIT)) was the big winner of the spot bitcoin ETF inflows race with roughly $13.9 billion coming into the fund.
Higher fees led to a massive exodus from Grayscale's Bitcoin Trust ([GBTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC)) with investors pulling out almost $14.7 billion from the fund. GBTC is the oldest and the largest bitcoin fund, that was converted into an ETF in January. Grayscale has filed for a [mini bitcoin ETF](https://www.investopedia.com/grayscale-wants-to-launch-a-mini-bitcoin-fund-amid-gbtc-outflows-8607872) with a lower fee plan to stem some of those outflows.
Hashdex's DEFI ETF, formerly a bitcoin futures ETF and one of the eleven approved by the SEC, finally converted to a spot bitcoin ETF and began trading on March 27.
### Sam Bankman-Fried Sentenced for FTX Fraud
Bankman-Fried has been [handed a 25-year prison term](https://www.investopedia.com/sam-bankman-fried-former-ftx-ceo-sentenced-25-years-in-prison-for-crypto-fraud-8621556) for his involvement in a monumental fraud scheme that led to the platform's downfall in November 2022. Alongside the prison sentence, Bankman-Fried will undergo three years of monitored release and is ordered to surrender more than $11 billion. This massive forfeiture is intended to reimburse defrauded FTX customers.
The [collapse of FTX](https://www.investopedia.com/what-went-wrong-with-ftx-6828447) was precipitated by a liquidity crisis in November 2022 and unveiled a tangled web of financial mismanagement, including the improper mingling of funds with its sister firm, Alameda Research. This misuse of funds led to the exchange's inability to fulfill customer withdrawal requests, causing significant losses estimated at around $8 billion.
While a bankruptcy plan promises FTX users a [return of up to 90% of their lost funds](https://www.investopedia.com/why-ftx-plan-to-refund-90-percent-of-recovered-assets-doesnt-add-up-to-90-percent-of-what-customers-lost-8362556), the compensation will reflect the value of their assets at the time of the exchange's collapse, not accounting for any potential increases in cryptocurrency values since then. Despite arguments from Bankman-Fried’s defense for a more lenient sentence based on the possibility of full restitution, the judge maintained that the focus should be on the severity of the fraud committed.
### Crypto Exchange KuCoin Charged with Violations Of Anti-Money Laundering Rules
Crypto exchange KuCoin and its founding members face charges by the U.S. Attorney's Office in the Southern District of New York for violating anti-money laundering rules and operating an unlicensed money transmission business. The charges bring to light the exchange's significant role in the suspicious movement of funds, with more than $5 billion allegedly laundered through deposits and another $4 billion through withdrawals.
The platform was allegedly negligent in verifying customer identities and reporting potentially illicit activities. Such actions place KuCoin in a similar predicament to that previously experienced by other crypto exchanges such as BitMEX and [Binance](https://www.investopedia.com/crypto-exchange-binance-charged-with-money-laundering-fined-usd4-3-billion-8405545), which have also faced legal challenges for similar reasons. KuCoin founders Chun Gan and Ke Tang are specifically accused of disguising the platform's engagement with American users, thereby facilitating an unchecked expansion and securing billions in daily transactions without adhering to U.S. financial laws.
The indictment underscores the deliberate efforts by KuCoin and its founders to evade global financial regulatory measures by concealing the significant involvement of U.S. traders on their platform. This strategy has purportedly enabled KuCoin to amass over 30 million customers worldwide and handle billions in daily trade volumes.
### Coinbase Fails Bid to Have SEC Lawsuit Dismissed
In a [big blow to Coinbase](https://www.investopedia.com/coinbase-loses-bid-to-dismiss-sec-lawsuit-against-it-stock-slips-8620971), a U.S. District Court judge denied the crypto exchange's bid to have the SEC's lawsuit against it dismissed. The [SEC's lawsuit alleges](https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669) that Coinbase violated securities laws by offering unregistered securities through its exchange and staking services.
Coinbase Chief Legal Officer Paul Grewal expressed readiness for the court's decision in a thread on X, indicating the crypto exchange's intention to continue challenging the SEC's claims. Grewal also called on Congress to continue making progress in crypto-specific legislation. Meanwhile, the SEC welcomed the decision, emphasizing the continuity of traditional securities regulatory frameworks in the face of new technological domains like cryptocurrency.
The lawsuit centers on the SEC's accusation that Coinbase enabled the trading of crypto tokens, which should have been registered as securities, without proper authorization. This case represents a critical juncture in the SEC's broader campaign to apply traditional securities law to digital asset companies, testing the boundaries of regulatory oversight in the crypto industry. The outcome of this legal battle could have far-reaching consequences for how crypto assets are classified and regulated in the United States.
## What to Expect in the Markets This Week
All eyes will remain on spot bitcoin ETFs that investors seem to have found a renewed appetite for. Additionally, the potential for a [spot ether ETF](https://www.investopedia.com/why-spot-ether-etfs-could-face-a-difficult-path-to-approval-8609104) approval this year is still being tracked, with Bitwise's chief investment officer, Matt Hougan, now revealing a preference for approval to take place in December, according to an interview with *Forbes*.
The odds of approval by the end of May have continued to drop, now sitting at 20%, according to prediction market Polymarket. While the SEC is [reportedly](https://www.investopedia.com/cryptocurrency-market-news-sec-wants-to-define-ether-as-a-security-bitcoin-plummets-8619749) looking into the legal classification of ether (ETH) as a security, Blackrock ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK)) CEO Larry Fink has said such a categorization would not prevent the approval of a spot ether ETF.
Elsewhere, it has been reported that FTX has started unloading its roughly $7.5 billion worth of Solana ([SOL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=solusd)) as part of its bankruptcy process. Solana was trading sharply lower Monday.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Spot bitcoin ETFs amassed over $12 billion in net inflows by the end of the Q1, less than three months since the first such products began trading in January.Former FTX co-founder and CEO Sam Bankman-Fried was sentenced to 25 years in prison due to fraud-related charges related to his time at the crypto exchange.Crypto exchange KuCoin has been charged with violations of U.S. anti-money laundering rules.Coinbase failed in a bid to have the SEC's lawsuit against it dismissed, and the case will go to trial.Solana was down sharply after reports that FTX is unloading its Solana holdings as part of its bankruptcy proceedings.
Bitcoin (BTC) began the week trading in the red, below $70,000, after staying above that level most of the previous week. The cryptocurrency closed the first quarter of the year with gains of roughly 68%, driven in large part by spot bitcoin exchange-traded funds that amassed over $12 billion of net inflows since January.
Last week was a massive one for legal battles involving cryptocurrency companies. Former FTX CEO Sam Bankman-Fried has been sentenced to 25 years in prison roughly 18 months after the collapse of the defunct crypto exchange, while KuCoin is the latest exchange to face charges related to anti-money laundering laws. Additionally, Coinbase (COIN) failed in a bid to have a lawsuit by the U.S. Securities and Exchange Commission (SEC) against it dismissed.
Spot Bitcoin ETF Net Inflows Top $12 Billion
Eleven spot bitcoin ETFs approved by the SEC in January saw about $12.1 billion in net inflows by the end of the first quarter. Blackrock's iShares Bitcoin Trust (IBIT) was the big winner of the spot bitcoin ETF inflows race with roughly $13.9 billion coming into the fund.
Higher fees led to a massive exodus from Grayscale's Bitcoin Trust (GBTC) with investors pulling out almost $14.7 billion from the fund. GBTC is the oldest and the largest bitcoin fund, that was converted into an ETF in January. Grayscale has filed for a mini bitcoin ETF with a lower fee plan to stem some of those outflows.
Hashdex's DEFI ETF, formerly a bitcoin futures ETF and one of the eleven approved by the SEC, finally converted to a spot bitcoin ETF and began trading on March 27.
Sam Bankman-Fried Sentenced for FTX Fraud
Bankman-Fried has been handed a 25-year prison term for his involvement in a monumental fraud scheme that led to the platform's downfall in November 2022. Alongside the prison sentence, Bankman-Fried will undergo three years of monitored release and is ordered to surrender more than $11 billion. This massive forfeiture is intended to reimburse defrauded FTX customers.
The collapse of FTX was precipitated by a liquidity crisis in November 2022 and unveiled a tangled web of financial mismanagement, including the improper mingling of funds with its sister firm, Alameda Research. This misuse of funds led to the exchange's inability to fulfill customer withdrawal requests, causing significant losses estimated at around $8 billion.
While a bankruptcy plan promises FTX users a return of up to 90% of their lost funds, the compensation will reflect the value of their assets at the time of the exchange's collapse, not accounting for any potential increases in cryptocurrency values since then. Despite arguments from Bankman-Fried’s defense for a more lenient sentence based on the possibility of full restitution, the judge maintained that the focus should be on the severity of the fraud committed.
Crypto Exchange KuCoin Charged with Violations Of Anti-Money Laundering Rules
Crypto exchange KuCoin and its founding members face charges by the U.S. Attorney's Office in the Southern District of New York for violating anti-money laundering rules and operating an unlicensed money transmission business. The charges bring to light the exchange's significant role in the suspicious movement of funds, with more than $5 billion allegedly laundered through deposits and another $4 billion through withdrawals.
The platform was allegedly negligent in verifying customer identities and reporting potentially illicit activities. Such actions place KuCoin in a similar predicament to that previously experienced by other crypto exchanges such as BitMEX and Binance, which have also faced legal challenges for similar reasons. KuCoin founders Chun Gan and Ke Tang are specifically accused of disguising the platform's engagement with American users, thereby facilitating an unchecked expansion and securing billions in daily transactions without adhering to U.S. financial laws.
The indictment underscores the deliberate efforts by KuCoin and its founders to evade global financial regulatory measures by concealing the significant involvement of U.S. traders on their platform. This strategy has purportedly enabled KuCoin to amass over 30 million customers worldwide and handle billions in daily trade volumes.
Coinbase Fails Bid to Have SEC Lawsuit Dismissed
In a big blow to Coinbase, a U.S. District Court judge denied the crypto exchange's bid to have the SEC's lawsuit against it dismissed. The SEC's lawsuit alleges that Coinbase violated securities laws by offering unregistered securities through its exchange and staking services.
Coinbase Chief Legal Officer Paul Grewal expressed readiness for the court's decision in a thread on X, indicating the crypto exchange's intention to continue challenging the SEC's claims. Grewal also called on Congress to continue making progress in crypto-specific legislation. Meanwhile, the SEC welcomed the decision, emphasizing the continuity of traditional securities regulatory frameworks in the face of new technological domains like cryptocurrency.
The lawsuit centers on the SEC's accusation that Coinbase enabled the trading of crypto tokens, which should have been registered as securities, without proper authorization. This case represents a critical juncture in the SEC's broader campaign to apply traditional securities law to digital asset companies, testing the boundaries of regulatory oversight in the crypto industry. The outcome of this legal battle could have far-reaching consequences for how crypto assets are classified and regulated in the United States.
What to Expect in the Markets This Week
All eyes will remain on spot bitcoin ETFs that investors seem to have found a renewed appetite for. Additionally, the potential for a spot ether ETF approval this year is still being tracked, with Bitwise's chief investment officer, Matt Hougan, now revealing a preference for approval to take place in December, according to an interview with Forbes.
The odds of approval by the end of May have continued to drop, now sitting at 20%, according to prediction market Polymarket. While the SEC is reportedly looking into the legal classification of ether (ETH) as a security, Blackrock (BLK) CEO Larry Fink has said such a categorization would not prevent the approval of a spot ether ETF.
Elsewhere, it has been reported that FTX has started unloading its roughly $7.5 billion worth of Solana (SOL) as part of its bankruptcy process. Solana was trading sharply lower Monday.
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-google-i-o-developer-conference-8646629 | What To Expect From Google's I/O Developer Conference Tuesday | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Alphabet's Google will hold its annual developer conference, Google I/O, on Tuesday.</li><li>Google could announce updates about its artificial intelligence (AI) initiatives at the event, as it did at its 2023 conference.</li><li>Analysts suggested the event may bring more clarity about Google's AI monetization plans.</li><li>Google could also provide further color on how it has integrated AI into Google Search, as Microsoft-backed OpenAI is reportedly set to announce an AI-powered search engine that could increase competition.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Alphabet's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>) Google is set to host its annual developer conference on Tuesday, with investors likely to be watching for any updates related to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a>.<span class="ql-inline-citation" data-cite="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"> At the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/google-ai-push-new-features-search-maps-7496370">2023 Google I/O </a>conference, AI took center stage with the company highlighting its AI chatbot, Bard, which has since been <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-google-is-rebranding-its-bard-ai-chatbot-as-gemini-with-a-new-app-and-subscription-8572209">rebranded</a> as Gemini. The company also announced AI integrations into its existing products and services like maps along with photo editing tools it worked on with Adobe (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ADBE">ADBE</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"> Google could unveil new AI features, initiatives, or provide fresh details about the companies that it is partnering with to advance its AI offerings at this year's conference.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<span class="heading-toc" id="toc-ai-monetization-plans-could-become-clearer"></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"> AI Monetization Plans Could Become Clearer </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Analysts suggested the event could also bring more clarity about Google's AI monetization plans as tech giants work to secure their position in the AI race.
</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"> Melius Research analysts said they would "like to see the monetization path become clearer" at the conference.<span class="ql-inline-citation" data-cite="2"></span> Bank of America analysts said "Google's AI platform updates for developers at I/O" could be a "potential AI catalyst."<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_13-0"></div>
<span class="heading-toc" id="toc-ai-integration-in-google-search-as-openai-is-expected-to-unveil-ai-search-tool"></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"> AI Integration in Google Search as OpenAI Is Expected To Unveil AI Search Tool </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Several AI-focused sessions are scheduled to take place during the I/O conference.<span class="ql-inline-citation" data-cite="4"></span> One session, called "Web AI: New models, tools, and APIs for your next web app" could be of particular interest amid reports 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>) OpenAI is set to announce an AI product that could negatively impact Google.
</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"> OpenAI is reportedly expected to announce an AI-powered search engine ahead of the I/O conference which could rival Google's offerings.<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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Alphabet shares closed 0.8% lower at $168.65 Friday. The stock has gained nearly 21% since the start of 2024.<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
* Alphabet's Google will hold its annual developer conference, Google I/O, on Tuesday.
* Google could announce updates about its artificial intelligence (AI) initiatives at the event, as it did at its 2023 conference.
* Analysts suggested the event may bring more clarity about Google's AI monetization plans.
* Google could also provide further color on how it has integrated AI into Google Search, as Microsoft-backed OpenAI is reportedly set to announce an AI-powered search engine that could increase competition.
Alphabet's ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL)) Google is set to host its annual developer conference on Tuesday, with investors likely to be watching for any updates related to [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp).
At the [2023 Google I/O](https://www.investopedia.com/google-ai-push-new-features-search-maps-7496370) conference, AI took center stage with the company highlighting its AI chatbot, Bard, which has since been [rebranded](https://www.investopedia.com/why-google-is-rebranding-its-bard-ai-chatbot-as-gemini-with-a-new-app-and-subscription-8572209) as Gemini. The company also announced AI integrations into its existing products and services like maps along with photo editing tools it worked on with Adobe ([ADBE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ADBE)).
Google could unveil new AI features, initiatives, or provide fresh details about the companies that it is partnering with to advance its AI offerings at this year's conference.
## AI Monetization Plans Could Become Clearer
Analysts suggested the event could also bring more clarity about Google's AI monetization plans as tech giants work to secure their position in the AI race.
Melius Research analysts said they would "like to see the monetization path become clearer" at the conference. Bank of America analysts said "Google's AI platform updates for developers at I/O" could be a "potential AI catalyst."
## AI Integration in Google Search as OpenAI Is Expected To Unveil AI Search Tool
Several AI-focused sessions are scheduled to take place during the I/O conference. One session, called "Web AI: New models, tools, and APIs for your next web app" could be of particular interest amid reports Microsoft-backed ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) OpenAI is set to announce an AI product that could negatively impact Google.
OpenAI is reportedly expected to announce an AI-powered search engine ahead of the I/O conference which could rival Google's offerings.
Alphabet shares closed 0.8% lower at $168.65 Friday. The stock has gained nearly 21% since the start of 2024.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Alphabet's Google will hold its annual developer conference, Google I/O, on Tuesday.Google could announce updates about its artificial intelligence (AI) initiatives at the event, as it did at its 2023 conference.Analysts suggested the event may bring more clarity about Google's AI monetization plans.Google could also provide further color on how it has integrated AI into Google Search, as Microsoft-backed OpenAI is reportedly set to announce an AI-powered search engine that could increase competition.
Alphabet's (GOOGL) Google is set to host its annual developer conference on Tuesday, with investors likely to be watching for any updates related to artificial intelligence (AI).
At the 2023 Google I/O conference, AI took center stage with the company highlighting its AI chatbot, Bard, which has since been rebranded as Gemini. The company also announced AI integrations into its existing products and services like maps along with photo editing tools it worked on with Adobe (ADBE).
Google could unveil new AI features, initiatives, or provide fresh details about the companies that it is partnering with to advance its AI offerings at this year's conference.
AI Monetization Plans Could Become Clearer
Analysts suggested the event could also bring more clarity about Google's AI monetization plans as tech giants work to secure their position in the AI race.
Melius Research analysts said they would "like to see the monetization path become clearer" at the conference. Bank of America analysts said "Google's AI platform updates for developers at I/O" could be a "potential AI catalyst."
AI Integration in Google Search as OpenAI Is Expected To Unveil AI Search Tool
Several AI-focused sessions are scheduled to take place during the I/O conference. One session, called "Web AI: New models, tools, and APIs for your next web app" could be of particular interest amid reports Microsoft-backed (MSFT) OpenAI is set to announce an AI product that could negatively impact Google.
OpenAI is reportedly expected to announce an AI-powered search engine ahead of the I/O conference which could rival Google's offerings.
Alphabet shares closed 0.8% lower at $168.65 Friday. The stock has gained nearly 21% since the start of 2024.
Do you have a news tip for Investopedia reporters? Please email us at
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https://www.investopedia.com/terms/j/just-say-no-defense.asp | "Just Say No" Defense: 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-a-just-say-no-defense"></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 "Just Say No" Defense? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A "just say no" defense is a strategy employed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boardofdirectors.asp">boards of directors</a> to discourage <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hostiletakeover.asp">hostile takeovers</a> by simply refusing to negotiate and rejecting outright whatever the prospective buyer might offer.
</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 legality of a "just say no" defense may depend on whether the target company has a long-term strategy it is pursuing, which can include a merger with a firm other than the one making the takeover bid, or if the takeover bid undervalues the company.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A "just say no" defense is a strategy used by boards of directors to discourage hostile takeovers by rejecting outright the takeover bid.</li><li>Named after Nancy Reagan's "Just Say No" anti-drug campaign, this strategy gives the board power to decide whether to accept an acquisition proposal or not.</li><li>Such a stance may be taken to render a takeover impossible or to encourage better offers either from the same bidder or, better yet, from a friendly white knight.</li><li>The legality of a "just say no" defense may depend on whether the target company has a long-term strategy or if the takeover bid undervalues the company.</li><li>A "just say no" defense is one of many strategies to prevent hostile takeovers. Others include a poison pill strategy and a white knight strategy. </li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-a-just-say-no-defense"></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 "Just Say No" Defense </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The origins of the "just say no" defense can be traced to the 1980s, when <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/raider.asp">raiders</a> with deep pockets bought undervalued companies, dismembering them for a quick <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit.asp">profit</a>. This prompted defenseless companies to come up with strategies to thwart corporate raiders.
</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 "just say no" defense was named after the anti-drug campaign promoted by former First Lady Nancy Reagan.<span class="ql-inline-citation" data-cite="1"></span> The defense left it up to the board to decide whether to accept or reject a bid, regardless of how much was being offered. Reasons could include anything from fear of job security to a general dislike of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/acquirer.asp">acquirer</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>An early use of the term occurred in 1990 when<strong> </strong>NCR Corp. rejected AT&T's initial $90-per-share tender offer. NCR Chair Charles Exley said the board's stance was to "just say no" to the telephone giant.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The target company's board could deal with an unwanted bid by refusing to negotiate and waive potential defense strategies such as a poison pill. This stance may be taken to render a takeover impossible. Alternatively, it might be pursued to extract a better offer, either from the same bidder or, better yet, from a friendly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/whiteknight.asp" rel="noopener noreferrer">white knight</a>.
</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-a-just-say-no-defense"></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 a "Just Say No" Defense </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The case of Paramount Communications vs. Time helped establish the "just say no" defense as a viable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/anti-takeovermeasure.asp">anti-takeover</a> strategy. Time was close to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/merger.asp">merging</a><strong> </strong>with Warner Communications but then received a bid from Paramount that its board rejected because the publishing company had already negotiated a long-term plan with Warner. In July 1989, the case was heard in the Court of Chancery in Wilmington, Delaware.<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_20-0"> The Delaware courts had established precedents for corporate board actions during <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</a> in two previous cases. The Delaware Supreme Court ruled in the 1985 case involving Unocal, that directors defending their company from a raider may respond only in a reasonable way.<span class="ql-inline-citation" data-cite="10"></span> Meanwhile, in the 1986 Revlon case, the court ruled that if the board decides to sell a company, it <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revlon_rule.asp">must accept the highest bid</a> and not show any favoritism.<span class="ql-inline-citation" data-cite="11"></span>
</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"> Fortunately for Time, the judge supported its board as the corporation's fiduciaries in this matter, even if <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp">shareholders</a> might well have preferred to accept Paramount's bid, adding that corporate law does not compel directors to follow the wishes of the majority of the shares. To support the decision for the Time-Warner merger, the judge wrote: "Directors, not shareholders, are charged with the duty to manage the firm."
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> On appeal, the Delaware Supreme Court upheld the decision unanimously.<span class="ql-inline-citation" data-cite="9"></span>
</p>
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<span class="heading-toc" id="toc-criticism-of-a-just-say-no-defense"></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 a “Just Say No” Defense </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A "just say no" defense isn't necessarily in the best interest of shareholders since board members can employ it even if an offer is made at a significant <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/at-a-premium.asp">premium</a> to the current share price.
</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"> Adding to this frustration is a number of stories of companies using this tactic to hold firm and rebuff offers that, in retrospect, they would have been better off accepting. One example is Yahoo, which engaged in a "just say no" battle to fight off a $44.6 billion bid from Microsoft<strong> </strong>(<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft">MSFT</a>) in 2008 and then ended up selling off its core business several years later for $4.83 billion.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></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_31-0"> <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_32-0"> There is a significant risk that a "just say no" defense won't be accepted by the courts. If the price offered looks fair and shareholders support it, the board's option to "just say no" may not be viable.
</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"> Still, that doesn't mean that directors won't give it a go. Yes, failure is possible. But so, too, is the prospect of securing the company's freedom or, failing that, at least squeezing out a better price for the business.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-is-the-just-say-no-strategy"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Just Say No Strategy?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A just say no strategy is a defense strategy used by the board of directors of a firm to prevent a hostile takeover. The strategy involves refusing to negotiate and rejecting all outright offers that a potential acquirer makes.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-is-the-poison-pill-defense"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Poison Pill Defense?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A poison pill defense is a strategy employed by a company to prevent a hostile takeover. It is used when a potential acquirer owns a large portion of a company's outstanding shares. A poison pill strategy allows existing shareholders (but not the potential acquirer) to purchase additional shares at a discounted price, thereby diluting the value of the potential acquirer's shares.</p><p>To control a significant portion of the company again, the potential acquirer would have to spend more money purchasing shares, making the attempted takeover more expensive.</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-are-takeovers-good-for-shareholders"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Takeovers Good for Shareholders?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Takeovers are generally better for the company being acquired as the share price goes up for that company whereas takeovers are generally less beneficial for the shareholders of the acquiring company, as the share price usually goes down. Takeovers are complex strategies and depending on how they are enacted and carried out once complete, all shareholders can benefit or none at all.</p></div>
</div></div> | ## What Is a "Just Say No" Defense?
A "just say no" defense is a strategy employed by [boards of directors](https://www.investopedia.com/terms/b/boardofdirectors.asp) to discourage [hostile takeovers](https://www.investopedia.com/terms/h/hostiletakeover.asp) by simply refusing to negotiate and rejecting outright whatever the prospective buyer might offer.
The legality of a "just say no" defense may depend on whether the target company has a long-term strategy it is pursuing, which can include a merger with a firm other than the one making the takeover bid, or if the takeover bid undervalues the company.
### Key Takeaways
* A "just say no" defense is a strategy used by boards of directors to discourage hostile takeovers by rejecting outright the takeover bid.
* Named after Nancy Reagan's "Just Say No" anti-drug campaign, this strategy gives the board power to decide whether to accept an acquisition proposal or not.
* Such a stance may be taken to render a takeover impossible or to encourage better offers either from the same bidder or, better yet, from a friendly white knight.
* The legality of a "just say no" defense may depend on whether the target company has a long-term strategy or if the takeover bid undervalues the company.
* A "just say no" defense is one of many strategies to prevent hostile takeovers. Others include a poison pill strategy and a white knight strategy.
## Understanding a "Just Say No" Defense
The origins of the "just say no" defense can be traced to the 1980s, when [raiders](https://www.investopedia.com/terms/r/raider.asp) with deep pockets bought undervalued companies, dismembering them for a quick [profit](https://www.investopedia.com/terms/p/profit.asp). This prompted defenseless companies to come up with strategies to thwart corporate raiders.
The "just say no" defense was named after the anti-drug campaign promoted by former First Lady Nancy Reagan. The defense left it up to the board to decide whether to accept or reject a bid, regardless of how much was being offered. Reasons could include anything from fear of job security to a general dislike of the [acquirer](https://www.investopedia.com/terms/a/acquirer.asp).
###
An early use of the term occurred in 1990 whenNCR Corp. rejected AT&T's initial $90-per-share tender offer. NCR Chair Charles Exley said the board's stance was to "just say no" to the telephone giant.
The target company's board could deal with an unwanted bid by refusing to negotiate and waive potential defense strategies such as a poison pill. This stance may be taken to render a takeover impossible. Alternatively, it might be pursued to extract a better offer, either from the same bidder or, better yet, from a friendly [white knight](https://www.investopedia.com/terms/w/whiteknight.asp).
## Example of a "Just Say No" Defense
The case of Paramount Communications vs. Time helped establish the "just say no" defense as a viable [anti-takeover](https://www.investopedia.com/terms/a/anti-takeovermeasure.asp) strategy. Time was close to [merging](https://www.investopedia.com/terms/m/merger.asp)with Warner Communications but then received a bid from Paramount that its board rejected because the publishing company had already negotiated a long-term plan with Warner. In July 1989, the case was heard in the Court of Chancery in Wilmington, Delaware.
The Delaware courts had established precedents for corporate board actions during [mergers and acquisitions](https://www.investopedia.com/terms/m/mergersandacquisitions.asp) in two previous cases. The Delaware Supreme Court ruled in the 1985 case involving Unocal, that directors defending their company from a raider may respond only in a reasonable way. Meanwhile, in the 1986 Revlon case, the court ruled that if the board decides to sell a company, it [must accept the highest bid](https://www.investopedia.com/terms/r/revlon_rule.asp) and not show any favoritism.
Fortunately for Time, the judge supported its board as the corporation's fiduciaries in this matter, even if [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) might well have preferred to accept Paramount's bid, adding that corporate law does not compel directors to follow the wishes of the majority of the shares. To support the decision for the Time-Warner merger, the judge wrote: "Directors, not shareholders, are charged with the duty to manage the firm."
On appeal, the Delaware Supreme Court upheld the decision unanimously.
## Criticism of a “Just Say No” Defense
A "just say no" defense isn't necessarily in the best interest of shareholders since board members can employ it even if an offer is made at a significant [premium](https://www.investopedia.com/terms/a/at-a-premium.asp) to the current share price.
Adding to this frustration is a number of stories of companies using this tactic to hold firm and rebuff offers that, in retrospect, they would have been better off accepting. One example is Yahoo, which engaged in a "just say no" battle to fight off a $44.6 billion bid from Microsoft([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft)) in 2008 and then ended up selling off its core business several years later for $4.83 billion.
## Special Considerations
There is a significant risk that a "just say no" defense won't be accepted by the courts. If the price offered looks fair and shareholders support it, the board's option to "just say no" may not be viable.
Still, that doesn't mean that directors won't give it a go. Yes, failure is possible. But so, too, is the prospect of securing the company's freedom or, failing that, at least squeezing out a better price for the business.
## What Is the Just Say No Strategy?
A just say no strategy is a defense strategy used by the board of directors of a firm to prevent a hostile takeover. The strategy involves refusing to negotiate and rejecting all outright offers that a potential acquirer makes.
## What Is the Poison Pill Defense?
A poison pill defense is a strategy employed by a company to prevent a hostile takeover. It is used when a potential acquirer owns a large portion of a company's outstanding shares. A poison pill strategy allows existing shareholders (but not the potential acquirer) to purchase additional shares at a discounted price, thereby diluting the value of the potential acquirer's shares.
To control a significant portion of the company again, the potential acquirer would have to spend more money purchasing shares, making the attempted takeover more expensive.
## Are Takeovers Good for Shareholders?
Takeovers are generally better for the company being acquired as the share price goes up for that company whereas takeovers are generally less beneficial for the shareholders of the acquiring company, as the share price usually goes down. Takeovers are complex strategies and depending on how they are enacted and carried out once complete, all shareholders can benefit or none at all.
| What Is a "Just Say No" Defense?
A "just say no" defense is a strategy employed by boards of directors to discourage hostile takeovers by simply refusing to negotiate and rejecting outright whatever the prospective buyer might offer.
The legality of a "just say no" defense may depend on whether the target company has a long-term strategy it is pursuing, which can include a merger with a firm other than the one making the takeover bid, or if the takeover bid undervalues the company.
Key Takeaways
A "just say no" defense is a strategy used by boards of directors to discourage hostile takeovers by rejecting outright the takeover bid.Named after Nancy Reagan's "Just Say No" anti-drug campaign, this strategy gives the board power to decide whether to accept an acquisition proposal or not.Such a stance may be taken to render a takeover impossible or to encourage better offers either from the same bidder or, better yet, from a friendly white knight.The legality of a "just say no" defense may depend on whether the target company has a long-term strategy or if the takeover bid undervalues the company.A "just say no" defense is one of many strategies to prevent hostile takeovers. Others include a poison pill strategy and a white knight strategy.
Understanding a "Just Say No" Defense
The origins of the "just say no" defense can be traced to the 1980s, when raiders with deep pockets bought undervalued companies, dismembering them for a quick profit. This prompted defenseless companies to come up with strategies to thwart corporate raiders.
The "just say no" defense was named after the anti-drug campaign promoted by former First Lady Nancy Reagan. The defense left it up to the board to decide whether to accept or reject a bid, regardless of how much was being offered. Reasons could include anything from fear of job security to a general dislike of the acquirer.
An early use of the term occurred in 1990 when NCR Corp. rejected AT&T's initial $90-per-share tender offer. NCR Chair Charles Exley said the board's stance was to "just say no" to the telephone giant.
The target company's board could deal with an unwanted bid by refusing to negotiate and waive potential defense strategies such as a poison pill. This stance may be taken to render a takeover impossible. Alternatively, it might be pursued to extract a better offer, either from the same bidder or, better yet, from a friendly white knight.
Example of a "Just Say No" Defense
The case of Paramount Communications vs. Time helped establish the "just say no" defense as a viable anti-takeover strategy. Time was close to merging with Warner Communications but then received a bid from Paramount that its board rejected because the publishing company had already negotiated a long-term plan with Warner. In July 1989, the case was heard in the Court of Chancery in Wilmington, Delaware.
The Delaware courts had established precedents for corporate board actions during mergers and acquisitions in two previous cases. The Delaware Supreme Court ruled in the 1985 case involving Unocal, that directors defending their company from a raider may respond only in a reasonable way. Meanwhile, in the 1986 Revlon case, the court ruled that if the board decides to sell a company, it must accept the highest bid and not show any favoritism.
Fortunately for Time, the judge supported its board as the corporation's fiduciaries in this matter, even if shareholders might well have preferred to accept Paramount's bid, adding that corporate law does not compel directors to follow the wishes of the majority of the shares. To support the decision for the Time-Warner merger, the judge wrote: "Directors, not shareholders, are charged with the duty to manage the firm."
On appeal, the Delaware Supreme Court upheld the decision unanimously.
Criticism of a “Just Say No” Defense
A "just say no" defense isn't necessarily in the best interest of shareholders since board members can employ it even if an offer is made at a significant premium to the current share price.
Adding to this frustration is a number of stories of companies using this tactic to hold firm and rebuff offers that, in retrospect, they would have been better off accepting. One example is Yahoo, which engaged in a "just say no" battle to fight off a $44.6 billion bid from Microsoft (MSFT) in 2008 and then ended up selling off its core business several years later for $4.83 billion.
Special Considerations
There is a significant risk that a "just say no" defense won't be accepted by the courts. If the price offered looks fair and shareholders support it, the board's option to "just say no" may not be viable.
Still, that doesn't mean that directors won't give it a go. Yes, failure is possible. But so, too, is the prospect of securing the company's freedom or, failing that, at least squeezing out a better price for the business.
What Is the Just Say No Strategy?
A just say no strategy is a defense strategy used by the board of directors of a firm to prevent a hostile takeover. The strategy involves refusing to negotiate and rejecting all outright offers that a potential acquirer makes.
What Is the Poison Pill Defense?
A poison pill defense is a strategy employed by a company to prevent a hostile takeover. It is used when a potential acquirer owns a large portion of a company's outstanding shares. A poison pill strategy allows existing shareholders (but not the potential acquirer) to purchase additional shares at a discounted price, thereby diluting the value of the potential acquirer's shares.To control a significant portion of the company again, the potential acquirer would have to spend more money purchasing shares, making the attempted takeover more expensive.
Are Takeovers Good for Shareholders?
Takeovers are generally better for the company being acquired as the share price goes up for that company whereas takeovers are generally less beneficial for the shareholders of the acquiring company, as the share price usually goes down. Takeovers are complex strategies and depending on how they are enacted and carried out once complete, all shareholders can benefit or none at all.
| [
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],
[
"hostile takeovers",
"https://www.investopedia.com/terms/h/hostiletakeover.asp"
],
[
"raiders",
"https://www.investopedia.com/terms/r/raider.asp"
],
[
"profit",
"https://www.investopedia.com/terms/p/profit.asp"
],
[
"acquirer",
"https://www.investopedia.com/terms/a/acquirer.asp"
],
[
"white knight",
"https://www.investopedia.com/terms/w/whiteknight.asp"
],
[
"anti-takeover",
"https://www.investopedia.com/terms/a/anti-takeovermeasure.asp"
],
[
"merging",
"https://www.investopedia.com/terms/m/merger.asp"
],
[
"mergers and acquisitions",
"https://www.investopedia.com/terms/m/mergersandacquisitions.asp"
],
[
"must accept the highest bid",
"https://www.investopedia.com/terms/r/revlon_rule.asp"
],
[
"shareholders",
"https://www.investopedia.com/terms/s/shareholder.asp"
],
[
"premium",
"https://www.investopedia.com/terms/a/at-a-premium.asp"
],
[
"MSFT",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft"
]
] |
https://www.investopedia.com/articles/mutualfund/03/061103.asp | The Hidden Differences Among Index Funds | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Index funds, which track an underlying market index have grown in popularity with investors over the years. A fund might 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</a> or <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</a>, allowing investors to own each of the holdings within those indices.<br/>
</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"> Although <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> do attempt to replicate highly similar performance compared to their respective indices, no fund's performance is guaranteed to be the same as similar funds; nor will a fund necessarily replicate the index it tracks. Although the differences between index funds can be subtle, they can have a major impact on an investor's return over the long term.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Index funds, which track an underlying market index have grown in popularity with investors over the years.</li><li>Fees and expenses ratios or operating expenses can vary between index funds and erode an investor's return.</li><li>An index fund might not track the underlying index or sector exactly causing tracking errors or variances between the fund and the index.</li><li>Some index funds might only hold a few components, and the lack of diversification can expose investors to the risk of losses.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-hidden-differences-between-index-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Understanding the Hidden Differences Between Index Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> An index fund is a type 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 fund (ETF)</a> that contains a basket of stocks or securities that track the components of an existing financial <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketindex.asp">market index</a>. For example, there are index funds that track the Standard & Poor's 500 Index. Although investors can't buy an index per se, they can invest in index funds that are designed to mirror the index. In other words, an index fund tracking the S&P would have all 500 stocks from the S&P 500 in the fund. Index funds tend to provide investors with broad market exposure or exposure to an overall sector.
</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"> As a result, index funds are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passivemanagement.asp">passive investments</a>, meaning that a portfolio manager is not actively stock-picking by buying and selling securities for the fund. Instead, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundmanager.asp">fund manager</a> selects a combination of assets for a portfolio intended to mimic an index. Because the fund's <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying-asset.asp">underlying assets</a> are held and not actively traded, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating_expense.asp">operating expenses</a> are usually lower than actively managed funds.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> At the onset, it might be reasonable that the index fund should track the index with little difference, and other funds tracking the same index should all have the same performance. However, a deeper look uncovers numerous disparities across fund types and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/012616/4-best-us-equity-index-mutual-funds.asp">helps to uncover some winners</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-expense-ratios"></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"> Expense Ratios </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Perhaps the most distinctive hidden difference between index funds is a fund's operating expenses. These are expressed as a ratio, which represents the percentage of expenses compared to the amount of annual average <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Investors who invest in index funds should, theoretically, expect lower operating expenses since the fund manager doesn't have to select or manage any securities. However, operating expenses can vary between funds. Expenses are very important to consider when investing since expenses can erode an investor's return.
</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"> Consider the following comparison of 10 S&P 500 funds and their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://web.archive.org/web/20190331091250/https://www.investopedia.com/terms/e/expenseratio.asp">expense ratios</a> as of April 2003:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_21-0"> <div class="figure-media">
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<img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/pyWB9mLNGCmECm_vupXn4QlD1Hg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_The_Hidden_Differences_Between_Index_Funds_Mar_2020-01-8a899febd3cd4dba861bd83490608347.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/pyWB9mLNGCmECm_vupXn4QlD1Hg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_The_Hidden_Differences_Between_Index_Funds_Mar_2020-01-8a899febd3cd4dba861bd83490608347.jpg" data-srcset="https://www.investopedia.com/thmb/h0s2_hQGH8L073MphN0NiV8PCVY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_The_Hidden_Differences_Between_Index_Funds_Mar_2020-01-8a899febd3cd4dba861bd83490608347.jpg 750w" data-tracking-container="true" height="3876" id="mntl-sc-block-image_1-0" width="5260"/>
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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 different bars in this chart represent different funds. Bear in mind that the yearly return of the S&P 500 as of the end of April 2003 was approximately 5%, taking into specific account that expense ratios range from 0.15% to almost 1.60%. If we assume that the fund tracks the index closely, a 1.60% expense ratio will reduce an investor's return by about 30%.
</p>
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<span class="heading-toc" id="toc-fees"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Fees </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Index funds with nearly identical portfolio mixes and investing strategies can have different fee structures. Some index funds charge <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/front-endload.asp">front-end loads</a>, which are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commission.asp">commissions </a>or sales charges applied upfront when the initial purchase of an investment occurs. Other funds charge <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/back-end-load.asp">back-end loads</a>, which are charges and commissions that occur when the investment is sold. Other fees include <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/12b-1fees.asp">12b-1 fees</a>, which are annual distribution or marketing fees for the fund. However, the 12b-1 fee can be charged separately or be embedded within the fund's expense ratio.<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_27-0"> The fees, along with the expense ratio, should be considered before buying an index fund. Some funds may appear to be a better buy since they might charge a low expense ratio, but they might charge a back-end load or a 12b-1 fee separately. The fees and expense ratio, when taken cumulatively, can dramatically impact an investor's return over time.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Typically, larger, more established funds tend to charge lower fees. For example, the Vanguard 500 Index Admiral Shares fund (VFIAX), which tracks the stocks of 500 of the largest U.S. companies, charges a 0.04% expense ratio as of April 26, 2024.<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_31-0"> The lower fees could be the result of management experience in tracking indexes, a larger <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>, which could enhance the ability to use <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economiesofscale.asp">economies of scale</a> in purchasing the securities. Economies of scale are cost savings and advantages reaped by large companies when they can buy in bulk, thus lowering the per-unit cost.
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<span class="heading-toc" id="toc-tracking-errors"></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"> Tracking Errors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Another method for effectively assessing index funds involves comparing their <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> and quantifying each fund's deviation from the index it mimics.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Tracking error measures how much <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divergence.asp">divergence</a> occurs between the fund's value and that of the index the fund it's tracking. The tracking error is usually expressed as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeviation.asp">standard deviation</a>, which shows how much variance or dispersion exists between the fund's price and the average or mean price for the underlying index. Sizable deviations indicate large inconsistencies between the return of an index fund and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> This large divergence could be an indication of poor fund construction, high fees, or operating expenses. High costs can cause the return on an index fund to be significantly lower than the index's return, resulting in a large tracking error. As a result, any deviation can create smaller gains and larger losses for the fund.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The figure below compares the S&P 500's return (red), the Vanguard 500 Index Admiral Shares (green), the Dreyfus S&P 500 (blue), and the Advantus Index 500 B (purple). Notice the index fund's divergence from the benchmark increase as expenses increase.
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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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<span class="heading-toc" id="toc-a-funds-holdings"></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"> A Fund's Holdings </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Just because a fund says index fund in its name, doesn't necessarily mean it tracks the underlying index or sector exactly. When screening for an index fund, it's important to remember that not all index funds labeled "S&P 500" or "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insights/introduction-to-stock-market-indices/">Wilshire 5000</a>" only follow those indexes. Some funds can have divergent management behavior. In other words, a portfolio manager may add stocks to the fund that are similar to what's in the index.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Take for example the Devcap Shared Return fund, which is a socially responsible S&P 500 index fund. As of Jun. 4, 2003, it had an expense ratio of 1.75% and charged a 12b-1 fee of 0.25%. Another fund, the ASAF Bernstein Managed Index 500 B, was categorized as an S&P 500 index fund, but it actually sought to outperform the S&P 500.
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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">Image by Sabrina Jiang © Investopedia 2020</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"> Sector index funds that track a sector in the economy are often open to subjectivity by the investment manager as to what's included in the fund. For example, the SPDR S&P Homebuilders exchange-traded fund (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XHB">XHB</a>) is known for tracking stocks in the homebuilding industry.<span class="ql-inline-citation" data-cite="3"></span> An investor buying the fund might assume it contains only homebuilders. However, some holdings are stocks of companies related to the industry. For example, Whirlpool Corporation (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=WHR">WHR</a>), the appliance manufacturer, the home supply store, Home Depot (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD">HD</a>), as well as Aaron's Inc., which is a rent-to-own furniture retailer, are all included.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Also, if a <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> for an index fund performs additional management services, the fund is no longer passive. In other words, a fund might have the goal to outperform the index, such as the S&P 500, leading to holdings that include companies and securities outside the index being tracked. As a result, funds with these added selling features typically have fees well above average.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> It's important for investors to analyze the holdings of an index fund before investing to determine whether it's a true index fund or a fund that has an index-like name.
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<span class="heading-toc" id="toc-lack-of-diversification"></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"> Lack of Diversification </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Within the index <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundcategory.asp">fund category</a>, not all funds listed are as diversified as those tracking an index such as the S&P 500. Many index funds have the same properties as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/focusedfund.asp">focused</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuefund.asp">value</a>, or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sectorfund.asp">sector funds</a>. In general, investors will notice that focused funds tend to hold fewer than 30 stocks or assets, and they may often hold them within the same sector—though there is no specific limitation on the number they can hold. In theory, the lack of <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversification</a> in sector funds can expose investors to higher risk than a fund tracking the S&P 500, which is comprised of 500 companies within various sectors of the economy.
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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_58-0"> <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_59-0"> Careful investigation of index funds before buying includes making sure that there are little-to-no tracking errors and that fees and expenses ratios are low. Also, it's important to understand the investment manager's goal for the index fund and what holdings or investments are included in order to reach that goal. If the goal is considered aggressive, the fund's investments might deviate from the underlying index.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> The need to consider fees becomes even more important relative to increased risk factors—fees reduce the amount of return received for the risks taken. Consider the following comparison of Dow 30 index funds:
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> An investor's risk tolerance and time horizon can impact the choice of investments. A retiree would likely seek index funds that are conservative or low risk since the goal might be to maintain the portfolio and provide income. A Millennial, on the other hand, might choose a fund that has a more aggressive investment strategy designed to offer growth since the Millennial has more time to make up for any market downturns. Risk tolerance and time horizon are both important considerations when it comes to choosing an index fund.
</p></div> | Index funds, which track an underlying market index have grown in popularity with investors over the years. A fund might track the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) or [Dow Jones Industrial Average](https://www.investopedia.com/terms/d/djia.asp), allowing investors to own each of the holdings within those indices.
Although [index funds](https://www.investopedia.com/terms/i/indexfund.asp) do attempt to replicate highly similar performance compared to their respective indices, no fund's performance is guaranteed to be the same as similar funds; nor will a fund necessarily replicate the index it tracks. Although the differences between index funds can be subtle, they can have a major impact on an investor's return over the long term.
### Key Takeaways
* Index funds, which track an underlying market index have grown in popularity with investors over the years.
* Fees and expenses ratios or operating expenses can vary between index funds and erode an investor's return.
* An index fund might not track the underlying index or sector exactly causing tracking errors or variances between the fund and the index.
* Some index funds might only hold a few components, and the lack of diversification can expose investors to the risk of losses.
## Understanding the Hidden Differences Between Index Funds
An index fund is a type of [exchange-traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp) that contains a basket of stocks or securities that track the components of an existing financial [market index](https://www.investopedia.com/terms/m/marketindex.asp). For example, there are index funds that track the Standard & Poor's 500 Index. Although investors can't buy an index per se, they can invest in index funds that are designed to mirror the index. In other words, an index fund tracking the S&P would have all 500 stocks from the S&P 500 in the fund. Index funds tend to provide investors with broad market exposure or exposure to an overall sector.
As a result, index funds are [passive investments](https://www.investopedia.com/terms/p/passivemanagement.asp), meaning that a portfolio manager is not actively stock-picking by buying and selling securities for the fund. Instead, a [fund manager](https://www.investopedia.com/terms/f/fundmanager.asp) selects a combination of assets for a portfolio intended to mimic an index. Because the fund's [underlying assets](https://www.investopedia.com/terms/u/underlying-asset.asp) are held and not actively traded, [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp) are usually lower than actively managed funds.
At the onset, it might be reasonable that the index fund should track the index with little difference, and other funds tracking the same index should all have the same performance. However, a deeper look uncovers numerous disparities across fund types and [helps to uncover some winners](https://www.investopedia.com/articles/investing/012616/4-best-us-equity-index-mutual-funds.asp).
## Expense Ratios
Perhaps the most distinctive hidden difference between index funds is a fund's operating expenses. These are expressed as a ratio, which represents the percentage of expenses compared to the amount of annual average [assets under management](https://www.investopedia.com/terms/a/aum.asp).
Investors who invest in index funds should, theoretically, expect lower operating expenses since the fund manager doesn't have to select or manage any securities. However, operating expenses can vary between funds. Expenses are very important to consider when investing since expenses can erode an investor's return.
Consider the following comparison of 10 S&P 500 funds and their [expense ratios](https://web.archive.org/web/20190331091250/https://www.investopedia.com/terms/e/expenseratio.asp) as of April 2003:
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Image by Sabrina Jiang © Investopedia 2020
The different bars in this chart represent different funds. Bear in mind that the yearly return of the S&P 500 as of the end of April 2003 was approximately 5%, taking into specific account that expense ratios range from 0.15% to almost 1.60%. If we assume that the fund tracks the index closely, a 1.60% expense ratio will reduce an investor's return by about 30%.
## Fees
Index funds with nearly identical portfolio mixes and investing strategies can have different fee structures. Some index funds charge [front-end loads](https://www.investopedia.com/terms/f/front-endload.asp), which are [commissions](https://www.investopedia.com/terms/c/commission.asp)or sales charges applied upfront when the initial purchase of an investment occurs. Other funds charge [back-end loads](https://www.investopedia.com/terms/b/back-end-load.asp), which are charges and commissions that occur when the investment is sold. Other fees include [12b-1 fees](https://www.investopedia.com/terms/1/12b-1fees.asp), which are annual distribution or marketing fees for the fund. However, the 12b-1 fee can be charged separately or be embedded within the fund's expense ratio.
The fees, along with the expense ratio, should be considered before buying an index fund. Some funds may appear to be a better buy since they might charge a low expense ratio, but they might charge a back-end load or a 12b-1 fee separately. The fees and expense ratio, when taken cumulatively, can dramatically impact an investor's return over time.
Typically, larger, more established funds tend to charge lower fees. For example, the Vanguard 500 Index Admiral Shares fund (VFIAX), which tracks the stocks of 500 of the largest U.S. companies, charges a 0.04% expense ratio as of April 26, 2024.
The lower fees could be the result of management experience in tracking indexes, a larger [asset base](https://www.investopedia.com/terms/a/asset-base.asp), which could enhance the ability to use [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) in purchasing the securities. Economies of scale are cost savings and advantages reaped by large companies when they can buy in bulk, thus lowering the per-unit cost.
## Tracking Errors
Another method for effectively assessing index funds involves comparing their [tracking errors](https://www.investopedia.com/terms/t/trackingerror.asp) and quantifying each fund's deviation from the index it mimics.
Tracking error measures how much [divergence](https://www.investopedia.com/terms/d/divergence.asp) occurs between the fund's value and that of the index the fund it's tracking. The tracking error is usually expressed as a [standard deviation](https://www.investopedia.com/terms/s/standarddeviation.asp), which shows how much variance or dispersion exists between the fund's price and the average or mean price for the underlying index. Sizable deviations indicate large inconsistencies between the return of an index fund and the [benchmark](https://www.investopedia.com/terms/b/benchmark.asp).
This large divergence could be an indication of poor fund construction, high fees, or operating expenses. High costs can cause the return on an index fund to be significantly lower than the index's return, resulting in a large tracking error. As a result, any deviation can create smaller gains and larger losses for the fund.
The figure below compares the S&P 500's return (red), the Vanguard 500 Index Admiral Shares (green), the Dreyfus S&P 500 (blue), and the Advantus Index 500 B (purple). Notice the index fund's divergence from the benchmark increase as expenses increase.
![Image]()
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Image by Sabrina Jiang © Investopedia 2020
## A Fund's Holdings
Just because a fund says index fund in its name, doesn't necessarily mean it tracks the underlying index or sector exactly. When screening for an index fund, it's important to remember that not all index funds labeled "S&P 500" or "[Wilshire 5000](https://www.investopedia.com/insights/introduction-to-stock-market-indices/)" only follow those indexes. Some funds can have divergent management behavior. In other words, a portfolio manager may add stocks to the fund that are similar to what's in the index.
Take for example the Devcap Shared Return fund, which is a socially responsible S&P 500 index fund. As of Jun. 4, 2003, it had an expense ratio of 1.75% and charged a 12b-1 fee of 0.25%. Another fund, the ASAF Bernstein Managed Index 500 B, was categorized as an S&P 500 index fund, but it actually sought to outperform the S&P 500.
![Image]()
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Image by Sabrina Jiang © Investopedia 2020
Sector index funds that track a sector in the economy are often open to subjectivity by the investment manager as to what's included in the fund. For example, the SPDR S&P Homebuilders exchange-traded fund ([XHB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XHB)) is known for tracking stocks in the homebuilding industry. An investor buying the fund might assume it contains only homebuilders. However, some holdings are stocks of companies related to the industry. For example, Whirlpool Corporation ([WHR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WHR)), the appliance manufacturer, the home supply store, Home Depot ([HD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD)), as well as Aaron's Inc., which is a rent-to-own furniture retailer, are all included.
Also, if a [portfolio manager](https://www.investopedia.com/terms/p/portfoliomanager.asp) for an index fund performs additional management services, the fund is no longer passive. In other words, a fund might have the goal to outperform the index, such as the S&P 500, leading to holdings that include companies and securities outside the index being tracked. As a result, funds with these added selling features typically have fees well above average.
It's important for investors to analyze the holdings of an index fund before investing to determine whether it's a true index fund or a fund that has an index-like name.
## Lack of Diversification
Within the index [fund category](https://www.investopedia.com/terms/f/fundcategory.asp), not all funds listed are as diversified as those tracking an index such as the S&P 500. Many index funds have the same properties as [focused](https://www.investopedia.com/terms/f/focusedfund.asp), [value](https://www.investopedia.com/terms/v/valuefund.asp), or [sector funds](https://www.investopedia.com/terms/s/sectorfund.asp). In general, investors will notice that focused funds tend to hold fewer than 30 stocks or assets, and they may often hold them within the same sector—though there is no specific limitation on the number they can hold. In theory, the lack of [diversification](https://www.investopedia.com/terms/d/diversification.asp) in sector funds can expose investors to higher risk than a fund tracking the S&P 500, which is comprised of 500 companies within various sectors of the economy.
## Special Considerations
Careful investigation of index funds before buying includes making sure that there are little-to-no tracking errors and that fees and expenses ratios are low. Also, it's important to understand the investment manager's goal for the index fund and what holdings or investments are included in order to reach that goal. If the goal is considered aggressive, the fund's investments might deviate from the underlying index.
The need to consider fees becomes even more important relative to increased risk factors—fees reduce the amount of return received for the risks taken. Consider the following comparison of Dow 30 index funds:
![Image]()
:max_bytes(150000):strip_icc()/dotdash_Final_The_Hidden_Differences_Between_Index_Funds_Mar_2020-04-e87a6f8de5e14ab1a4a15f687bdb3ecf.jpg)
Image by Sabrina Jiang © Investopedia 2020
An investor's risk tolerance and time horizon can impact the choice of investments. A retiree would likely seek index funds that are conservative or low risk since the goal might be to maintain the portfolio and provide income. A Millennial, on the other hand, might choose a fund that has a more aggressive investment strategy designed to offer growth since the Millennial has more time to make up for any market downturns. Risk tolerance and time horizon are both important considerations when it comes to choosing an index fund.
| Index funds, which track an underlying market index have grown in popularity with investors over the years. A fund might track the S&P 500 or Dow Jones Industrial Average, allowing investors to own each of the holdings within those indices.
Although index funds do attempt to replicate highly similar performance compared to their respective indices, no fund's performance is guaranteed to be the same as similar funds; nor will a fund necessarily replicate the index it tracks. Although the differences between index funds can be subtle, they can have a major impact on an investor's return over the long term.
Key Takeaways
Index funds, which track an underlying market index have grown in popularity with investors over the years.Fees and expenses ratios or operating expenses can vary between index funds and erode an investor's return.An index fund might not track the underlying index or sector exactly causing tracking errors or variances between the fund and the index.Some index funds might only hold a few components, and the lack of diversification can expose investors to the risk of losses.
Understanding the Hidden Differences Between Index Funds
An index fund is a type of exchange-traded fund (ETF) that contains a basket of stocks or securities that track the components of an existing financial market index. For example, there are index funds that track the Standard & Poor's 500 Index. Although investors can't buy an index per se, they can invest in index funds that are designed to mirror the index. In other words, an index fund tracking the S&P would have all 500 stocks from the S&P 500 in the fund. Index funds tend to provide investors with broad market exposure or exposure to an overall sector.
As a result, index funds are passive investments, meaning that a portfolio manager is not actively stock-picking by buying and selling securities for the fund. Instead, a fund manager selects a combination of assets for a portfolio intended to mimic an index. Because the fund's underlying assets are held and not actively traded, operating expenses are usually lower than actively managed funds.
At the onset, it might be reasonable that the index fund should track the index with little difference, and other funds tracking the same index should all have the same performance. However, a deeper look uncovers numerous disparities across fund types and helps to uncover some winners.
Expense Ratios
Perhaps the most distinctive hidden difference between index funds is a fund's operating expenses. These are expressed as a ratio, which represents the percentage of expenses compared to the amount of annual average assets under management.
Investors who invest in index funds should, theoretically, expect lower operating expenses since the fund manager doesn't have to select or manage any securities. However, operating expenses can vary between funds. Expenses are very important to consider when investing since expenses can erode an investor's return.
Consider the following comparison of 10 S&P 500 funds and their expense ratios as of April 2003:
Image by Sabrina Jiang © Investopedia 2020
The different bars in this chart represent different funds. Bear in mind that the yearly return of the S&P 500 as of the end of April 2003 was approximately 5%, taking into specific account that expense ratios range from 0.15% to almost 1.60%. If we assume that the fund tracks the index closely, a 1.60% expense ratio will reduce an investor's return by about 30%.
Fees
Index funds with nearly identical portfolio mixes and investing strategies can have different fee structures. Some index funds charge front-end loads, which are commissions or sales charges applied upfront when the initial purchase of an investment occurs. Other funds charge back-end loads, which are charges and commissions that occur when the investment is sold. Other fees include 12b-1 fees, which are annual distribution or marketing fees for the fund. However, the 12b-1 fee can be charged separately or be embedded within the fund's expense ratio.
The fees, along with the expense ratio, should be considered before buying an index fund. Some funds may appear to be a better buy since they might charge a low expense ratio, but they might charge a back-end load or a 12b-1 fee separately. The fees and expense ratio, when taken cumulatively, can dramatically impact an investor's return over time.
Typically, larger, more established funds tend to charge lower fees. For example, the Vanguard 500 Index Admiral Shares fund (VFIAX), which tracks the stocks of 500 of the largest U.S. companies, charges a 0.04% expense ratio as of April 26, 2024.
The lower fees could be the result of management experience in tracking indexes, a larger asset base, which could enhance the ability to use economies of scale in purchasing the securities. Economies of scale are cost savings and advantages reaped by large companies when they can buy in bulk, thus lowering the per-unit cost.
Tracking Errors
Another method for effectively assessing index funds involves comparing their tracking errors and quantifying each fund's deviation from the index it mimics.
Tracking error measures how much divergence occurs between the fund's value and that of the index the fund it's tracking. The tracking error is usually expressed as a standard deviation, which shows how much variance or dispersion exists between the fund's price and the average or mean price for the underlying index. Sizable deviations indicate large inconsistencies between the return of an index fund and the benchmark.
This large divergence could be an indication of poor fund construction, high fees, or operating expenses. High costs can cause the return on an index fund to be significantly lower than the index's return, resulting in a large tracking error. As a result, any deviation can create smaller gains and larger losses for the fund.
The figure below compares the S&P 500's return (red), the Vanguard 500 Index Admiral Shares (green), the Dreyfus S&P 500 (blue), and the Advantus Index 500 B (purple). Notice the index fund's divergence from the benchmark increase as expenses increase.
Image by Sabrina Jiang © Investopedia 2020
A Fund's Holdings
Just because a fund says index fund in its name, doesn't necessarily mean it tracks the underlying index or sector exactly. When screening for an index fund, it's important to remember that not all index funds labeled "S&P 500" or "Wilshire 5000" only follow those indexes. Some funds can have divergent management behavior. In other words, a portfolio manager may add stocks to the fund that are similar to what's in the index.
Take for example the Devcap Shared Return fund, which is a socially responsible S&P 500 index fund. As of Jun. 4, 2003, it had an expense ratio of 1.75% and charged a 12b-1 fee of 0.25%. Another fund, the ASAF Bernstein Managed Index 500 B, was categorized as an S&P 500 index fund, but it actually sought to outperform the S&P 500.
Image by Sabrina Jiang © Investopedia 2020
Sector index funds that track a sector in the economy are often open to subjectivity by the investment manager as to what's included in the fund. For example, the SPDR S&P Homebuilders exchange-traded fund (XHB) is known for tracking stocks in the homebuilding industry. An investor buying the fund might assume it contains only homebuilders. However, some holdings are stocks of companies related to the industry. For example, Whirlpool Corporation (WHR), the appliance manufacturer, the home supply store, Home Depot (HD), as well as Aaron's Inc., which is a rent-to-own furniture retailer, are all included.
Also, if a portfolio manager for an index fund performs additional management services, the fund is no longer passive. In other words, a fund might have the goal to outperform the index, such as the S&P 500, leading to holdings that include companies and securities outside the index being tracked. As a result, funds with these added selling features typically have fees well above average.
It's important for investors to analyze the holdings of an index fund before investing to determine whether it's a true index fund or a fund that has an index-like name.
Lack of Diversification
Within the index fund category, not all funds listed are as diversified as those tracking an index such as the S&P 500. Many index funds have the same properties as focused, value, or sector funds. In general, investors will notice that focused funds tend to hold fewer than 30 stocks or assets, and they may often hold them within the same sector—though there is no specific limitation on the number they can hold. In theory, the lack of diversification in sector funds can expose investors to higher risk than a fund tracking the S&P 500, which is comprised of 500 companies within various sectors of the economy.
Special Considerations
Careful investigation of index funds before buying includes making sure that there are little-to-no tracking errors and that fees and expenses ratios are low. Also, it's important to understand the investment manager's goal for the index fund and what holdings or investments are included in order to reach that goal. If the goal is considered aggressive, the fund's investments might deviate from the underlying index.
The need to consider fees becomes even more important relative to increased risk factors—fees reduce the amount of return received for the risks taken. Consider the following comparison of Dow 30 index funds:
Image by Sabrina Jiang © Investopedia 2020
An investor's risk tolerance and time horizon can impact the choice of investments. A retiree would likely seek index funds that are conservative or low risk since the goal might be to maintain the portfolio and provide income. A Millennial, on the other hand, might choose a fund that has a more aggressive investment strategy designed to offer growth since the Millennial has more time to make up for any market downturns. Risk tolerance and time horizon are both important considerations when it comes to choosing an index fund.
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https://www.investopedia.com/articles/etfs-mutual-funds/071216/5-etfs-amazon-exposure-amznxlyfdnrth.asp | 5 ETFs With Exposure to Amazon (FDIS, XLY, VCR, RTH, FDN) | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Amazon.com, Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn">AMZN</a>) dominates the retail industry. The company sustains diversified businesses; shows relentless innovation, and posts consistent <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/topline.asp">top-line</a> growth. Moreover, Amazon enjoys persistent profitability, strong <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashflow.asp">cash flow</a>, a healthy <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancesheet.asp">balance sheet</a>, and impressive stock appreciation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> On the other hand, today Amazon is trading at a trailing 12-month <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">price-to-earnings (P/E) ratio</a> of 56.33 as of February 2022.<span class="ql-inline-citation" data-cite="1"></span> To <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/analyst.asp">analysts</a>, this means that any surprise bad news could result in the stock's sudden slide. The investment community has feared a potential downside—which has not yet come to fruition—of Amazon stock for many years.
</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>Amazon is an appealing investment option for many market participants. But the stock's success also makes it vulnerable to declines should it weather bad news.</li><li>To be invested in Amazon, but still hedge against the possibility of a big selloff, many investors are looking for exchange-traded funds (ETFs) that have Amazon stock among their top holdings.</li><li>The best ETFS with notable Amazon exposure include Fidelity MSCI Consumer Discretionary Index ETF, SPDR Consumer Discretionary Select Sector Fund, Vanguard Consumer Discretionary ETF, VanEck Vectors Retail ETF, and the First Trust DJ Internet Index Fund.</li></ul></div></div></div>
<span class="heading-toc" id="toc-whats-an-investor-to-do"></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's an Investor To Do? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> All of this can lead to investor confusion. You want to invest in Amazon, but don’t want to end up being a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bag-holder.asp">bag holder</a> who entered the trade right before the fall. Instead of investing directly in AMZN, you can invest in an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded fund</a> (ETF) that has the stock as one of its top holdings. Although this approach will not protect you in the event that AMZN slumps, it will help to limit any potential losses because you will be <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/importance-diversification/">diversified</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When evaluating a stock, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/070214/how-can-pricetoearnings-pe-ratio-mislead-investors.asp">P/E ratio is not the only consideration</a>.</p></div></div></div>
<span class="heading-toc" id="toc-enter-etfs-with-amazon-exposure"></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"> Enter ETFs With Amazon Exposure </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The five ETFs cited below, according to Amazon weighting, have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/031416/top-5-mutual-fund-holders-amazon-inc-amzn-agthx.asp">AMZN as their top holding</a>. If you’re interested in taking a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/072303.asp">diversified investing approach</a> to this stock, then it might be worth exploring these funds as an alternative to buying individual shares of AMZN. As with any investment, you should consider the facts and figures of each ETF thoroughly to determine the best fit for your investing goals.
</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"> <a class="mntl-sc-block-subheading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FDIS" rel="nocaes">1. Fidelity MSCI Consumer Discretionary Index ETF (FDIS)</a> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0">
<li><strong>Amazon Weighting: 21.07%</strong></li>
<li>Issuer: Fidelity</li>
<li>Tracks: Price and yield of the MSCI U.S. IMI Consumer Discretionary Index</li>
<li>Inception: 10/21/13</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">Expense Ratio</a>: 0.08%</li>
<li>Assets Under Management: $2B</li>
<li>Average Daily Volume (90 days): 166,341</li>
<li>Average Spread: 0.06% <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_17-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <a class="mntl-sc-block-subheading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=xly" rel="nocaes">2. SPDR Consumer Discretionary Select Sector Fund (XLY)</a> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> <li><strong>Amazon Weighting: 22.24%</strong></li><li>Issuer: State Street Global Advisors</li><li>Tracks: Price and yield of the Consumer Discretionary Select Sector Index</li><li>Inception: 12/16/98</li><li>Expense Ratio: 0.12%</li><li>Assets Under Management: $23.5B</li><li>Average Daily Volume (90 days): 7,190,822</li><li>Average Spread: 0.01%<span class="ql-inline-citation" data-cite="12"></span> <span class="ql-inline-citation" data-cite="3"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_21-0"> <a class="mntl-sc-block-subheading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vcr" rel="nocaes">3. Vanguard Consumer Discretionary ETF (VCR)</a> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li><strong>Amazon Weighting: 21.14%</strong></li><li>Issuer: Vanguard</li><li>Tracks: Price and yield of the MSCI U.S. IMI/Consumer Discretionary 25/50</li><li>Inception: 01/26/04</li><li>Expense Ratio: 0.10%</li><li>Assets Under Management: $7.4B</li><li>Average Daily Volume (90 days): 137,708</li><li>Average Spread: 0.07%<span class="ql-inline-citation" data-cite="5"></span> <span class="ql-inline-citation" data-cite="4"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <a class="mntl-sc-block-subheading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=rth" rel="nocaes">4. VanEck Vectors Retail ETF (RTH)</a> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <li><strong>Amazon Weighting: 18.82%</strong></li><li>Issuer: Van Eck</li><li>Tracks: Price and yield of Market Vectors U.S. Listed Retail 25 Index</li><li>Inception:<strong> </strong>12/20/11</li><li>Expense Ratio: 0.35%</li><li>Assets Under Management: $237.7M</li><li>Average Daily Volume (90 days): 17,854</li><li>Average Spread: 0.06%<span class="ql-inline-citation" data-cite="7"></span> <span class="ql-inline-citation" data-cite="6"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_27-0"> <a class="mntl-sc-block-subheading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fdn" rel="nocaes">5. First Trust DJ Internet Index Fund (FDN)</a> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <li><strong>Amazon Weighting: 9.17%</strong></li><li>Tracks: Price and yield of Dow Jones Internet Composite Index</li><li>Inception: 06/19/06</li><li>Expense Ratio: 0.51%</li><li>Assets Under Management: $10B</li><li>Average Daily Volume (90 days): 290,293</li><li>Average Spread: 0.04%<span class="ql-inline-citation" data-cite="9"></span> <span class="ql-inline-citation" data-cite="8"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Amazon is one of the strongest companies on the planet. It is healthy in every regard and continues to steal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketshare.asp">market share</a> from its peers, sometimes even to the point of putting those competitors out of business. If you were to ignore the high P/E ratio and global economic <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risks</a> involved with this AMZN, then it would be a no-brainer. However, because these are important considerations with the stock, then investors who want exposure to it might consider a more diversified approach via one of the ETFs listed above.
</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"> <em>Neither Dan Moskowitz nor Carla Tardi has any positions in AMZN, RTH, XLY, FDN, FDIS, or VCR.</em>
</p></div> | Amazon.com, Inc. ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)) dominates the retail industry. The company sustains diversified businesses; shows relentless innovation, and posts consistent [top-line](https://www.investopedia.com/terms/t/topline.asp) growth. Moreover, Amazon enjoys persistent profitability, strong [cash flow](https://www.investopedia.com/terms/c/cashflow.asp), a healthy [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp), and impressive stock appreciation.
On the other hand, today Amazon is trading at a trailing 12-month [price-to-earnings (P/E) ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp) of 56.33 as of February 2022. To [analysts](https://www.investopedia.com/terms/a/analyst.asp), this means that any surprise bad news could result in the stock's sudden slide. The investment community has feared a potential downside—which has not yet come to fruition—of Amazon stock for many years.
### Key Takeaways
* Amazon is an appealing investment option for many market participants. But the stock's success also makes it vulnerable to declines should it weather bad news.
* To be invested in Amazon, but still hedge against the possibility of a big selloff, many investors are looking for exchange-traded funds (ETFs) that have Amazon stock among their top holdings.
* The best ETFS with notable Amazon exposure include Fidelity MSCI Consumer Discretionary Index ETF, SPDR Consumer Discretionary Select Sector Fund, Vanguard Consumer Discretionary ETF, VanEck Vectors Retail ETF, and the First Trust DJ Internet Index Fund.
## What's an Investor To Do?
All of this can lead to investor confusion. You want to invest in Amazon, but don’t want to end up being a [bag holder](https://www.investopedia.com/terms/b/bag-holder.asp) who entered the trade right before the fall. Instead of investing directly in AMZN, you can invest in an [exchange-traded fund](https://www.investopedia.com/terms/e/etf.asp) (ETF) that has the stock as one of its top holdings. Although this approach will not protect you in the event that AMZN slumps, it will help to limit any potential losses because you will be [diversified](https://www.investopedia.com/investing/importance-diversification/).
###
When evaluating a stock, the [P/E ratio is not the only consideration](https://www.investopedia.com/ask/answers/070214/how-can-pricetoearnings-pe-ratio-mislead-investors.asp).
## Enter ETFs With Amazon Exposure
The five ETFs cited below, according to Amazon weighting, have [AMZN as their top holding](https://www.investopedia.com/articles/investing/031416/top-5-mutual-fund-holders-amazon-inc-amzn-agthx.asp). If you’re interested in taking a [diversified investing approach](https://www.investopedia.com/articles/03/072303.asp) to this stock, then it might be worth exploring these funds as an alternative to buying individual shares of AMZN. As with any investment, you should consider the facts and figures of each ETF thoroughly to determine the best fit for your investing goals.
### [1. Fidelity MSCI Consumer Discretionary Index ETF (FDIS)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FDIS)
* **Amazon Weighting: 21.07%**
* Issuer: Fidelity
* Tracks: Price and yield of the MSCI U.S. IMI Consumer Discretionary Index
* Inception: 10/21/13
* [Expense Ratio](https://www.investopedia.com/terms/e/expenseratio.asp): 0.08%
* Assets Under Management: $2B
* Average Daily Volume (90 days): 166,341
* Average Spread: 0.06%
### [2. SPDR Consumer Discretionary Select Sector Fund (XLY)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=xly)
* **Amazon Weighting: 22.24%**
* Issuer: State Street Global Advisors
* Tracks: Price and yield of the Consumer Discretionary Select Sector Index
* Inception: 12/16/98
* Expense Ratio: 0.12%
* Assets Under Management: $23.5B
* Average Daily Volume (90 days): 7,190,822
* Average Spread: 0.01%
### [3. Vanguard Consumer Discretionary ETF (VCR)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vcr)
* **Amazon Weighting: 21.14%**
* Issuer: Vanguard
* Tracks: Price and yield of the MSCI U.S. IMI/Consumer Discretionary 25/50
* Inception: 01/26/04
* Expense Ratio: 0.10%
* Assets Under Management: $7.4B
* Average Daily Volume (90 days): 137,708
* Average Spread: 0.07%
### [4. VanEck Vectors Retail ETF (RTH)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rth)
* **Amazon Weighting: 18.82%**
* Issuer: Van Eck
* Tracks: Price and yield of Market Vectors U.S. Listed Retail 25 Index
* Inception:12/20/11
* Expense Ratio: 0.35%
* Assets Under Management: $237.7M
* Average Daily Volume (90 days): 17,854
* Average Spread: 0.06%
### [5. First Trust DJ Internet Index Fund (FDN)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fdn)
* **Amazon Weighting: 9.17%**
* Tracks: Price and yield of Dow Jones Internet Composite Index
* Inception: 06/19/06
* Expense Ratio: 0.51%
* Assets Under Management: $10B
* Average Daily Volume (90 days): 290,293
* Average Spread: 0.04%
## The Bottom Line
Amazon is one of the strongest companies on the planet. It is healthy in every regard and continues to steal [market share](https://www.investopedia.com/terms/m/marketshare.asp) from its peers, sometimes even to the point of putting those competitors out of business. If you were to ignore the high P/E ratio and global economic [risks](https://www.investopedia.com/terms/r/risk.asp) involved with this AMZN, then it would be a no-brainer. However, because these are important considerations with the stock, then investors who want exposure to it might consider a more diversified approach via one of the ETFs listed above.
*Neither Dan Moskowitz nor Carla Tardi has any positions in AMZN, RTH, XLY, FDN, FDIS, or VCR.*
| Amazon.com, Inc. (AMZN) dominates the retail industry. The company sustains diversified businesses; shows relentless innovation, and posts consistent top-line growth. Moreover, Amazon enjoys persistent profitability, strong cash flow, a healthy balance sheet, and impressive stock appreciation.
On the other hand, today Amazon is trading at a trailing 12-month price-to-earnings (P/E) ratio of 56.33 as of February 2022. To analysts, this means that any surprise bad news could result in the stock's sudden slide. The investment community has feared a potential downside—which has not yet come to fruition—of Amazon stock for many years.
Key Takeaways
Amazon is an appealing investment option for many market participants. But the stock's success also makes it vulnerable to declines should it weather bad news.To be invested in Amazon, but still hedge against the possibility of a big selloff, many investors are looking for exchange-traded funds (ETFs) that have Amazon stock among their top holdings.The best ETFS with notable Amazon exposure include Fidelity MSCI Consumer Discretionary Index ETF, SPDR Consumer Discretionary Select Sector Fund, Vanguard Consumer Discretionary ETF, VanEck Vectors Retail ETF, and the First Trust DJ Internet Index Fund.
What's an Investor To Do?
All of this can lead to investor confusion. You want to invest in Amazon, but don’t want to end up being a bag holder who entered the trade right before the fall. Instead of investing directly in AMZN, you can invest in an exchange-traded fund (ETF) that has the stock as one of its top holdings. Although this approach will not protect you in the event that AMZN slumps, it will help to limit any potential losses because you will be diversified.
When evaluating a stock, the P/E ratio is not the only consideration.
Enter ETFs With Amazon Exposure
The five ETFs cited below, according to Amazon weighting, have AMZN as their top holding. If you’re interested in taking a diversified investing approach to this stock, then it might be worth exploring these funds as an alternative to buying individual shares of AMZN. As with any investment, you should consider the facts and figures of each ETF thoroughly to determine the best fit for your investing goals.
1. Fidelity MSCI Consumer Discretionary Index ETF (FDIS)
Amazon Weighting: 21.07%
Issuer: Fidelity
Tracks: Price and yield of the MSCI U.S. IMI Consumer Discretionary Index
Inception: 10/21/13
Expense Ratio: 0.08%
Assets Under Management: $2B
Average Daily Volume (90 days): 166,341
Average Spread: 0.06%
2. SPDR Consumer Discretionary Select Sector Fund (XLY)
Amazon Weighting: 22.24%Issuer: State Street Global AdvisorsTracks: Price and yield of the Consumer Discretionary Select Sector IndexInception: 12/16/98Expense Ratio: 0.12%Assets Under Management: $23.5BAverage Daily Volume (90 days): 7,190,822Average Spread: 0.01%
3. Vanguard Consumer Discretionary ETF (VCR)
Amazon Weighting: 21.14%Issuer: VanguardTracks: Price and yield of the MSCI U.S. IMI/Consumer Discretionary 25/50Inception: 01/26/04Expense Ratio: 0.10%Assets Under Management: $7.4BAverage Daily Volume (90 days): 137,708Average Spread: 0.07%
4. VanEck Vectors Retail ETF (RTH)
Amazon Weighting: 18.82%Issuer: Van EckTracks: Price and yield of Market Vectors U.S. Listed Retail 25 IndexInception: 12/20/11Expense Ratio: 0.35%Assets Under Management: $237.7MAverage Daily Volume (90 days): 17,854Average Spread: 0.06%
5. First Trust DJ Internet Index Fund (FDN)
Amazon Weighting: 9.17%Tracks: Price and yield of Dow Jones Internet Composite IndexInception: 06/19/06Expense Ratio: 0.51%Assets Under Management: $10BAverage Daily Volume (90 days): 290,293Average Spread: 0.04%
The Bottom Line
Amazon is one of the strongest companies on the planet. It is healthy in every regard and continues to steal market share from its peers, sometimes even to the point of putting those competitors out of business. If you were to ignore the high P/E ratio and global economic risks involved with this AMZN, then it would be a no-brainer. However, because these are important considerations with the stock, then investors who want exposure to it might consider a more diversified approach via one of the ETFs listed above.
Neither Dan Moskowitz nor Carla Tardi has any positions in AMZN, RTH, XLY, FDN, FDIS, or VCR.
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https://www.investopedia.com/bitcoin-crosses-usd63k-as-etf-volumes-soar-and-halving-nears-8601479 | Bitcoin Crosses $63K as ETF Volumes Soar and 'Halving' Nears | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 is trading over $63,000 for the first time since November 2021.</li><li>Trading volumes for the "new nine" spot bitcoin ETFs hit a new all-time high on Monday.</li><li>Optimism around spot bitcoin ETFs and the upcoming halving is driving market sentiment, according to a Grayscale report.</li><li>Major crypto-related stocks, such as MSTR, COIN and RIOT, have hit year-to-date highs in this latest rally.</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 rose above $63,000 for the first time since November 2021 on Wednesday morning, buoyed by a surge in trading activity in spot bitcoin exchange-traded funds this week.
</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"> Also lifting investor appetite for the token: A reduction in its supply growth, an event known as its "halving," slated for April.
</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 largest cryptocurrency has staged a massive comeback since it traded at around $20,000 just under a year ago. 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>) prices are up around 45% since the beginning of the year and have soared from $42,000 to more than $60,000 in a matter of weeks.<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-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_9-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:60.8%;">
<img alt="Bitcoin crosses $63,000" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/e7rcL5DBS5KQgIMdra_k765sgUU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTCUSD_2024-02-28_12-21-56-c0d4c243130b4be2b52bfd68bd7b7316.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/e7rcL5DBS5KQgIMdra_k765sgUU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTCUSD_2024-02-28_12-21-56-c0d4c243130b4be2b52bfd68bd7b7316.png" data-srcset="https://www.investopedia.com/thmb/kLCLc72nugkIpF73qS91DJyCg_Y=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTCUSD_2024-02-28_12-21-56-c0d4c243130b4be2b52bfd68bd7b7316.png 750w" data-tracking-container="true" height="1282" id="mntl-sc-block-image_1-0" width="2108"/>
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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-bitcoin-etfs-halving-optimism-drive-tokens-rally"></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"> Bitcoin ETFs, Halving Optimism Drive Token's Rally </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> This latest price increase in the digital asset comes as activity around spot bitcoin ETFs hit levels not seen since these funds—which opened up bitcoin to a whole new swathe of retail investors—<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/bitcoin-etfs-explained/">started trading in January</a>. The new nine spot bitcoin ETFs, which only excludes the preexisting Grayscale Bitcoin Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC">GBTC</a>), hit a new all-time high for trading volume on Monday, according to Bloomberg Senior ETF Analyst Eric Balchunas.<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_13-0"> Blackrock's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK">BLK</a>) 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>) broke its own trading volume records on both Monday and Tuesday.<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_15-0"> In addition to the obvious hype around the spot bitcoin ETFs, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cryptocurrency-market-news-week-of-feb-12-8575903">recent report from Grayscale Advisors LLC</a> pointed to the upcoming bitcoin <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-halving-4843769">halving event</a> as a key factor driving bitcoin prices. Slated to occur in April, the halving will cut the supply of new bitcoin created per block as well as the rewards for bitcoin miners in half.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> With the supply of bitcoin capped at 21 million and more than 19.6 million already in circulation, halving will slow supply—feeding the token's scarcity.<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_19-0"> The halving is also likely to affect returns of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-miners-surpass-bitcoin-the-halving-may-change-that-8584288">bitcoin mining stocks</a>, which have recently enjoyed stellar gains.
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<span class="heading-toc" id="toc-rising-bitcoin-lifts-all-crypto"></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"> Rising Bitcoin Lifts All Crypto </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Bitcoin's rally has lifted the whole cryptocurrency space. According to CoinGecko data, the market capitalization of the entire cryptocurrency market has surpassed $2 trillion for the first time since April 2022. Bitcoin accounts for nearly $1.2 trillion of that.<span class="ql-inline-citation" data-cite="5"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The crytpo market's gains haven't matched the pace of bitcoin's this year, although ether (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD">ETH</a>) recently broke through the $3,000 mark for the first time since April 2022.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Crypto-focused stocks, such as Coinbase (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN">COIN</a>) and Riot Blockchain (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=RIOT">RIOT</a>), have also hit new year-to-date highs during this latest rally. Notably, software-intelligence firm Microstrategy (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSTR">MSTR</a>) now holds more than $11 billion worth of bitcoin on its balance sheet.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div>
<a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 is trading over $63,000 for the first time since November 2021.
* Trading volumes for the "new nine" spot bitcoin ETFs hit a new all-time high on Monday.
* Optimism around spot bitcoin ETFs and the upcoming halving is driving market sentiment, according to a Grayscale report.
* Major crypto-related stocks, such as MSTR, COIN and RIOT, have hit year-to-date highs in this latest rally.
Bitcoin rose above $63,000 for the first time since November 2021 on Wednesday morning, buoyed by a surge in trading activity in spot bitcoin exchange-traded funds this week.
Also lifting investor appetite for the token: A reduction in its supply growth, an event known as its "halving," slated for April.
The largest cryptocurrency has staged a massive comeback since it traded at around $20,000 just under a year ago. Bitcoin ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD)) prices are up around 45% since the beginning of the year and have soared from $42,000 to more than $60,000 in a matter of weeks.
![Bitcoin crosses $63,000]()
:max_bytes(150000):strip_icc()/BTCUSD_2024-02-28_12-21-56-c0d4c243130b4be2b52bfd68bd7b7316.png)
TradingView
## Bitcoin ETFs, Halving Optimism Drive Token's Rally
This latest price increase in the digital asset comes as activity around spot bitcoin ETFs hit levels not seen since these funds—which opened up bitcoin to a whole new swathe of retail investors—[started trading in January](https://www.investopedia.com/investing/bitcoin-etfs-explained/). The new nine spot bitcoin ETFs, which only excludes the preexisting Grayscale Bitcoin Trust ([GBTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC)), hit a new all-time high for trading volume on Monday, according to Bloomberg Senior ETF Analyst Eric Balchunas.
Blackrock's ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK)) iShares Bitcoin Trust ([IBIT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IBIT)) broke its own trading volume records on both Monday and Tuesday.
In addition to the obvious hype around the spot bitcoin ETFs, a [recent report from Grayscale Advisors LLC](https://www.investopedia.com/cryptocurrency-market-news-week-of-feb-12-8575903) pointed to the upcoming bitcoin [halving event](https://www.investopedia.com/bitcoin-halving-4843769) as a key factor driving bitcoin prices. Slated to occur in April, the halving will cut the supply of new bitcoin created per block as well as the rewards for bitcoin miners in half.
With the supply of bitcoin capped at 21 million and more than 19.6 million already in circulation, halving will slow supply—feeding the token's scarcity.
The halving is also likely to affect returns of [bitcoin mining stocks](https://www.investopedia.com/bitcoin-miners-surpass-bitcoin-the-halving-may-change-that-8584288), which have recently enjoyed stellar gains.
## Rising Bitcoin Lifts All Crypto
Bitcoin's rally has lifted the whole cryptocurrency space. According to CoinGecko data, the market capitalization of the entire cryptocurrency market has surpassed $2 trillion for the first time since April 2022. Bitcoin accounts for nearly $1.2 trillion of that.
The crytpo market's gains haven't matched the pace of bitcoin's this year, although ether ([ETH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD)) recently broke through the $3,000 mark for the first time since April 2022.
Crypto-focused stocks, such as Coinbase ([COIN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN)) and Riot Blockchain ([RIOT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=RIOT)), have also hit new year-to-date highs during this latest rally. Notably, software-intelligence firm Microstrategy ([MSTR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSTR)) now holds more than $11 billion worth of bitcoin on its balance sheet.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Bitcoin is trading over $63,000 for the first time since November 2021.Trading volumes for the "new nine" spot bitcoin ETFs hit a new all-time high on Monday.Optimism around spot bitcoin ETFs and the upcoming halving is driving market sentiment, according to a Grayscale report.Major crypto-related stocks, such as MSTR, COIN and RIOT, have hit year-to-date highs in this latest rally.
Bitcoin rose above $63,000 for the first time since November 2021 on Wednesday morning, buoyed by a surge in trading activity in spot bitcoin exchange-traded funds this week.
Also lifting investor appetite for the token: A reduction in its supply growth, an event known as its "halving," slated for April.
The largest cryptocurrency has staged a massive comeback since it traded at around $20,000 just under a year ago. Bitcoin (BTC) prices are up around 45% since the beginning of the year and have soared from $42,000 to more than $60,000 in a matter of weeks.
TradingView
Bitcoin ETFs, Halving Optimism Drive Token's Rally
This latest price increase in the digital asset comes as activity around spot bitcoin ETFs hit levels not seen since these funds—which opened up bitcoin to a whole new swathe of retail investors—started trading in January. The new nine spot bitcoin ETFs, which only excludes the preexisting Grayscale Bitcoin Trust (GBTC), hit a new all-time high for trading volume on Monday, according to Bloomberg Senior ETF Analyst Eric Balchunas.
Blackrock's (BLK) iShares Bitcoin Trust (IBIT) broke its own trading volume records on both Monday and Tuesday.
In addition to the obvious hype around the spot bitcoin ETFs, a recent report from Grayscale Advisors LLC pointed to the upcoming bitcoin halving event as a key factor driving bitcoin prices. Slated to occur in April, the halving will cut the supply of new bitcoin created per block as well as the rewards for bitcoin miners in half.
With the supply of bitcoin capped at 21 million and more than 19.6 million already in circulation, halving will slow supply—feeding the token's scarcity.
The halving is also likely to affect returns of bitcoin mining stocks, which have recently enjoyed stellar gains.
Rising Bitcoin Lifts All Crypto
Bitcoin's rally has lifted the whole cryptocurrency space. According to CoinGecko data, the market capitalization of the entire cryptocurrency market has surpassed $2 trillion for the first time since April 2022. Bitcoin accounts for nearly $1.2 trillion of that.
The crytpo market's gains haven't matched the pace of bitcoin's this year, although ether (ETH) recently broke through the $3,000 mark for the first time since April 2022.
Crypto-focused stocks, such as Coinbase (COIN) and Riot Blockchain (RIOT), have also hit new year-to-date highs during this latest rally. Notably, software-intelligence firm Microstrategy (MSTR) now holds more than $11 billion worth of bitcoin on its balance sheet.
Do you have a news tip for Investopedia reporters? Please email us at
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https://www.investopedia.com/insights/how-would-trade-war-affect-you/ | How Would a Trade War Affect You? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> On Friday, July 6th, 2018 at exactly 12:01 am, the U.S. fired the first shots in a war. No missiles were used. Nor were drones or U.S. Marines involved. Instead, these shots were billions of dollars worth of tariffs aimed at the Chinese economy. This was a trade war. One that continues and could become the largest in world history.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> In this article, we take a look at what trade wars can mean for the disputing countries, businesses, and consumers.
</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 trade war happens when countries take protectionist actions against each other as a result of barriers to trade.</li><li>Advocates say trade wars protect national interests and provide advantages to domestic businesses.</li><li>Critics of trade wars claim that they ultimately hurt local companies, consumers, and the economy.</li><li>In response to U.S. tariffs, China imposed its own tariffs on U.S. imports to China of pork, soybeans, and sorghum.</li><li>The trade war launched in 2018 between America and China continues even though it's believed that some tariffs imposed on China have damaged U.S. interests.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-basics-of-trade-wars"></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 Basics of Trade Wars </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trade-war.asp">trade war</a> is used to describe an economic conflict where, in response to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/protectionism.asp">protectionism</a>, countries impose trade barriers such as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tariff.asp">tariffs</a>, restrictions, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quota.asp">quotas</a> against each other.
</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"> Basically, one country imposes targeted tariffs on another’s economy in order to protect its own economy, or to hurt that of its adversary. The former may believe that the trading practices of the latter are unfair.
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<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"> Example of a Trade War </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Let's say Country A and Country B both manufacture rubber chickens. County B then starts to subsidize its rubber chicken manufacturing. That means that the government of Country B is paying part of the cost of manufacturing, thus reducing the price for consumers.
</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"> Now, Country A is upset, because no one is going to buy rubber chickens from it if they're cheaper to buy from Country B. So, Country A has two options. It can negotiate with Country B or impose tariffs on imported rubber chickens. The tariffs would raise the cost of Country B's rubber chickens, punishing Country B.
</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 Country B wants to continue exporting to Country A, it has to pay a higher tax on its exported rubber chickens. Then Country B would most likely hit back with its own tariffs. This tariff back-and-forth is considered a trade war.
</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"> Countries get into conflicts over trade frequently. To sort them out, they can approach the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/what-is-the-world-trade-organization/">World Trade Organization</a> (WTO) for arbitration and a decision over which is at fault. They can negotiate a deal directly with each other. However, another option— that chosen by the Trump administration—is to impose unilateral tariffs on its opponent's goods in the hope that they will buckle.
</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 no-title" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The U.S. trade war with Japan in the 1980s was meant to correct the trade imbalance involving electronics. President Reagan imposed 100% tariffs on products made by major Japanese manufacturers to punish Japan for breaching its trade agreement.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-did-the-trade-war-play-out"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> How Did the Trade War Play Out? </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-subheading__text"> America's Action </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> On Friday, July 6, 2018, the Trump administration imposed sweeping tariffs on $34 billion worth of Chinese goods. The tariffs targeted a wide variety of manufactured tech products, from flat-screen televisions, aircraft parts, and medical devices to nuclear reactor parts and self-propelled machinery.<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_27-0"> While it was believed that most Americans would feel no effects of these tariffs—parents wouldn't be shopping for aircraft parts— the Chinese economy would certainly suffer. The U.S. tariffs specifically targeted high-tech Chinese goods to hurt the Made in China 2025 initiative which sought to transform China into an advanced manufacturing powerhouse.<span class="ql-inline-citation" data-cite="8"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> President Trump pushed further, warning that the U.S. could ultimately target over $500 billion worth of Chinese goods. In 2021, the U.S. imported $506.4 billion worth of goods from China.<span class="ql-inline-citation" data-cite="9"></span>
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<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"> China's Response </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In response to these new tariffs, China imposed its own. It targeted American agricultural products like pork (which added an estimated $57 billion, directly and indirectly, to the U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gdp.asp">GDP</a> in 2021), soybeans, and sorghum.<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_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Caught in the crosshairs were American farmers and big industrial-agriculture operations in the Midwest. These are constituencies that largely voted for Donald Trump in 2016. China sought to affect these politically powerful groups of Americans directly and dramatically. As the 2018 midterm elections approached, perhaps they'd pressure President Trump to lower the barriers.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As of Sep. 2, 2022, President Biden has maintained the tariffs with China. The Biden administration stated that it will review the tariffs.<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_37-0"></div>
<span class="heading-toc" id="toc-why-china"></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"> Why China? </span> </h2>
<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"> Intellectual Property Theft </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> So, why was China hit with tariffs? The first reason points to growing concerns about Chinese economic espionage. The largest set of tariffs from the Trump administration came out of a federal investigation into Chinese intellectual property misdeeds.
</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 Trump administration designed the tariffs to punish China for trading access to the Chinese market for foreign tech plans.<span class="ql-inline-citation" data-cite="4"></span> While those concerns were valid, they existed under President Bush and President Obama. Both presidents refrained from imposing tariffs of the magnitude seen in 2018.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-subheading__text"> The Trade Deficit </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The second reason concerned the U.S. trade deficit with China. According to data released by the Commerce Department, the gap between American goods exported to China and Chinese goods imported to the U.S. rose to $355.3 billion in 2021 from $310.8 billion in 2020.<span class="ql-inline-citation" data-cite="14"></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_46-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> The Trump administration had been promising to eliminate the trade gap. It blamed the imbalance on the decline of American manufacturing and a reliance on foreign goods. With these newest tariffs in place, the Trump administration hoped to reverse the growth of our trade deficit and punish China for its trading practices.
</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-whats-the-impact-on-american-consumers"></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"> What's the Impact on American Consumers? </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-subheading__text"> Effect of Tariffs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The effect of tariffs can be felt beyond the borders of the targeted country.
</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"> It's important to understand that U.S.-China trade does not take place in a vacuum. Trade is part of a global economy. Different countries can be involved in the making and selling of goods before they reach their final destinations.
</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"> When the U.S. put tariffs on China, the world’s largest manufacturing hub, it likely affected other countries, products, and companies that are part of the global supply chain.
</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"> In our global, interconnected economy, it is nearly impossible to target one country (or one industry) without affecting others, including allies.
</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"> Potential Threat to Consumers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> These tariffs had the potential to hurt American companies and consumers even more than the firms in China targeted by the Trump administration. A study by the Federal Reserve Bank of San Francisco in 2011 showed that for every dollar spent on an item labeled Made in China, 55 cents went to services produced in the United States.<span class="ql-inline-citation" data-cite="6"></span> This is yet another example of how raising tariffs and starting trade wars in a global economy might come back to hurt U.S. businesses and consumers.
</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"> American consumers may have felt the consequences of Trump’s trade war with China. When companies have to make up for higher costs due to new tariffs, they shift that burden onto consumers. It takes time for these higher business costs to filter down to stores. It is likely that some prices have gone up and more will do the same.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-whats-a-trade-war"></span> <h2 class="mntl-sc-block-questionandanswer__question">What's a Trade War?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A trade war is an economic battle that countries wage on one another to address protectionist policies seen as barriers to trade. Trade wars involve imposing various economic restrictions, such as tariffs and embargoes.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-what-is-a-trade-deficit"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Trade Deficit?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A trade deficit is the imbalance between how much a country takes in for its exports and how much it spends on imports. If imports exceed exports, the country has a trade deficit. If exports exceed imports, the country has a trade surplus.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-why-are-tariffs-necessary"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are Tariffs Necessary?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are various viewpoints regarding the need for tariffs. However, when diplomatic efforts related to trade (and other unfortunate behavior such as theft of business secrets or intellectual property) fail to resolve adversarial positions, tariffs and other punitive actions are sometimes the next step.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Trade wars are economic battles between countries that seek redress for wrongful economic actions that pose a threat to a country's economic well-being. Tariffs can be part of those battles.
</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, in imposing tariffs, governments should bear in mind that more than the target country may suffer. Economies operate on a global scale. Economic policies designed to punish one country can have a trickle-down effect on other nations and their consumers. In fact, the tariffs imposed on China by the U.S. in 2018 are believed to have damaged U.S. businesses and consumers without accomplishing the hoped for goal of reducing the trade deficit.<span class="ql-inline-citation" data-cite="12"></span>
</p></div> | On Friday, July 6th, 2018 at exactly 12:01 am, the U.S. fired the first shots in a war. No missiles were used. Nor were drones or U.S. Marines involved. Instead, these shots were billions of dollars worth of tariffs aimed at the Chinese economy. This was a trade war. One that continues and could become the largest in world history.
In this article, we take a look at what trade wars can mean for the disputing countries, businesses, and consumers.
### Key Takeaways
* A trade war happens when countries take protectionist actions against each other as a result of barriers to trade.
* Advocates say trade wars protect national interests and provide advantages to domestic businesses.
* Critics of trade wars claim that they ultimately hurt local companies, consumers, and the economy.
* In response to U.S. tariffs, China imposed its own tariffs on U.S. imports to China of pork, soybeans, and sorghum.
* The trade war launched in 2018 between America and China continues even though it's believed that some tariffs imposed on China have damaged U.S. interests.
## The Basics of Trade Wars
The term [trade war](https://www.investopedia.com/terms/t/trade-war.asp) is used to describe an economic conflict where, in response to [protectionism](https://www.investopedia.com/terms/p/protectionism.asp), countries impose trade barriers such as [tariffs](https://www.investopedia.com/terms/t/tariff.asp), restrictions, and [quotas](https://www.investopedia.com/terms/q/quota.asp) against each other.
Basically, one country imposes targeted tariffs on another’s economy in order to protect its own economy, or to hurt that of its adversary. The former may believe that the trading practices of the latter are unfair.
### Example of a Trade War
Let's say Country A and Country B both manufacture rubber chickens. County B then starts to subsidize its rubber chicken manufacturing. That means that the government of Country B is paying part of the cost of manufacturing, thus reducing the price for consumers.
Now, Country A is upset, because no one is going to buy rubber chickens from it if they're cheaper to buy from Country B. So, Country A has two options. It can negotiate with Country B or impose tariffs on imported rubber chickens. The tariffs would raise the cost of Country B's rubber chickens, punishing Country B.
If Country B wants to continue exporting to Country A, it has to pay a higher tax on its exported rubber chickens. Then Country B would most likely hit back with its own tariffs. This tariff back-and-forth is considered a trade war.
Countries get into conflicts over trade frequently. To sort them out, they can approach the [World Trade Organization](https://www.investopedia.com/investing/what-is-the-world-trade-organization/) (WTO) for arbitration and a decision over which is at fault. They can negotiate a deal directly with each other. However, another option— that chosen by the Trump administration—is to impose unilateral tariffs on its opponent's goods in the hope that they will buckle.
###
The U.S. trade war with Japan in the 1980s was meant to correct the trade imbalance involving electronics. President Reagan imposed 100% tariffs on products made by major Japanese manufacturers to punish Japan for breaching its trade agreement.
## How Did the Trade War Play Out?
### America's Action
On Friday, July 6, 2018, the Trump administration imposed sweeping tariffs on $34 billion worth of Chinese goods. The tariffs targeted a wide variety of manufactured tech products, from flat-screen televisions, aircraft parts, and medical devices to nuclear reactor parts and self-propelled machinery.
While it was believed that most Americans would feel no effects of these tariffs—parents wouldn't be shopping for aircraft parts— the Chinese economy would certainly suffer. The U.S. tariffs specifically targeted high-tech Chinese goods to hurt the Made in China 2025 initiative which sought to transform China into an advanced manufacturing powerhouse.
President Trump pushed further, warning that the U.S. could ultimately target over $500 billion worth of Chinese goods. In 2021, the U.S. imported $506.4 billion worth of goods from China.
### China's Response
In response to these new tariffs, China imposed its own. It targeted American agricultural products like pork (which added an estimated $57 billion, directly and indirectly, to the U.S. [GDP](https://www.investopedia.com/terms/g/gdp.asp) in 2021), soybeans, and sorghum.
Caught in the crosshairs were American farmers and big industrial-agriculture operations in the Midwest. These are constituencies that largely voted for Donald Trump in 2016. China sought to affect these politically powerful groups of Americans directly and dramatically. As the 2018 midterm elections approached, perhaps they'd pressure President Trump to lower the barriers.
As of Sep. 2, 2022, President Biden has maintained the tariffs with China. The Biden administration stated that it will review the tariffs.
## Why China?
### Intellectual Property Theft
So, why was China hit with tariffs? The first reason points to growing concerns about Chinese economic espionage. The largest set of tariffs from the Trump administration came out of a federal investigation into Chinese intellectual property misdeeds.
The Trump administration designed the tariffs to punish China for trading access to the Chinese market for foreign tech plans. While those concerns were valid, they existed under President Bush and President Obama. Both presidents refrained from imposing tariffs of the magnitude seen in 2018.
### The Trade Deficit
The second reason concerned the U.S. trade deficit with China. According to data released by the Commerce Department, the gap between American goods exported to China and Chinese goods imported to the U.S. rose to $355.3 billion in 2021 from $310.8 billion in 2020.
The Trump administration had been promising to eliminate the trade gap. It blamed the imbalance on the decline of American manufacturing and a reliance on foreign goods. With these newest tariffs in place, the Trump administration hoped to reverse the growth of our trade deficit and punish China for its trading practices.
## What's the Impact on American Consumers?
### Effect of Tariffs
The effect of tariffs can be felt beyond the borders of the targeted country.
It's important to understand that U.S.-China trade does not take place in a vacuum. Trade is part of a global economy. Different countries can be involved in the making and selling of goods before they reach their final destinations.
When the U.S. put tariffs on China, the world’s largest manufacturing hub, it likely affected other countries, products, and companies that are part of the global supply chain.
In our global, interconnected economy, it is nearly impossible to target one country (or one industry) without affecting others, including allies.
### Potential Threat to Consumers
These tariffs had the potential to hurt American companies and consumers even more than the firms in China targeted by the Trump administration. A study by the Federal Reserve Bank of San Francisco in 2011 showed that for every dollar spent on an item labeled Made in China, 55 cents went to services produced in the United States. This is yet another example of how raising tariffs and starting trade wars in a global economy might come back to hurt U.S. businesses and consumers.
American consumers may have felt the consequences of Trump’s trade war with China. When companies have to make up for higher costs due to new tariffs, they shift that burden onto consumers. It takes time for these higher business costs to filter down to stores. It is likely that some prices have gone up and more will do the same.
## What's a Trade War?
A trade war is an economic battle that countries wage on one another to address protectionist policies seen as barriers to trade. Trade wars involve imposing various economic restrictions, such as tariffs and embargoes.
## What Is a Trade Deficit?
A trade deficit is the imbalance between how much a country takes in for its exports and how much it spends on imports. If imports exceed exports, the country has a trade deficit. If exports exceed imports, the country has a trade surplus.
## Why Are Tariffs Necessary?
There are various viewpoints regarding the need for tariffs. However, when diplomatic efforts related to trade (and other unfortunate behavior such as theft of business secrets or intellectual property) fail to resolve adversarial positions, tariffs and other punitive actions are sometimes the next step.
## The Bottom Line
Trade wars are economic battles between countries that seek redress for wrongful economic actions that pose a threat to a country's economic well-being. Tariffs can be part of those battles.
However, in imposing tariffs, governments should bear in mind that more than the target country may suffer. Economies operate on a global scale. Economic policies designed to punish one country can have a trickle-down effect on other nations and their consumers. In fact, the tariffs imposed on China by the U.S. in 2018 are believed to have damaged U.S. businesses and consumers without accomplishing the hoped for goal of reducing the trade deficit.
| On Friday, July 6th, 2018 at exactly 12:01 am, the U.S. fired the first shots in a war. No missiles were used. Nor were drones or U.S. Marines involved. Instead, these shots were billions of dollars worth of tariffs aimed at the Chinese economy. This was a trade war. One that continues and could become the largest in world history.
In this article, we take a look at what trade wars can mean for the disputing countries, businesses, and consumers.
Key Takeaways
A trade war happens when countries take protectionist actions against each other as a result of barriers to trade.Advocates say trade wars protect national interests and provide advantages to domestic businesses.Critics of trade wars claim that they ultimately hurt local companies, consumers, and the economy.In response to U.S. tariffs, China imposed its own tariffs on U.S. imports to China of pork, soybeans, and sorghum.The trade war launched in 2018 between America and China continues even though it's believed that some tariffs imposed on China have damaged U.S. interests.
The Basics of Trade Wars
The term trade war is used to describe an economic conflict where, in response to protectionism, countries impose trade barriers such as tariffs, restrictions, and quotas against each other.
Basically, one country imposes targeted tariffs on another’s economy in order to protect its own economy, or to hurt that of its adversary. The former may believe that the trading practices of the latter are unfair.
Example of a Trade War
Let's say Country A and Country B both manufacture rubber chickens. County B then starts to subsidize its rubber chicken manufacturing. That means that the government of Country B is paying part of the cost of manufacturing, thus reducing the price for consumers.
Now, Country A is upset, because no one is going to buy rubber chickens from it if they're cheaper to buy from Country B. So, Country A has two options. It can negotiate with Country B or impose tariffs on imported rubber chickens. The tariffs would raise the cost of Country B's rubber chickens, punishing Country B.
If Country B wants to continue exporting to Country A, it has to pay a higher tax on its exported rubber chickens. Then Country B would most likely hit back with its own tariffs. This tariff back-and-forth is considered a trade war.
Countries get into conflicts over trade frequently. To sort them out, they can approach the World Trade Organization (WTO) for arbitration and a decision over which is at fault. They can negotiate a deal directly with each other. However, another option— that chosen by the Trump administration—is to impose unilateral tariffs on its opponent's goods in the hope that they will buckle.
The U.S. trade war with Japan in the 1980s was meant to correct the trade imbalance involving electronics. President Reagan imposed 100% tariffs on products made by major Japanese manufacturers to punish Japan for breaching its trade agreement.
How Did the Trade War Play Out?
America's Action
On Friday, July 6, 2018, the Trump administration imposed sweeping tariffs on $34 billion worth of Chinese goods. The tariffs targeted a wide variety of manufactured tech products, from flat-screen televisions, aircraft parts, and medical devices to nuclear reactor parts and self-propelled machinery.
While it was believed that most Americans would feel no effects of these tariffs—parents wouldn't be shopping for aircraft parts— the Chinese economy would certainly suffer. The U.S. tariffs specifically targeted high-tech Chinese goods to hurt the Made in China 2025 initiative which sought to transform China into an advanced manufacturing powerhouse.
President Trump pushed further, warning that the U.S. could ultimately target over $500 billion worth of Chinese goods. In 2021, the U.S. imported $506.4 billion worth of goods from China.
China's Response
In response to these new tariffs, China imposed its own. It targeted American agricultural products like pork (which added an estimated $57 billion, directly and indirectly, to the U.S. GDP in 2021), soybeans, and sorghum.
Caught in the crosshairs were American farmers and big industrial-agriculture operations in the Midwest. These are constituencies that largely voted for Donald Trump in 2016. China sought to affect these politically powerful groups of Americans directly and dramatically. As the 2018 midterm elections approached, perhaps they'd pressure President Trump to lower the barriers.
As of Sep. 2, 2022, President Biden has maintained the tariffs with China. The Biden administration stated that it will review the tariffs.
Why China?
Intellectual Property Theft
So, why was China hit with tariffs? The first reason points to growing concerns about Chinese economic espionage. The largest set of tariffs from the Trump administration came out of a federal investigation into Chinese intellectual property misdeeds.
The Trump administration designed the tariffs to punish China for trading access to the Chinese market for foreign tech plans. While those concerns were valid, they existed under President Bush and President Obama. Both presidents refrained from imposing tariffs of the magnitude seen in 2018.
The Trade Deficit
The second reason concerned the U.S. trade deficit with China. According to data released by the Commerce Department, the gap between American goods exported to China and Chinese goods imported to the U.S. rose to $355.3 billion in 2021 from $310.8 billion in 2020.
The Trump administration had been promising to eliminate the trade gap. It blamed the imbalance on the decline of American manufacturing and a reliance on foreign goods. With these newest tariffs in place, the Trump administration hoped to reverse the growth of our trade deficit and punish China for its trading practices.
What's the Impact on American Consumers?
Effect of Tariffs
The effect of tariffs can be felt beyond the borders of the targeted country.
It's important to understand that U.S.-China trade does not take place in a vacuum. Trade is part of a global economy. Different countries can be involved in the making and selling of goods before they reach their final destinations.
When the U.S. put tariffs on China, the world’s largest manufacturing hub, it likely affected other countries, products, and companies that are part of the global supply chain.
In our global, interconnected economy, it is nearly impossible to target one country (or one industry) without affecting others, including allies.
Potential Threat to Consumers
These tariffs had the potential to hurt American companies and consumers even more than the firms in China targeted by the Trump administration. A study by the Federal Reserve Bank of San Francisco in 2011 showed that for every dollar spent on an item labeled Made in China, 55 cents went to services produced in the United States. This is yet another example of how raising tariffs and starting trade wars in a global economy might come back to hurt U.S. businesses and consumers.
American consumers may have felt the consequences of Trump’s trade war with China. When companies have to make up for higher costs due to new tariffs, they shift that burden onto consumers. It takes time for these higher business costs to filter down to stores. It is likely that some prices have gone up and more will do the same.
What's a Trade War?
A trade war is an economic battle that countries wage on one another to address protectionist policies seen as barriers to trade. Trade wars involve imposing various economic restrictions, such as tariffs and embargoes.
What Is a Trade Deficit?
A trade deficit is the imbalance between how much a country takes in for its exports and how much it spends on imports. If imports exceed exports, the country has a trade deficit. If exports exceed imports, the country has a trade surplus.
Why Are Tariffs Necessary?
There are various viewpoints regarding the need for tariffs. However, when diplomatic efforts related to trade (and other unfortunate behavior such as theft of business secrets or intellectual property) fail to resolve adversarial positions, tariffs and other punitive actions are sometimes the next step.
The Bottom Line
Trade wars are economic battles between countries that seek redress for wrongful economic actions that pose a threat to a country's economic well-being. Tariffs can be part of those battles.
However, in imposing tariffs, governments should bear in mind that more than the target country may suffer. Economies operate on a global scale. Economic policies designed to punish one country can have a trickle-down effect on other nations and their consumers. In fact, the tariffs imposed on China by the U.S. in 2018 are believed to have damaged U.S. businesses and consumers without accomplishing the hoped for goal of reducing the trade deficit.
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[
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"https://www.investopedia.com/terms/t/tariff.asp"
],
[
"quotas",
"https://www.investopedia.com/terms/q/quota.asp"
],
[
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]
] |
https://www.investopedia.com/the-express-podcast-episode-143-7553502 | Vanguard Makes the Case for Muted Expectations in the Future | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block megaphone" id="mntl-sc-block_1-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://playlist.megaphone.fm/?e=MERE2778479043" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Vanguard Makes the Case for Muted Expectations in the Future"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <strong>Subscribe Now</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197" rel="nofollow">Apple Podcasts</a> / <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9" rel="nofollow">Spotify</a> / <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver">Google Podcasts</a> / <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://player.fm/series/2836180">PlayerFM</a><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.linkedin.com/in/roger-aliaga-diaz">Roger Aliaga-Diaz</a> of The Vanguard Group joins <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-investopedia-express-podcast-5215636">The Express</a> to explain why investors should lower their expectations for future stock returns, and how to build a balanced portfolio now to withstand the next few years of high interest rates. Plus, volatility remains ultra-low, but activity in the options market is setting a record pace. Where is the disconnect, and who will end up on the wrong side of those bets?
</p>
<div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div>
<a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div> |
**Subscribe Now**: [Apple Podcasts](https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197) / [Spotify](https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9) / [Google Podcasts](https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver) / [PlayerFM](https://player.fm/series/2836180)
[Roger Aliaga-Diaz](https://www.linkedin.com/in/roger-aliaga-diaz) of The Vanguard Group joins [The Express](https://www.investopedia.com/the-investopedia-express-podcast-5215636) to explain why investors should lower their expectations for future stock returns, and how to build a balanced portfolio now to withstand the next few years of high interest rates. Plus, volatility remains ultra-low, but activity in the options market is setting a record pace. Where is the disconnect, and who will end up on the wrong side of those bets?
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) |
Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM
Roger Aliaga-Diaz of The Vanguard Group joins The Express to explain why investors should lower their expectations for future stock returns, and how to build a balanced portfolio now to withstand the next few years of high interest rates. Plus, volatility remains ultra-low, but activity in the options market is setting a record pace. Where is the disconnect, and who will end up on the wrong side of those bets?
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/terms/r/ratelevelrisk.asp | Rate Level Risk | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-rate-level-risk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Rate Level Risk? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Rate level risk is the possibility that an interest-bearing asset will lose value if market interest rates increase above its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon-rate.asp" rel="noopener noreferrer">coupon rate</a>.
</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>Rate level risk is the risk of an interest-bearing asset losing value in the case that market interest rates rise above its coupon rate.</li><li>Interest rate risk is one of the main factors affecting bond prices and typically increases with duration.</li><li>When market interest rates increase and cross the level of the coupon rate, the value of a bond will decrease and the investor stands to lose value on their investment.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-rate-level-risk"></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 Rate Level Risk </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestraterisk.asp">Interest rate risk</a> is one of the main factors affecting bond prices and typically increases with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duration.asp">duration</a>, a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates, stated in terms of years.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> When a government or business issues fixed-income securities, the price and coupon are set by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/issuer.asp">issuer</a> to be competitive within the current rate environment. Bonds will be offered at prices based on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/termstructure.asp">term structure</a> and corresponding rates across the current <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yieldcurve.asp">yield curve</a>. As interest rates vary going forward, prices of existing bonds will fluctuate accordingly. When interest rates increase, bond prices fall, and when interest rates decrease, bond prices rise.
</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 interest rates fall, holders of bonds and other fixed-income securities will typically see the value of their holding increase, even though the coupon rate is fixed. They may be able to sell their bond for a higher price than they paid for it. However, when rates increase, the value of a bond, or portfolio of bonds that have been issued at correspondingly lower rates, will decrease. When the market interest rate increase crosses the level of the fixed-income investment's coupon rate, the investor stands to lose value.<span class="ql-inline-citation" data-cite="1"></span> This will be readily apparent in the daily pricing of bond mutual funds. For example, during a period when longer-term rates are rising, a bond portfolio that has a concentration in longer-term bonds will see its value drop.
</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"> Investors who own individual bonds can hold their bonds to maturity (unless the bond has a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/callablebond.asp">call feature</a> and is called) and receive the full return that the bond originally offered, barring a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a>.<span class="ql-inline-citation" data-cite="2"></span> This assumes that the investor is comfortable with earning less than what may be available in the current market. For managers of large bond portfolios, rising rate levels have a significant effect on the value of the portfolio and the ability of the manager to attract and retain investors. For this reason, professional bond managers typically trade more frequently than individual bondholders in order to produce competitive pricing and yields for the portfolio.
</p></div> | ## What Is Rate Level Risk?
Rate level risk is the possibility that an interest-bearing asset will lose value if market interest rates increase above its [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp).
### Key Takeaways
* Rate level risk is the risk of an interest-bearing asset losing value in the case that market interest rates rise above its coupon rate.
* Interest rate risk is one of the main factors affecting bond prices and typically increases with duration.
* When market interest rates increase and cross the level of the coupon rate, the value of a bond will decrease and the investor stands to lose value on their investment.
## Understanding Rate Level Risk
[Interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp) is one of the main factors affecting bond prices and typically increases with [duration](https://www.investopedia.com/terms/d/duration.asp), a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates, stated in terms of years.
When a government or business issues fixed-income securities, the price and coupon are set by the [issuer](https://www.investopedia.com/terms/i/issuer.asp) to be competitive within the current rate environment. Bonds will be offered at prices based on [term structure](https://www.investopedia.com/terms/t/termstructure.asp) and corresponding rates across the current [yield curve](https://www.investopedia.com/terms/y/yieldcurve.asp). As interest rates vary going forward, prices of existing bonds will fluctuate accordingly. When interest rates increase, bond prices fall, and when interest rates decrease, bond prices rise.
When interest rates fall, holders of bonds and other fixed-income securities will typically see the value of their holding increase, even though the coupon rate is fixed. They may be able to sell their bond for a higher price than they paid for it. However, when rates increase, the value of a bond, or portfolio of bonds that have been issued at correspondingly lower rates, will decrease. When the market interest rate increase crosses the level of the fixed-income investment's coupon rate, the investor stands to lose value. This will be readily apparent in the daily pricing of bond mutual funds. For example, during a period when longer-term rates are rising, a bond portfolio that has a concentration in longer-term bonds will see its value drop.
Investors who own individual bonds can hold their bonds to maturity (unless the bond has a [call feature](https://www.investopedia.com/terms/c/callablebond.asp) and is called) and receive the full return that the bond originally offered, barring a [default](https://www.investopedia.com/terms/d/default2.asp). This assumes that the investor is comfortable with earning less than what may be available in the current market. For managers of large bond portfolios, rising rate levels have a significant effect on the value of the portfolio and the ability of the manager to attract and retain investors. For this reason, professional bond managers typically trade more frequently than individual bondholders in order to produce competitive pricing and yields for the portfolio.
| What Is Rate Level Risk?
Rate level risk is the possibility that an interest-bearing asset will lose value if market interest rates increase above its coupon rate.
Key Takeaways
Rate level risk is the risk of an interest-bearing asset losing value in the case that market interest rates rise above its coupon rate.Interest rate risk is one of the main factors affecting bond prices and typically increases with duration.When market interest rates increase and cross the level of the coupon rate, the value of a bond will decrease and the investor stands to lose value on their investment.
Understanding Rate Level Risk
Interest rate risk is one of the main factors affecting bond prices and typically increases with duration, a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates, stated in terms of years.
When a government or business issues fixed-income securities, the price and coupon are set by the issuer to be competitive within the current rate environment. Bonds will be offered at prices based on term structure and corresponding rates across the current yield curve. As interest rates vary going forward, prices of existing bonds will fluctuate accordingly. When interest rates increase, bond prices fall, and when interest rates decrease, bond prices rise.
When interest rates fall, holders of bonds and other fixed-income securities will typically see the value of their holding increase, even though the coupon rate is fixed. They may be able to sell their bond for a higher price than they paid for it. However, when rates increase, the value of a bond, or portfolio of bonds that have been issued at correspondingly lower rates, will decrease. When the market interest rate increase crosses the level of the fixed-income investment's coupon rate, the investor stands to lose value. This will be readily apparent in the daily pricing of bond mutual funds. For example, during a period when longer-term rates are rising, a bond portfolio that has a concentration in longer-term bonds will see its value drop.
Investors who own individual bonds can hold their bonds to maturity (unless the bond has a call feature and is called) and receive the full return that the bond originally offered, barring a default. This assumes that the investor is comfortable with earning less than what may be available in the current market. For managers of large bond portfolios, rising rate levels have a significant effect on the value of the portfolio and the ability of the manager to attract and retain investors. For this reason, professional bond managers typically trade more frequently than individual bondholders in order to produce competitive pricing and yields for the portfolio.
| [
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https://www.investopedia.com/do-i-need-travel-insurance-7553834 | Do I Need Travel Insurance? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Travel insurance can offer financial protection if you cancel an expensive, nonrefundable vacation for an approved reason. Travel insurance can also cover your medical bills if you experience a medical emergency while traveling. However, sometimes you can get away with not purchasing it.
</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"> “Ultimately, the decision to purchase <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/do-i-need-travel-insurance-7553834">travel insurance</a> should be based on your individual circumstances, including your destination, planned activities, health condition, and financial situation,” Rajeev Shrivastava, founder and CEO of insurance marketplace VisitorsCoverage, told Investopedia via email.
</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>Travel insurance typically covers a variety of situations, such as trip cancellations, travel delays, lost luggage, medical care, and emergency evacuation.</li>
<li>A travel insurance policy generally costs 4% to 10% of the cost of a trip.</li>
<li>Seriously consider buying travel insurance if you’re taking a nonrefundable trip or traveling internationally.</li>
<li>Existing coverage from homeowners, health insurance, and credit cards might mean you don’t need to buy a separate travel insurance policy, but it's still smart to look at the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-travel-insurance-4842641">best travel insurance companies</a> before your trip.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-what-does-travel-insurance-cover"></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 Does Travel Insurance Cover? </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/t/travel-insurance.asp">Travel insurance</a> policies typically cover these five financial and health risks:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-subheading__text"> Trip Cancellations, Interruptions, and Delays </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Illness, the death of a traveler’s family member, bad weather, job loss, or a natural disaster are a few circumstances that might trigger reimbursement of prepaid travel costs, such as plane tickets or emergency expenses. However, only reasons outlined by the insurance policy are covered, so review exclusions.<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>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-subheading__text"> Luggage and Rental Car Damage or Loss </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> A travel insurance policy might cover lost, stolen, or damaged luggage, personal items, or auto rentals. In some cases, the coverage might include reimbursement of purchases (such as clothing) you needed to make because you didn’t have your luggage. An auto rental damage waiver covers a rental vehicle’s damage or theft.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-subheading__text"> Travel Health Insurance </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Travel insurance kicks in for medical or dental emergencies when your regular U.S. health insurance doesn’t apply. Remember that even if a country has a low-cost or free nationalized health system, you’ll pay out of pocket if you are not a citizen.<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_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"> Medical Evacuation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Medical evacuation coverage reimburses you if you must be evacuated from a remote area to a hospital. For example, if you become seriously ill while trekking in the Swiss Alps, travel insurance may pay for you to be airlifted to a big-city hospital for treatment. Medical evacuation from a remote location can cost as much as $250,000. This insurance may be part of travel health insurance or a stand-alone policy.<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_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"> Accidental Death and Dismemberment </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> This type of coverage pays benefits to your survivors if you get injured or die while on a trip. Injuries are typically limited to losing an eye, hand, foot, or limb.<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-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Many travel insurance policies provide 24/7 assistance to help you find medical care, make travel arrangements, and contact loved ones in an emergency.</p></div></div></div>
<span class="heading-toc" id="toc-what-does-travel-insurance-not-cover"></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"> What Does Travel Insurance Not Cover? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A standard travel insurance policy won’t cover some cancellation reasons. For example, a standard travel insurance policy won’t provide coverage if you decide to back out of a trip because you need to cut back on spending. You would need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-buy-cancel-for-any-reason-travel-insurance-7553379">purchase “cancel for any reason” (CFAR) coverage</a>. Even CFAR has its own rules, such as canceling within a specific time frame.<span class="ql-inline-citation" data-cite="1"></span>
</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"> Other losses that traditional travel insurance may or may not cover include:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <li>Costs associated with preexisting health conditions, pregnancy complications, or mental health issues</li><li>Injury costs after participating in higher-risk activities such as rock climbing or skydiving</li><li>Trip interruption, cancellation, or other losses due to health and disease outbreaks or natural disasters</li><li>Cancellations due to terrorism, civil unrest, or any U.S. State Department warnings<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="13"></span></li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Ask the insurer about exclusions to find out which exclusions apply, or review documentation. You may be able to find travel health insurance coverage that won’t exclude your mountain-climbing injuries, for example.
</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-which-countries-require-travel-insurance"></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"> Which Countries Require Travel Insurance? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Many countries don’t require travel or health insurance now that the COVID-19 pandemic is in retreat. However, future disease outbreaks can influence requirements. Check the U.S. State Department’s website and destination government sites for the most current information on health requirements and recommendations.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> For example, Thailand still requires visitors to carry $10,000 in travel medical insurance if they’re coming from a country with pre-departure COVID tests. However, the United States doesn’t require pre-departure COVID testing, making the insurance unnecessary for Americans.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="14"></span>
</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"> Some nations have blanket requirements for coverage. Cuba requires U.S. airlines leaving from the U.S. to pay for each passenger’s health insurance. Every international traveler entering Saudi Arabia receives government-supplied travel medical insurance for emergencies.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="7"></span>
</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"> Travelers entering Qatar must purchase emergency and accident services health insurance from a Qatar-registered insurer.<span class="ql-inline-citation" data-cite="8"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> In some countries, you must apply for a visa to visit, even for a few days. In Nepal, U.S. visitors applying for the required six-month visa must demonstrate proof of a six-month international health insurance policy.<span class="ql-inline-citation" data-cite="9"></span>
</p>
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<span class="heading-toc" id="toc-when-is-travel-insurance-not-necessary"></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 Is Travel Insurance Not Necessary? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Suppose you’re taking a short trip in your own country and have adequate health insurance. In that case, you might not need travel insurance, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.businessclass.com/lifestyle/articles/a-message-from-our-founder-ceo" rel="nofollow">Jason Eckhoff</a>, founder and CEO of the BusinessClass.com travel website, as told to Investopedia via email.]
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> In addition, if you’re taking a trip with refundable costs—such as airfare—and can cancel it without being financially penalized, then travel insurance may not be necessary.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> You may not need travel insurance if your credit card offers robust benefits. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/travel-4689716">Travel credit cards and other credit cards</a> may provide the following coverages:
</p>
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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><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-cancel-for-any-reason-cfar-insurance-8599192">Trip cancellation insurance</a></li>
<li>Trip delay reimbursement</li>
<li>Emergency evacuation and transportation</li>
<li>Accidental death and dismemberment</li>
<li>Lost or delayed luggage reimbursement</li>
<li>Auto damage waivers</li>
<li>Roadside emergency assistance</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> However, Jiten Puri, founder and CEO of insurance marketplace PolicyAdvisor.com, noted that this coverage might be limited, such as providing only basic medical care or not covering trip cancellation or interruption.
</p>
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<span class="heading-toc" id="toc-how-much-does-travel-insurance-cost"></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"> How Much Does Travel Insurance Cost? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Generally, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-much-does-travel-insurance-cost-7377124">travel insurance costs</a> 4% to 10% of the total prepaid, nonrefundable expenses for your trip. If you buy travel insurance for a cruise with a $6,000 price tag, you might pay anywhere from $240 to $600 for a policy.<span class="ql-inline-citation" data-cite="1"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> The cost of travel insurance varies by insurer. Investopedia reviewed six insurers’ travel insurance plans offering trip cancellation/interruption, emergency medical/evacuation, and baggage loss/damage found the following ranges:
</p>
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<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_63-0"> <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>Age</b></td>
<td><b>Trip Cost</b></td>
<td><b>Low Premium</b></td>
<td><b>High Premium</b></td>
</tr>
<tr>
<td>35</td>
<td>$1,500</td>
<td>$51</td>
<td>$69</td>
</tr>
<tr>
<td>65</td>
<td>$3,000</td>
<td>$135</td>
<td>$186</td>
</tr>
</tbody>
</table>
</div></figure>
<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"> Factors that affect the cost of travel insurance include:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0">
<li><strong>Age</strong>: This is the largest factor in rates charged for travel insurance. Older travelers and travelers with preexisting medical conditions might find travel insurance costs more than it does for other travelers.</li>
<li><strong>Coverage type and dollar amount</strong>: A policy with fewer coverage types and where your trip expenses are lower typically costs less than coverage for higher dollar amounts or extra benefits, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-much-is-cancel-for-any-reason-travel-insurance-7557668">CFAR insurance</a>.</li>
<li><strong>Trip length</strong>: The more days you travel, the more risks you might encounter.</li>
<li><strong>Number of travelers</strong>: A trip with six people might be riskier (and cost more) than a trip with two people.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Remember that an insurer may turn you down or charge you more after reviewing your application based on the insurer’s risk standards.
</p>
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<span class="heading-toc" id="toc-when-is-travel-insurance-worth-it"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> When Is Travel Insurance Worth It? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://theworldtravelguy.com/about/">David Leiter</a>, publisher of The World Travel Guy blog, said it’s generally a good idea to buy travel insurance with appropriate coverages if you’re:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> <li>Taking a pricey trip with nonrefundable costs</li><li>Traveling internationally</li><li>Visiting a remote location without easy access to medical care</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Eckhoff suggested considering buying travel insurance if you:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> <li>Have a preexisting medical condition, as long as the policy covers your needs</li><li>Are visiting a country threatened by political instability, natural disasters, or health risks</li><li>Participate in higher-risk activities, increasing the odds of becoming injured or ill</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> In addition to the above, the U.S. Centers for Disease Control and Prevention (CDC) recommends buying supplemental travel health insurance if you’re traveling for more than six months.<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_81-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> The U.S. State Department suggests buying insurance before you travel and reviewing the country information page of your destination before you travel.<span class="ql-inline-citation" data-cite="15"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_84-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_85-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>The CDC recommends seeking a travel health insurance policy that makes payments directly to the provider or hospital, provides 24-hour physician support, offers emergency medical transport to the U.S. or equivalent, and covers high-risk activities.<span class="ql-inline-citation" data-cite="13"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> “If you’re shopping for travel insurance, make sure you get something that fits you, your destination, and your style of travel. Think of what’s most likely to go wrong in your situation, and then pick a plan that will cover it,” Leiter recommended.
</p>
<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-do-i-need-travel-insurance-if-i-have-health-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Need Travel Insurance if I Have Health Insurance?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Your existing health insurance may cover emergency care during international travel. However, only some health insurance plans kick in when traveling abroad. Before buying extra travel insurance, check with your health insurance company about on-the-go coverage; ask if you must seek preauthorization and which exclusions apply.</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-do-i-need-travel-insurance-if-my-credit-card-has-built-in-travel-protection"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Need Travel Insurance if My Credit Card Has Built-in Travel Protection?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Built-in travel protection from one of your credit cards may be all you need for your trip. For instance, if your primary goal is to obtain trip cancellation coverage, then your credit card benefits might be adequate. However, you may want to buy travel insurance if your credit card lacks sufficient medical coverage—or offers no medical coverage.</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-is-travel-insurance-the-same-as-cancellation-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Travel Insurance the Same as Cancellation Insurance?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Travel insurance is not the same as cancellation insurance. However, cancellation insurance is often one component of travel insurance. So, your travel insurance policy may offer reimbursement for a cancellation due to specific circumstances, such as a death. But travel insurance can also cover medical expenses, lost baggage, and auto rental damage.</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-does-travel-insurance-protect-my-possessions"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Travel Insurance Protect My Possessions?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Homeowners and renters insurance can cover your possessions when you’re traveling. However, that coverage might not be enough to protect valuable items such as jewelry or may not cover the total cost for replacement. Furthermore, filing a homeowners or renters insurance claim might increase your premium.<span class="ql-inline-citation" data-cite="16"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_96-0"><span class="heading-toc" id="toc-how-can-i-save-money-on-travel-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Save Money on Travel Insurance?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Don’t go with the first travel insurance policy you come across. Instead, shop around to make sure you’re getting the most coverage at the best price. Also, if you’re booking a trip through a travel agency or tour operator, ask for a package deal, including travel insurance.</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_98-0"> <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_99-0"> Buying travel insurance might not be necessary if you’re traveling domestically or going on a refundable trip, or if you carry adequate coverage through a credit card. “We would always recommend getting travel insurance. But if you are extremely elderly or in very poor health, your travel insurance premiums may be expensive,” Puri said.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> Travel insurance generally provides “invaluable peace of mind,” Puri said. For instance, travel insurance can be a smart investment if you’re traveling internationally and purchased a high-cost, nonrefundable trip.<br/>
</p></div> | Travel insurance can offer financial protection if you cancel an expensive, nonrefundable vacation for an approved reason. Travel insurance can also cover your medical bills if you experience a medical emergency while traveling. However, sometimes you can get away with not purchasing it.
“Ultimately, the decision to purchase [travel insurance](https://www.investopedia.com/do-i-need-travel-insurance-7553834) should be based on your individual circumstances, including your destination, planned activities, health condition, and financial situation,” Rajeev Shrivastava, founder and CEO of insurance marketplace VisitorsCoverage, told Investopedia via email.
### Key Takeaways
* Travel insurance typically covers a variety of situations, such as trip cancellations, travel delays, lost luggage, medical care, and emergency evacuation.
* A travel insurance policy generally costs 4% to 10% of the cost of a trip.
* Seriously consider buying travel insurance if you’re taking a nonrefundable trip or traveling internationally.
* Existing coverage from homeowners, health insurance, and credit cards might mean you don’t need to buy a separate travel insurance policy, but it's still smart to look at the [best travel insurance companies](https://www.investopedia.com/best-travel-insurance-4842641) before your trip.
## What Does Travel Insurance Cover?
[Travel insurance](https://www.investopedia.com/terms/t/travel-insurance.asp) policies typically cover these five financial and health risks:
### Trip Cancellations, Interruptions, and Delays
Illness, the death of a traveler’s family member, bad weather, job loss, or a natural disaster are a few circumstances that might trigger reimbursement of prepaid travel costs, such as plane tickets or emergency expenses. However, only reasons outlined by the insurance policy are covered, so review exclusions.
### Luggage and Rental Car Damage or Loss
A travel insurance policy might cover lost, stolen, or damaged luggage, personal items, or auto rentals. In some cases, the coverage might include reimbursement of purchases (such as clothing) you needed to make because you didn’t have your luggage. An auto rental damage waiver covers a rental vehicle’s damage or theft.
### Travel Health Insurance
Travel insurance kicks in for medical or dental emergencies when your regular U.S. health insurance doesn’t apply. Remember that even if a country has a low-cost or free nationalized health system, you’ll pay out of pocket if you are not a citizen.
### Medical Evacuation
Medical evacuation coverage reimburses you if you must be evacuated from a remote area to a hospital. For example, if you become seriously ill while trekking in the Swiss Alps, travel insurance may pay for you to be airlifted to a big-city hospital for treatment. Medical evacuation from a remote location can cost as much as $250,000. This insurance may be part of travel health insurance or a stand-alone policy.
### Accidental Death and Dismemberment
This type of coverage pays benefits to your survivors if you get injured or die while on a trip. Injuries are typically limited to losing an eye, hand, foot, or limb.
###
Many travel insurance policies provide 24/7 assistance to help you find medical care, make travel arrangements, and contact loved ones in an emergency.
## What Does Travel Insurance Not Cover?
A standard travel insurance policy won’t cover some cancellation reasons. For example, a standard travel insurance policy won’t provide coverage if you decide to back out of a trip because you need to cut back on spending. You would need to [purchase “cancel for any reason” (CFAR) coverage](https://www.investopedia.com/how-to-buy-cancel-for-any-reason-travel-insurance-7553379). Even CFAR has its own rules, such as canceling within a specific time frame.
Other losses that traditional travel insurance may or may not cover include:
* Costs associated with preexisting health conditions, pregnancy complications, or mental health issues
* Injury costs after participating in higher-risk activities such as rock climbing or skydiving
* Trip interruption, cancellation, or other losses due to health and disease outbreaks or natural disasters
* Cancellations due to terrorism, civil unrest, or any U.S. State Department warnings
Ask the insurer about exclusions to find out which exclusions apply, or review documentation. You may be able to find travel health insurance coverage that won’t exclude your mountain-climbing injuries, for example.
## Which Countries Require Travel Insurance?
Many countries don’t require travel or health insurance now that the COVID-19 pandemic is in retreat. However, future disease outbreaks can influence requirements. Check the U.S. State Department’s website and destination government sites for the most current information on health requirements and recommendations.
For example, Thailand still requires visitors to carry $10,000 in travel medical insurance if they’re coming from a country with pre-departure COVID tests. However, the United States doesn’t require pre-departure COVID testing, making the insurance unnecessary for Americans.
Some nations have blanket requirements for coverage. Cuba requires U.S. airlines leaving from the U.S. to pay for each passenger’s health insurance. Every international traveler entering Saudi Arabia receives government-supplied travel medical insurance for emergencies.
Travelers entering Qatar must purchase emergency and accident services health insurance from a Qatar-registered insurer.
In some countries, you must apply for a visa to visit, even for a few days. In Nepal, U.S. visitors applying for the required six-month visa must demonstrate proof of a six-month international health insurance policy.
## When Is Travel Insurance Not Necessary?
Suppose you’re taking a short trip in your own country and have adequate health insurance. In that case, you might not need travel insurance, according to [Jason Eckhoff](https://www.businessclass.com/lifestyle/articles/a-message-from-our-founder-ceo), founder and CEO of the BusinessClass.com travel website, as told to Investopedia via email.]
In addition, if you’re taking a trip with refundable costs—such as airfare—and can cancel it without being financially penalized, then travel insurance may not be necessary.
You may not need travel insurance if your credit card offers robust benefits. [Travel credit cards and other credit cards](https://www.investopedia.com/travel-4689716) may provide the following coverages:
* [Trip cancellation insurance](https://www.investopedia.com/what-is-cancel-for-any-reason-cfar-insurance-8599192)
* Trip delay reimbursement
* Emergency evacuation and transportation
* Accidental death and dismemberment
* Lost or delayed luggage reimbursement
* Auto damage waivers
* Roadside emergency assistance
However, Jiten Puri, founder and CEO of insurance marketplace PolicyAdvisor.com, noted that this coverage might be limited, such as providing only basic medical care or not covering trip cancellation or interruption.
## How Much Does Travel Insurance Cost?
Generally, [travel insurance costs](https://www.investopedia.com/how-much-does-travel-insurance-cost-7377124) 4% to 10% of the total prepaid, nonrefundable expenses for your trip. If you buy travel insurance for a cruise with a $6,000 price tag, you might pay anywhere from $240 to $600 for a policy.
The cost of travel insurance varies by insurer. Investopedia reviewed six insurers’ travel insurance plans offering trip cancellation/interruption, emergency medical/evacuation, and baggage loss/damage found the following ranges:
| **Age** | **Trip Cost** | **Low Premium** | **High Premium** |
| --- | --- | --- | --- |
| 35 | $1,500 | $51 | $69 |
| 65 | $3,000 | $135 | $186 |
Factors that affect the cost of travel insurance include:
* **Age**: This is the largest factor in rates charged for travel insurance. Older travelers and travelers with preexisting medical conditions might find travel insurance costs more than it does for other travelers.
* **Coverage type and dollar amount**: A policy with fewer coverage types and where your trip expenses are lower typically costs less than coverage for higher dollar amounts or extra benefits, such as [CFAR insurance](https://www.investopedia.com/how-much-is-cancel-for-any-reason-travel-insurance-7557668).
* **Trip length**: The more days you travel, the more risks you might encounter.
* **Number of travelers**: A trip with six people might be riskier (and cost more) than a trip with two people.
Remember that an insurer may turn you down or charge you more after reviewing your application based on the insurer’s risk standards.
## When Is Travel Insurance Worth It?
[David Leiter](https://theworldtravelguy.com/about/), publisher of The World Travel Guy blog, said it’s generally a good idea to buy travel insurance with appropriate coverages if you’re:
* Taking a pricey trip with nonrefundable costs
* Traveling internationally
* Visiting a remote location without easy access to medical care
Eckhoff suggested considering buying travel insurance if you:
* Have a preexisting medical condition, as long as the policy covers your needs
* Are visiting a country threatened by political instability, natural disasters, or health risks
* Participate in higher-risk activities, increasing the odds of becoming injured or ill
In addition to the above, the U.S. Centers for Disease Control and Prevention (CDC) recommends buying supplemental travel health insurance if you’re traveling for more than six months.
The U.S. State Department suggests buying insurance before you travel and reviewing the country information page of your destination before you travel.
### Note
The CDC recommends seeking a travel health insurance policy that makes payments directly to the provider or hospital, provides 24-hour physician support, offers emergency medical transport to the U.S. or equivalent, and covers high-risk activities.
“If you’re shopping for travel insurance, make sure you get something that fits you, your destination, and your style of travel. Think of what’s most likely to go wrong in your situation, and then pick a plan that will cover it,” Leiter recommended.
## Do I Need Travel Insurance if I Have Health Insurance?
Your existing health insurance may cover emergency care during international travel. However, only some health insurance plans kick in when traveling abroad. Before buying extra travel insurance, check with your health insurance company about on-the-go coverage; ask if you must seek preauthorization and which exclusions apply.
## Do I Need Travel Insurance if My Credit Card Has Built-in Travel Protection?
Built-in travel protection from one of your credit cards may be all you need for your trip. For instance, if your primary goal is to obtain trip cancellation coverage, then your credit card benefits might be adequate. However, you may want to buy travel insurance if your credit card lacks sufficient medical coverage—or offers no medical coverage.
## Is Travel Insurance the Same as Cancellation Insurance?
Travel insurance is not the same as cancellation insurance. However, cancellation insurance is often one component of travel insurance. So, your travel insurance policy may offer reimbursement for a cancellation due to specific circumstances, such as a death. But travel insurance can also cover medical expenses, lost baggage, and auto rental damage.
## Does Travel Insurance Protect My Possessions?
Homeowners and renters insurance can cover your possessions when you’re traveling. However, that coverage might not be enough to protect valuable items such as jewelry or may not cover the total cost for replacement. Furthermore, filing a homeowners or renters insurance claim might increase your premium.
## How Can I Save Money on Travel Insurance?
Don’t go with the first travel insurance policy you come across. Instead, shop around to make sure you’re getting the most coverage at the best price. Also, if you’re booking a trip through a travel agency or tour operator, ask for a package deal, including travel insurance.
## The Bottom Line
Buying travel insurance might not be necessary if you’re traveling domestically or going on a refundable trip, or if you carry adequate coverage through a credit card. “We would always recommend getting travel insurance. But if you are extremely elderly or in very poor health, your travel insurance premiums may be expensive,” Puri said.
Travel insurance generally provides “invaluable peace of mind,” Puri said. For instance, travel insurance can be a smart investment if you’re traveling internationally and purchased a high-cost, nonrefundable trip.
| Travel insurance can offer financial protection if you cancel an expensive, nonrefundable vacation for an approved reason. Travel insurance can also cover your medical bills if you experience a medical emergency while traveling. However, sometimes you can get away with not purchasing it.
“Ultimately, the decision to purchase travel insurance should be based on your individual circumstances, including your destination, planned activities, health condition, and financial situation,” Rajeev Shrivastava, founder and CEO of insurance marketplace VisitorsCoverage, told Investopedia via email.
Key Takeaways
Travel insurance typically covers a variety of situations, such as trip cancellations, travel delays, lost luggage, medical care, and emergency evacuation.
A travel insurance policy generally costs 4% to 10% of the cost of a trip.
Seriously consider buying travel insurance if you’re taking a nonrefundable trip or traveling internationally.
Existing coverage from homeowners, health insurance, and credit cards might mean you don’t need to buy a separate travel insurance policy, but it's still smart to look at the best travel insurance companies before your trip.
What Does Travel Insurance Cover?
Travel insurance policies typically cover these five financial and health risks:
Trip Cancellations, Interruptions, and Delays
Illness, the death of a traveler’s family member, bad weather, job loss, or a natural disaster are a few circumstances that might trigger reimbursement of prepaid travel costs, such as plane tickets or emergency expenses. However, only reasons outlined by the insurance policy are covered, so review exclusions.
Luggage and Rental Car Damage or Loss
A travel insurance policy might cover lost, stolen, or damaged luggage, personal items, or auto rentals. In some cases, the coverage might include reimbursement of purchases (such as clothing) you needed to make because you didn’t have your luggage. An auto rental damage waiver covers a rental vehicle’s damage or theft.
Travel Health Insurance
Travel insurance kicks in for medical or dental emergencies when your regular U.S. health insurance doesn’t apply. Remember that even if a country has a low-cost or free nationalized health system, you’ll pay out of pocket if you are not a citizen.
Medical Evacuation
Medical evacuation coverage reimburses you if you must be evacuated from a remote area to a hospital. For example, if you become seriously ill while trekking in the Swiss Alps, travel insurance may pay for you to be airlifted to a big-city hospital for treatment. Medical evacuation from a remote location can cost as much as $250,000. This insurance may be part of travel health insurance or a stand-alone policy.
Accidental Death and Dismemberment
This type of coverage pays benefits to your survivors if you get injured or die while on a trip. Injuries are typically limited to losing an eye, hand, foot, or limb.
Many travel insurance policies provide 24/7 assistance to help you find medical care, make travel arrangements, and contact loved ones in an emergency.
What Does Travel Insurance Not Cover?
A standard travel insurance policy won’t cover some cancellation reasons. For example, a standard travel insurance policy won’t provide coverage if you decide to back out of a trip because you need to cut back on spending. You would need to purchase “cancel for any reason” (CFAR) coverage. Even CFAR has its own rules, such as canceling within a specific time frame.
Other losses that traditional travel insurance may or may not cover include:
Costs associated with preexisting health conditions, pregnancy complications, or mental health issuesInjury costs after participating in higher-risk activities such as rock climbing or skydivingTrip interruption, cancellation, or other losses due to health and disease outbreaks or natural disastersCancellations due to terrorism, civil unrest, or any U.S. State Department warnings
Ask the insurer about exclusions to find out which exclusions apply, or review documentation. You may be able to find travel health insurance coverage that won’t exclude your mountain-climbing injuries, for example.
Which Countries Require Travel Insurance?
Many countries don’t require travel or health insurance now that the COVID-19 pandemic is in retreat. However, future disease outbreaks can influence requirements. Check the U.S. State Department’s website and destination government sites for the most current information on health requirements and recommendations.
For example, Thailand still requires visitors to carry $10,000 in travel medical insurance if they’re coming from a country with pre-departure COVID tests. However, the United States doesn’t require pre-departure COVID testing, making the insurance unnecessary for Americans.
Some nations have blanket requirements for coverage. Cuba requires U.S. airlines leaving from the U.S. to pay for each passenger’s health insurance. Every international traveler entering Saudi Arabia receives government-supplied travel medical insurance for emergencies.
Travelers entering Qatar must purchase emergency and accident services health insurance from a Qatar-registered insurer.
In some countries, you must apply for a visa to visit, even for a few days. In Nepal, U.S. visitors applying for the required six-month visa must demonstrate proof of a six-month international health insurance policy.
When Is Travel Insurance Not Necessary?
Suppose you’re taking a short trip in your own country and have adequate health insurance. In that case, you might not need travel insurance, according to Jason Eckhoff, founder and CEO of the BusinessClass.com travel website, as told to Investopedia via email.]
In addition, if you’re taking a trip with refundable costs—such as airfare—and can cancel it without being financially penalized, then travel insurance may not be necessary.
You may not need travel insurance if your credit card offers robust benefits. Travel credit cards and other credit cards may provide the following coverages:
Trip cancellation insurance
Trip delay reimbursement
Emergency evacuation and transportation
Accidental death and dismemberment
Lost or delayed luggage reimbursement
Auto damage waivers
Roadside emergency assistance
However, Jiten Puri, founder and CEO of insurance marketplace PolicyAdvisor.com, noted that this coverage might be limited, such as providing only basic medical care or not covering trip cancellation or interruption.
How Much Does Travel Insurance Cost?
Generally, travel insurance costs 4% to 10% of the total prepaid, nonrefundable expenses for your trip. If you buy travel insurance for a cruise with a $6,000 price tag, you might pay anywhere from $240 to $600 for a policy.
The cost of travel insurance varies by insurer. Investopedia reviewed six insurers’ travel insurance plans offering trip cancellation/interruption, emergency medical/evacuation, and baggage loss/damage found the following ranges:
Age
Trip Cost
Low Premium
High Premium
35
$1,500
$51
$69
65
$3,000
$135
$186
Factors that affect the cost of travel insurance include:
Age: This is the largest factor in rates charged for travel insurance. Older travelers and travelers with preexisting medical conditions might find travel insurance costs more than it does for other travelers.
Coverage type and dollar amount: A policy with fewer coverage types and where your trip expenses are lower typically costs less than coverage for higher dollar amounts or extra benefits, such as CFAR insurance.
Trip length: The more days you travel, the more risks you might encounter.
Number of travelers: A trip with six people might be riskier (and cost more) than a trip with two people.
Remember that an insurer may turn you down or charge you more after reviewing your application based on the insurer’s risk standards.
When Is Travel Insurance Worth It?
David Leiter, publisher of The World Travel Guy blog, said it’s generally a good idea to buy travel insurance with appropriate coverages if you’re:
Taking a pricey trip with nonrefundable costsTraveling internationallyVisiting a remote location without easy access to medical care
Eckhoff suggested considering buying travel insurance if you:
Have a preexisting medical condition, as long as the policy covers your needsAre visiting a country threatened by political instability, natural disasters, or health risksParticipate in higher-risk activities, increasing the odds of becoming injured or ill
In addition to the above, the U.S. Centers for Disease Control and Prevention (CDC) recommends buying supplemental travel health insurance if you’re traveling for more than six months.
The U.S. State Department suggests buying insurance before you travel and reviewing the country information page of your destination before you travel.
Note
The CDC recommends seeking a travel health insurance policy that makes payments directly to the provider or hospital, provides 24-hour physician support, offers emergency medical transport to the U.S. or equivalent, and covers high-risk activities.
“If you’re shopping for travel insurance, make sure you get something that fits you, your destination, and your style of travel. Think of what’s most likely to go wrong in your situation, and then pick a plan that will cover it,” Leiter recommended.
Do I Need Travel Insurance if I Have Health Insurance?
Your existing health insurance may cover emergency care during international travel. However, only some health insurance plans kick in when traveling abroad. Before buying extra travel insurance, check with your health insurance company about on-the-go coverage; ask if you must seek preauthorization and which exclusions apply.
Do I Need Travel Insurance if My Credit Card Has Built-in Travel Protection?
Built-in travel protection from one of your credit cards may be all you need for your trip. For instance, if your primary goal is to obtain trip cancellation coverage, then your credit card benefits might be adequate. However, you may want to buy travel insurance if your credit card lacks sufficient medical coverage—or offers no medical coverage.
Is Travel Insurance the Same as Cancellation Insurance?
Travel insurance is not the same as cancellation insurance. However, cancellation insurance is often one component of travel insurance. So, your travel insurance policy may offer reimbursement for a cancellation due to specific circumstances, such as a death. But travel insurance can also cover medical expenses, lost baggage, and auto rental damage.
Does Travel Insurance Protect My Possessions?
Homeowners and renters insurance can cover your possessions when you’re traveling. However, that coverage might not be enough to protect valuable items such as jewelry or may not cover the total cost for replacement. Furthermore, filing a homeowners or renters insurance claim might increase your premium.
How Can I Save Money on Travel Insurance?
Don’t go with the first travel insurance policy you come across. Instead, shop around to make sure you’re getting the most coverage at the best price. Also, if you’re booking a trip through a travel agency or tour operator, ask for a package deal, including travel insurance.
The Bottom Line
Buying travel insurance might not be necessary if you’re traveling domestically or going on a refundable trip, or if you carry adequate coverage through a credit card. “We would always recommend getting travel insurance. But if you are extremely elderly or in very poor health, your travel insurance premiums may be expensive,” Puri said.
Travel insurance generally provides “invaluable peace of mind,” Puri said. For instance, travel insurance can be a smart investment if you’re traveling internationally and purchased a high-cost, nonrefundable trip.
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https://www.investopedia.com/articles/investing/122315/6-rules-successful-dividend-investing.asp | 6 Rules for Successful Dividend Investing | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Investing in stocks that pay out <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> is a strategic way to establish a reliable income stream and build wealth. While investors are taking on a higher degree of risk, there's also the potential for greater returns.
</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"> Finding success with these investments isn't necessarily rocket science, but it does require an understanding of some basic principles. Here are six tried-and-true rules every savvy investor should be aware of when investing in dividends.
</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-choose-quality-over-quantity"></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"> Choose Quality Over Quantity </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> One of the most important considerations for investors when choosing investments is the <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>. The higher the yield, the better the return, but the numbers can be deceptive. If the stock's current payout level is not sustainable over the long-term, those market-beating dividends can quickly dry up. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">REITs</a> are a good example of how fluctuations in the market can directly affect dividend payouts.
</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"> Selecting an investment that offers more stability may mean sacrificing a certain amount of yield in the short-term, but the result may be more favorable, particularly for investors who prefer a <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 approach</a>. The income generated by lower-risk dividend stocks may be less, but it's likely to be more reliable over time.
</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-stick-with-established-companies"></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"> Stick With Established Companies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The stock market moves in cycles and it has a tendency to repeat itself now and then. When choosing dividend investments, there's no better measuring stick than a stock's past performance. Specifically, investors should be targeting those companies that have earned <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend-aristocrat.asp">"dividend aristocrat"</a> status.
</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"> These are established companies that have increased their dividend payouts to investors consistently over the previous 25 years. Their brands are easily recognizable, and they generate a steady flow of cash with a high likelihood of continuing to do so in the future.
</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-look-for-growth-potential"></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"> Look for Growth Potential </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> While newer companies can pay out some impressive dividends, investors shouldn't be jumping on the bandwagon without doing their research. Aside from looking at past and present returns, it's also important to look at the company's future <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/07/build_dividend_portfolio.asp">potential to increase its dividend</a> payouts.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> This is the primary difference between <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthinvesting.asp">growth investing</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valueinvesting.asp">value investing</a>. With growth investing, rather than focusing on what the stock is trading for currently, you would look at the long-term outlook for growth to gauge how profitable it would be from a dividend standpoint.
</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-be-mindful-of-the-payout-ratio"></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"> Be Mindful of the Payout Ratio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> A company's <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> can reveal how safe the investment is. This ratio tells investors not only how much is being paid out to shareholders, but also how much income the company can retain.
</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 come across a high-yield dividend stock, but the company is paying out a substantial percentage of its income to investors, that's a sign that you need to tread cautiously. If the company were to see its income stream reduced, the amount of dividends you're receiving would go on the chopping block.
</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-mix-it-up"></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"> Mix It Up </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> There's a strong argument to be made for concentrating assets on a handful of stocks or targeting a specific <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sector</a> of the market. If the companies or industries you've zeroed in on have an exceptional track record, that bodes well for your future dividend earnings. On the other hand, that can be problematic during a market downtown.
</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"> Spreading assets out over multiple dividend-paying investments adds diversity to your holdings, and it allows you to minimize risk. When dividends are reduced in one area, the loss may not be felt as deeply when the rest of your portfolio continues to perform.
</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-know-when-to-hold-and-when-to-fold"></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"> Know When to Hold and When to Fold </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Investing guru <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/warren-buffetts-investing-style-reviewed/">Warren Buffett</a> firmly believes in taking the long view when it comes to investing, but like any smart investor, he knows when to cut his losses. With dividend stocks, there's a fine line between waiting for the investment to pay off and hanging on too long.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> This is a particularly easy mistake to make when purchasing stocks that on the surface appear to be an excellent value. The problem occurs when the company fails to deliver regarding growth. Being able to recognize when a stock is sinking is vital, but you also have to know when to act on it and when to sit tight.
</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-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> With the right approach, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-buy-dividend-stocks-7503745">dividend investing</a> can add an exponential amount of value to an investor's portfolio. The key lies in knowing how to evaluate stocks to pinpoint those that offer the strongest returns while minimizing risk and maintaining diversity.
</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 nothing short of a juggling act, but by adhering to the guidelines laid out here, investors may be better able to position themselves for maximum success.
</p></div> | Investing in stocks that pay out [dividends](https://www.investopedia.com/terms/d/dividend.asp) is a strategic way to establish a reliable income stream and build wealth. While investors are taking on a higher degree of risk, there's also the potential for greater returns.
Finding success with these investments isn't necessarily rocket science, but it does require an understanding of some basic principles. Here are six tried-and-true rules every savvy investor should be aware of when investing in dividends.
## Choose Quality Over Quantity
One of the most important considerations for investors when choosing investments is the [dividend yield](https://www.investopedia.com/terms/d/dividendyield.asp). The higher the yield, the better the return, but the numbers can be deceptive. If the stock's current payout level is not sustainable over the long-term, those market-beating dividends can quickly dry up. [REITs](https://www.investopedia.com/terms/r/reit.asp) are a good example of how fluctuations in the market can directly affect dividend payouts.
Selecting an investment that offers more stability may mean sacrificing a certain amount of yield in the short-term, but the result may be more favorable, particularly for investors who prefer a [buy-and-hold approach](https://www.investopedia.com/terms/b/buyandhold.asp). The income generated by lower-risk dividend stocks may be less, but it's likely to be more reliable over time.
## Stick With Established Companies
The stock market moves in cycles and it has a tendency to repeat itself now and then. When choosing dividend investments, there's no better measuring stick than a stock's past performance. Specifically, investors should be targeting those companies that have earned ["dividend aristocrat"](https://www.investopedia.com/terms/d/dividend-aristocrat.asp) status.
These are established companies that have increased their dividend payouts to investors consistently over the previous 25 years. Their brands are easily recognizable, and they generate a steady flow of cash with a high likelihood of continuing to do so in the future.
## Look for Growth Potential
While newer companies can pay out some impressive dividends, investors shouldn't be jumping on the bandwagon without doing their research. Aside from looking at past and present returns, it's also important to look at the company's future [potential to increase its dividend](https://www.investopedia.com/articles/stocks/07/build_dividend_portfolio.asp) payouts.
This is the primary difference between [growth investing](https://www.investopedia.com/terms/g/growthinvesting.asp) and [value investing](https://www.investopedia.com/terms/v/valueinvesting.asp). With growth investing, rather than focusing on what the stock is trading for currently, you would look at the long-term outlook for growth to gauge how profitable it would be from a dividend standpoint.
## Be Mindful of the Payout Ratio
A company's [dividend payout ratio](https://www.investopedia.com/terms/d/dividendpayoutratio.asp) can reveal how safe the investment is. This ratio tells investors not only how much is being paid out to shareholders, but also how much income the company can retain.
If you come across a high-yield dividend stock, but the company is paying out a substantial percentage of its income to investors, that's a sign that you need to tread cautiously. If the company were to see its income stream reduced, the amount of dividends you're receiving would go on the chopping block.
## Mix It Up
There's a strong argument to be made for concentrating assets on a handful of stocks or targeting a specific [sector](https://www.investopedia.com/terms/s/sector.asp) of the market. If the companies or industries you've zeroed in on have an exceptional track record, that bodes well for your future dividend earnings. On the other hand, that can be problematic during a market downtown.
Spreading assets out over multiple dividend-paying investments adds diversity to your holdings, and it allows you to minimize risk. When dividends are reduced in one area, the loss may not be felt as deeply when the rest of your portfolio continues to perform.
## Know When to Hold and When to Fold
Investing guru [Warren Buffett](https://www.investopedia.com/investing/warren-buffetts-investing-style-reviewed/) firmly believes in taking the long view when it comes to investing, but like any smart investor, he knows when to cut his losses. With dividend stocks, there's a fine line between waiting for the investment to pay off and hanging on too long.
This is a particularly easy mistake to make when purchasing stocks that on the surface appear to be an excellent value. The problem occurs when the company fails to deliver regarding growth. Being able to recognize when a stock is sinking is vital, but you also have to know when to act on it and when to sit tight.
## The Bottom Line
With the right approach, [dividend investing](https://www.investopedia.com/how-to-buy-dividend-stocks-7503745) can add an exponential amount of value to an investor's portfolio. The key lies in knowing how to evaluate stocks to pinpoint those that offer the strongest returns while minimizing risk and maintaining diversity.
It's nothing short of a juggling act, but by adhering to the guidelines laid out here, investors may be better able to position themselves for maximum success.
| Investing in stocks that pay out dividends is a strategic way to establish a reliable income stream and build wealth. While investors are taking on a higher degree of risk, there's also the potential for greater returns.
Finding success with these investments isn't necessarily rocket science, but it does require an understanding of some basic principles. Here are six tried-and-true rules every savvy investor should be aware of when investing in dividends.
Choose Quality Over Quantity
One of the most important considerations for investors when choosing investments is the dividend yield. The higher the yield, the better the return, but the numbers can be deceptive. If the stock's current payout level is not sustainable over the long-term, those market-beating dividends can quickly dry up. REITs are a good example of how fluctuations in the market can directly affect dividend payouts.
Selecting an investment that offers more stability may mean sacrificing a certain amount of yield in the short-term, but the result may be more favorable, particularly for investors who prefer a buy-and-hold approach. The income generated by lower-risk dividend stocks may be less, but it's likely to be more reliable over time.
Stick With Established Companies
The stock market moves in cycles and it has a tendency to repeat itself now and then. When choosing dividend investments, there's no better measuring stick than a stock's past performance. Specifically, investors should be targeting those companies that have earned "dividend aristocrat" status.
These are established companies that have increased their dividend payouts to investors consistently over the previous 25 years. Their brands are easily recognizable, and they generate a steady flow of cash with a high likelihood of continuing to do so in the future.
Look for Growth Potential
While newer companies can pay out some impressive dividends, investors shouldn't be jumping on the bandwagon without doing their research. Aside from looking at past and present returns, it's also important to look at the company's future potential to increase its dividend payouts.
This is the primary difference between growth investing and value investing. With growth investing, rather than focusing on what the stock is trading for currently, you would look at the long-term outlook for growth to gauge how profitable it would be from a dividend standpoint.
Be Mindful of the Payout Ratio
A company's dividend payout ratio can reveal how safe the investment is. This ratio tells investors not only how much is being paid out to shareholders, but also how much income the company can retain.
If you come across a high-yield dividend stock, but the company is paying out a substantial percentage of its income to investors, that's a sign that you need to tread cautiously. If the company were to see its income stream reduced, the amount of dividends you're receiving would go on the chopping block.
Mix It Up
There's a strong argument to be made for concentrating assets on a handful of stocks or targeting a specific sector of the market. If the companies or industries you've zeroed in on have an exceptional track record, that bodes well for your future dividend earnings. On the other hand, that can be problematic during a market downtown.
Spreading assets out over multiple dividend-paying investments adds diversity to your holdings, and it allows you to minimize risk. When dividends are reduced in one area, the loss may not be felt as deeply when the rest of your portfolio continues to perform.
Know When to Hold and When to Fold
Investing guru Warren Buffett firmly believes in taking the long view when it comes to investing, but like any smart investor, he knows when to cut his losses. With dividend stocks, there's a fine line between waiting for the investment to pay off and hanging on too long.
This is a particularly easy mistake to make when purchasing stocks that on the surface appear to be an excellent value. The problem occurs when the company fails to deliver regarding growth. Being able to recognize when a stock is sinking is vital, but you also have to know when to act on it and when to sit tight.
The Bottom Line
With the right approach, dividend investing can add an exponential amount of value to an investor's portfolio. The key lies in knowing how to evaluate stocks to pinpoint those that offer the strongest returns while minimizing risk and maintaining diversity.
It's nothing short of a juggling act, but by adhering to the guidelines laid out here, investors may be better able to position themselves for maximum success.
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] |
https://www.investopedia.com/terms/t/tax-expense.asp | Tax Expense: Definition, Calculation, and Effect on 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"><span class="heading-toc" id="toc-what-is-a-tax-expense"></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 Tax Expense? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A tax expense is a liability owed to a federal, state, or local government within a given time period, typically over the course of a year.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Tax expenses are calculated by multiplying the tax rate of the individual or business by the income received or generated before taxes. This happens after factoring in variables such as non-deductible items, tax assets, and tax liabilities.<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>Tax expenses are the total amount of taxes owed by an individual, corporation, or other entity to a taxing authority.</li><li>Income tax expense is calculated by multiplying taxable income by the effective tax rate.</li><li>Other taxes may be levied against an asset's value, such as property or estate taxes.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-tax-expenses"></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 Tax Expenses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A tax expense is the effective tax rate multiplied by taxable income. But calculating tax expense can be complex given that businesses and individuals are subject to various taxes, each set at a different rate.
</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 instance, a business must pay multiple taxes, including:
</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><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payrolltax.asp">Payroll tax</a> on wages paid to employees</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/salestax.asp">Sales tax</a> on certain purchases</li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/excisetax.asp">Excise tax</a> on certain goods</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"> An individual pays different income tax rates for wages and for their FICA (Federal Insurance Contributions Act) contribution, which goes to Social Security, Medicare, Medicaid, and unemployment insurance. In addition to the range of tax rates applicable to various levels of income, the different tax rates in different jurisdictions and the multiple layers of tax on income add to the complexity of determining an entity’s tax expense.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In the U.S., determining the appropriate tax rate and identifying the correct accounting methods for items affecting business tax expense are detailed by the Internal Revenue Service (IRS) and are standardized by Generally Accepted Accounting Principles (GAAP). The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gaap.asp">GAAP</a> standards provide for a certain treatment of income and expenses which may at times differ from the provisions allowed under the applicable government tax code.
</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"> This means that the amount of tax expense recognized is unlikely to exactly match the standard income tax percentage that is applied to business income. In other words, the differences in financial accounting and the tax code may result in a tax expense that differs from the actual tax bill.
</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"> For example, many companies use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/straightlinebasis.asp">straight-line depreciation</a> to calculate depreciation reported in their financial statements but are allowed to employ an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accelerateddepreciation.asp">accelerated form of depreciation</a> to derive their taxable profit. The result is a taxable income figure that is lower than the reported income figure.<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"> Tax expense affects a company's net earnings given that it is a liability that must be paid to a federal or state government. The expense reduces the profits to be distributed to shareholders in the form of dividends.
</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>This is even more disadvantageous <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/c-corporation.asp">C corporations</a> who must pay taxes on earned profits and the shareholders are taxed on the dividend received.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A tax expense is only recognized when a company has taxable income. In the event that a loss is recognized, the business can carry its losses forward to future years to offset or reduce later tax expenses.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<span class="heading-toc" id="toc-tax-expense-vs-tax-payable"></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"> Tax Expense vs. Tax Payable </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The tax expense is the amount of money that a business or other entity has determined is owed in taxes based on standard business accounting rules. This charge is reported on the business'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>.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incometaxpayable.asp">tax payable</a> is the actual amount owed in taxes based on the rules of the tax code. The payable amount is recognized on the balance sheet as a liability until the company settles the tax bill.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If the tax expense is higher than the tax liability, the difference creates another liability, called a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deferredtaxliability.asp">deferred tax liability</a>, which must be paid at some point in the future. On the other hand, if the tax payable is higher than the tax expense, the difference creates an asset category, called the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deferredtaxasset.asp">deferred tax asset,</a> which can be used to settle any tax expense in the future.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-is-a-tax-expense-for-an-individual-taxpayer"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Tax Expense for an Individual Taxpayer?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>For most individuals, a tax expense is the amount of money owed to federal, state, and local governments in annual income taxes. This tax expense is reported annually in a tax return in which the individual resolves the difference between the amount of taxes already paid and the amount that was owed.<br/></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-is-a-tax-expense-for-a-business"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Tax Expense for a Business?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Arriving at a tax expense is generally more complicated for businesses than for individuals. A business is taxed on its net income, or the revenue it takes in minus the costs of doing business. Recording business expenses properly for tax purposes requires following rules set by the IRS and standards called Generally Accepted Accounting Principles, or GAAP.</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-what-do-my-federal-tax-expenses-include"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Do My Federal Tax Expenses Include?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Your annual tax return reports your income for the year and the taxes you owe in a number of categories including:</p><ul><li>Earned income including salary, wages, tips, and commissions</li><li>Unearned income such as capital gains on the sale of stock or interest on bonds</li><li>The FICA payroll tax, which is deducted from your paycheck</li></ul></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"> A tax expense is an amount of money that a business or an individual owes to a government body, whether it is federal, state, or local. The term covers all taxes, including capital gains taxes, payroll taxes, and sales taxes as well as income taxes.
</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"> Each of these taxes has its own tax rate, which is used to calculate the amount owed. In most cases, this means multiplying the applicable tax rate by the taxable income of the business or individual. A notable exception, of course, is the sales tax. The amount of sales tax owed is calculated by multiplying the applicable tax rate by the sales price of the goods or services being purchased.
</p></div> | ## What Is a Tax Expense?
A tax expense is a liability owed to a federal, state, or local government within a given time period, typically over the course of a year.
Tax expenses are calculated by multiplying the tax rate of the individual or business by the income received or generated before taxes. This happens after factoring in variables such as non-deductible items, tax assets, and tax liabilities.
### Key Takeaways
* Tax expenses are the total amount of taxes owed by an individual, corporation, or other entity to a taxing authority.
* Income tax expense is calculated by multiplying taxable income by the effective tax rate.
* Other taxes may be levied against an asset's value, such as property or estate taxes.
## Understanding Tax Expenses
A tax expense is the effective tax rate multiplied by taxable income. But calculating tax expense can be complex given that businesses and individuals are subject to various taxes, each set at a different rate.
For instance, a business must pay multiple taxes, including:
* [Payroll tax](https://www.investopedia.com/terms/p/payrolltax.asp) on wages paid to employees
* [Sales tax](https://www.investopedia.com/terms/s/salestax.asp) on certain purchases
* [Excise tax](https://www.investopedia.com/terms/e/excisetax.asp) on certain goods
An individual pays different income tax rates for wages and for their FICA (Federal Insurance Contributions Act) contribution, which goes to Social Security, Medicare, Medicaid, and unemployment insurance. In addition to the range of tax rates applicable to various levels of income, the different tax rates in different jurisdictions and the multiple layers of tax on income add to the complexity of determining an entity’s tax expense.
In the U.S., determining the appropriate tax rate and identifying the correct accounting methods for items affecting business tax expense are detailed by the Internal Revenue Service (IRS) and are standardized by Generally Accepted Accounting Principles (GAAP). The [GAAP](https://www.investopedia.com/terms/g/gaap.asp) standards provide for a certain treatment of income and expenses which may at times differ from the provisions allowed under the applicable government tax code.
This means that the amount of tax expense recognized is unlikely to exactly match the standard income tax percentage that is applied to business income. In other words, the differences in financial accounting and the tax code may result in a tax expense that differs from the actual tax bill.
For example, many companies use [straight-line depreciation](https://www.investopedia.com/terms/s/straightlinebasis.asp) to calculate depreciation reported in their financial statements but are allowed to employ an [accelerated form of depreciation](https://www.investopedia.com/terms/a/accelerateddepreciation.asp) to derive their taxable profit. The result is a taxable income figure that is lower than the reported income figure.
Tax expense affects a company's net earnings given that it is a liability that must be paid to a federal or state government. The expense reduces the profits to be distributed to shareholders in the form of dividends.
###
This is even more disadvantageous [C corporations](https://www.investopedia.com/terms/c/c-corporation.asp) who must pay taxes on earned profits and the shareholders are taxed on the dividend received.
A tax expense is only recognized when a company has taxable income. In the event that a loss is recognized, the business can carry its losses forward to future years to offset or reduce later tax expenses.
## Tax Expense vs. Tax Payable
The tax expense is the amount of money that a business or other entity has determined is owed in taxes based on standard business accounting rules. This charge is reported on the business's [income statement](https://www.investopedia.com/terms/i/incomestatement.asp).
The [tax payable](https://www.investopedia.com/terms/i/incometaxpayable.asp) is the actual amount owed in taxes based on the rules of the tax code. The payable amount is recognized on the balance sheet as a liability until the company settles the tax bill.
If the tax expense is higher than the tax liability, the difference creates another liability, called a [deferred tax liability](https://www.investopedia.com/terms/d/deferredtaxliability.asp), which must be paid at some point in the future. On the other hand, if the tax payable is higher than the tax expense, the difference creates an asset category, called the [deferred tax asset,](https://www.investopedia.com/terms/d/deferredtaxasset.asp) which can be used to settle any tax expense in the future.
## What Is a Tax Expense for an Individual Taxpayer?
For most individuals, a tax expense is the amount of money owed to federal, state, and local governments in annual income taxes. This tax expense is reported annually in a tax return in which the individual resolves the difference between the amount of taxes already paid and the amount that was owed.
## What Is a Tax Expense for a Business?
Arriving at a tax expense is generally more complicated for businesses than for individuals. A business is taxed on its net income, or the revenue it takes in minus the costs of doing business. Recording business expenses properly for tax purposes requires following rules set by the IRS and standards called Generally Accepted Accounting Principles, or GAAP.
## What Do My Federal Tax Expenses Include?
Your annual tax return reports your income for the year and the taxes you owe in a number of categories including:
* Earned income including salary, wages, tips, and commissions
* Unearned income such as capital gains on the sale of stock or interest on bonds
* The FICA payroll tax, which is deducted from your paycheck
## The Bottom Line
A tax expense is an amount of money that a business or an individual owes to a government body, whether it is federal, state, or local. The term covers all taxes, including capital gains taxes, payroll taxes, and sales taxes as well as income taxes.
Each of these taxes has its own tax rate, which is used to calculate the amount owed. In most cases, this means multiplying the applicable tax rate by the taxable income of the business or individual. A notable exception, of course, is the sales tax. The amount of sales tax owed is calculated by multiplying the applicable tax rate by the sales price of the goods or services being purchased.
| What Is a Tax Expense?
A tax expense is a liability owed to a federal, state, or local government within a given time period, typically over the course of a year.
Tax expenses are calculated by multiplying the tax rate of the individual or business by the income received or generated before taxes. This happens after factoring in variables such as non-deductible items, tax assets, and tax liabilities.
Key Takeaways
Tax expenses are the total amount of taxes owed by an individual, corporation, or other entity to a taxing authority.Income tax expense is calculated by multiplying taxable income by the effective tax rate.Other taxes may be levied against an asset's value, such as property or estate taxes.
Understanding Tax Expenses
A tax expense is the effective tax rate multiplied by taxable income. But calculating tax expense can be complex given that businesses and individuals are subject to various taxes, each set at a different rate.
For instance, a business must pay multiple taxes, including:
Payroll tax on wages paid to employees
Sales tax on certain purchases
Excise tax on certain goods
An individual pays different income tax rates for wages and for their FICA (Federal Insurance Contributions Act) contribution, which goes to Social Security, Medicare, Medicaid, and unemployment insurance. In addition to the range of tax rates applicable to various levels of income, the different tax rates in different jurisdictions and the multiple layers of tax on income add to the complexity of determining an entity’s tax expense.
In the U.S., determining the appropriate tax rate and identifying the correct accounting methods for items affecting business tax expense are detailed by the Internal Revenue Service (IRS) and are standardized by Generally Accepted Accounting Principles (GAAP). The GAAP standards provide for a certain treatment of income and expenses which may at times differ from the provisions allowed under the applicable government tax code.
This means that the amount of tax expense recognized is unlikely to exactly match the standard income tax percentage that is applied to business income. In other words, the differences in financial accounting and the tax code may result in a tax expense that differs from the actual tax bill.
For example, many companies use straight-line depreciation to calculate depreciation reported in their financial statements but are allowed to employ an accelerated form of depreciation to derive their taxable profit. The result is a taxable income figure that is lower than the reported income figure.
Tax expense affects a company's net earnings given that it is a liability that must be paid to a federal or state government. The expense reduces the profits to be distributed to shareholders in the form of dividends.
This is even more disadvantageous C corporations who must pay taxes on earned profits and the shareholders are taxed on the dividend received.
A tax expense is only recognized when a company has taxable income. In the event that a loss is recognized, the business can carry its losses forward to future years to offset or reduce later tax expenses.
Tax Expense vs. Tax Payable
The tax expense is the amount of money that a business or other entity has determined is owed in taxes based on standard business accounting rules. This charge is reported on the business's income statement.
The tax payable is the actual amount owed in taxes based on the rules of the tax code. The payable amount is recognized on the balance sheet as a liability until the company settles the tax bill.
If the tax expense is higher than the tax liability, the difference creates another liability, called a deferred tax liability, which must be paid at some point in the future. On the other hand, if the tax payable is higher than the tax expense, the difference creates an asset category, called the deferred tax asset, which can be used to settle any tax expense in the future.
What Is a Tax Expense for an Individual Taxpayer?
For most individuals, a tax expense is the amount of money owed to federal, state, and local governments in annual income taxes. This tax expense is reported annually in a tax return in which the individual resolves the difference between the amount of taxes already paid and the amount that was owed.
What Is a Tax Expense for a Business?
Arriving at a tax expense is generally more complicated for businesses than for individuals. A business is taxed on its net income, or the revenue it takes in minus the costs of doing business. Recording business expenses properly for tax purposes requires following rules set by the IRS and standards called Generally Accepted Accounting Principles, or GAAP.
What Do My Federal Tax Expenses Include?
Your annual tax return reports your income for the year and the taxes you owe in a number of categories including:Earned income including salary, wages, tips, and commissionsUnearned income such as capital gains on the sale of stock or interest on bondsThe FICA payroll tax, which is deducted from your paycheck
The Bottom Line
A tax expense is an amount of money that a business or an individual owes to a government body, whether it is federal, state, or local. The term covers all taxes, including capital gains taxes, payroll taxes, and sales taxes as well as income taxes.
Each of these taxes has its own tax rate, which is used to calculate the amount owed. In most cases, this means multiplying the applicable tax rate by the taxable income of the business or individual. A notable exception, of course, is the sales tax. The amount of sales tax owed is calculated by multiplying the applicable tax rate by the sales price of the goods or services being purchased.
| [
[
"Payroll tax",
"https://www.investopedia.com/terms/p/payrolltax.asp"
],
[
"Sales tax",
"https://www.investopedia.com/terms/s/salestax.asp"
],
[
"Excise tax",
"https://www.investopedia.com/terms/e/excisetax.asp"
],
[
"GAAP",
"https://www.investopedia.com/terms/g/gaap.asp"
],
[
"straight-line depreciation",
"https://www.investopedia.com/terms/s/straightlinebasis.asp"
],
[
"accelerated form of depreciation",
"https://www.investopedia.com/terms/a/accelerateddepreciation.asp"
],
[
"C corporations",
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],
[
"income statement",
"https://www.investopedia.com/terms/i/incomestatement.asp"
],
[
"tax payable",
"https://www.investopedia.com/terms/i/incometaxpayable.asp"
],
[
"deferred tax liability",
"https://www.investopedia.com/terms/d/deferredtaxliability.asp"
],
[
"deferred tax asset,",
"https://www.investopedia.com/terms/d/deferredtaxasset.asp"
]
] |
https://www.investopedia.com/general-motors-enters-the-auto-insurance-industry-5089024 | General Motors Enters the Auto Insurance Business | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> General Motors has launched an auto insurance platform through its subsidiary OnStar. The auto manufacturer is taking advantage of the new age of automotive data provided by cars that are more connected than ever. General Motors is one of several companies in the auto industry to enter the insurance space.
</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>General Motors plans to start offering auto insurance in early 2021 through its OnStar subsidiary. </li><li>OnStar collects data on driver behavior, which can be used to personalize insurance rates.</li><li>Tesla has also unveiled plans to offer auto insurance, and Ford has partnered with Allstate to allow some customers to share their driving data as a factor in setting their rates.</li></ul></div></div></div>
<span class="heading-toc" id="toc-telematics-may-help-drive-down-insurance-costs-for-some"></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"> Telematics May Help Drive Down Insurance Costs for Some </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Telematics has been around for a long time now, but more and more insurers are using it to gather data about consumer driving habits.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In the past, vehicle owners could connect a device—downloading a mobile app is more common now—that would keep track of all sorts of information while they drove, including speed, acceleration, braking, fuel consumption, idling, and more.
</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"> Insurance companies would use this data to offer discounts based on how safely customers drive. Exhibiting good driving behaviors over a period of time could show the insurer that you’re a lower risk, which could result in a lower rate.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> With vehicles continuing to become more connected and automated, it’s getting easier for insurers to access that data and make better decisions on premiums.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<span class="heading-toc" id="toc-how-gms-new-insurance-is-different"></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 GM’s New Insurance Is Different </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> General Motors isn’t the first auto manufacturer to get into the insurance business. Tesla announced in 2019 that it would offer its own auto insurance product in response to reports that some of its customers were paying higher rates.<span class="ql-inline-citation" data-cite="1"></span> Currently, its policies are available only in California.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.insurancejournal.com/news/national/2020/03/04/560116.htm" rel="noopener noreferrer nofollow"><br/>Ford</a> is another automaker that’s capitalizing on improved telematics technology and connectivity. Unlike GM and Tesla, Ford doesn’t offer its own insurance policies. Rather, it has partnered with Allstate to allow customers with newer models to share data via embedded modems and participate in Allstate’s Milewise program.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> While GM’s new insurance offering won’t be available to the general public until early next year, its integration with OnStar offers a more streamlined service than Ford's. Also, the service appears likely to be available to more than just GM customers, making it more accessible than policies offered by Ford or Tesla.
</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"> GM doesn’t say that vehicle owners must have an OnStar subscription to apply for a policy, but OnStar members will be eligible for discounts.
</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> | General Motors has launched an auto insurance platform through its subsidiary OnStar. The auto manufacturer is taking advantage of the new age of automotive data provided by cars that are more connected than ever. General Motors is one of several companies in the auto industry to enter the insurance space.
### Key Takeaways
* General Motors plans to start offering auto insurance in early 2021 through its OnStar subsidiary.
* OnStar collects data on driver behavior, which can be used to personalize insurance rates.
* Tesla has also unveiled plans to offer auto insurance, and Ford has partnered with Allstate to allow some customers to share their driving data as a factor in setting their rates.
## Telematics May Help Drive Down Insurance Costs for Some
Telematics has been around for a long time now, but more and more insurers are using it to gather data about consumer driving habits.
In the past, vehicle owners could connect a device—downloading a mobile app is more common now—that would keep track of all sorts of information while they drove, including speed, acceleration, braking, fuel consumption, idling, and more.
Insurance companies would use this data to offer discounts based on how safely customers drive. Exhibiting good driving behaviors over a period of time could show the insurer that you’re a lower risk, which could result in a lower rate.
With vehicles continuing to become more connected and automated, it’s getting easier for insurers to access that data and make better decisions on premiums.
## How GM’s New Insurance Is Different
General Motors isn’t the first auto manufacturer to get into the insurance business. Tesla announced in 2019 that it would offer its own auto insurance product in response to reports that some of its customers were paying higher rates. Currently, its policies are available only in California.
[Ford](https://www.insurancejournal.com/news/national/2020/03/04/560116.htm) is another automaker that’s capitalizing on improved telematics technology and connectivity. Unlike GM and Tesla, Ford doesn’t offer its own insurance policies. Rather, it has partnered with Allstate to allow customers with newer models to share data via embedded modems and participate in Allstate’s Milewise program.
While GM’s new insurance offering won’t be available to the general public until early next year, its integration with OnStar offers a more streamlined service than Ford's. Also, the service appears likely to be available to more than just GM customers, making it more accessible than policies offered by Ford or Tesla.
GM doesn’t say that vehicle owners must have an OnStar subscription to apply for a policy, but OnStar members will be eligible for discounts.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | General Motors has launched an auto insurance platform through its subsidiary OnStar. The auto manufacturer is taking advantage of the new age of automotive data provided by cars that are more connected than ever. General Motors is one of several companies in the auto industry to enter the insurance space.
Key Takeaways
General Motors plans to start offering auto insurance in early 2021 through its OnStar subsidiary. OnStar collects data on driver behavior, which can be used to personalize insurance rates.Tesla has also unveiled plans to offer auto insurance, and Ford has partnered with Allstate to allow some customers to share their driving data as a factor in setting their rates.
Telematics May Help Drive Down Insurance Costs for Some
Telematics has been around for a long time now, but more and more insurers are using it to gather data about consumer driving habits.
In the past, vehicle owners could connect a device—downloading a mobile app is more common now—that would keep track of all sorts of information while they drove, including speed, acceleration, braking, fuel consumption, idling, and more.
Insurance companies would use this data to offer discounts based on how safely customers drive. Exhibiting good driving behaviors over a period of time could show the insurer that you’re a lower risk, which could result in a lower rate.
With vehicles continuing to become more connected and automated, it’s getting easier for insurers to access that data and make better decisions on premiums.
How GM’s New Insurance Is Different
General Motors isn’t the first auto manufacturer to get into the insurance business. Tesla announced in 2019 that it would offer its own auto insurance product in response to reports that some of its customers were paying higher rates. Currently, its policies are available only in California.
Ford is another automaker that’s capitalizing on improved telematics technology and connectivity. Unlike GM and Tesla, Ford doesn’t offer its own insurance policies. Rather, it has partnered with Allstate to allow customers with newer models to share data via embedded modems and participate in Allstate’s Milewise program.
While GM’s new insurance offering won’t be available to the general public until early next year, its integration with OnStar offers a more streamlined service than Ford's. Also, the service appears likely to be available to more than just GM customers, making it more accessible than policies offered by Ford or Tesla.
GM doesn’t say that vehicle owners must have an OnStar subscription to apply for a policy, but OnStar members will be eligible for discounts.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
[
"Ford",
"https://www.insurancejournal.com/news/national/2020/03/04/560116.htm"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/terms/u/unsecuredloan.asp | Unsecured Loans: Borrowing Without Collateral | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-unsecured-loan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Unsecured Loan? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An unsecured loan is a loan that doesn’t require any type of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a>. Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-worthiness.asp">creditworthiness</a>.<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_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Examples of unsecured loans include personal loans, student loans, and credit cards.
</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 unsecured loan is supported only by the borrower’s creditworthiness, rather than by any collateral, such as property or other assets.</li><li>Unsecured loans are riskier than secured loans for lenders, so they require higher credit scores for approval.</li><li>Credit cards, student loans, and personal loans are examples of unsecured loans.</li><li>If a borrower defaults on an unsecured loan, the lender may commission a collection agency to collect the debt or take the borrower to court.</li><li>Lenders can decide whether or not to approve an unsecured loan based on a borrower’s creditworthiness, but laws protect borrowers from discriminatory lending practices.</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">
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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-how-an-unsecured-loan-works"></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 an Unsecured Loan Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Unsecured loans—sometimes referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/signature_loan.asp">signature loans</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">personal loans</a>—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a>. Typically, borrowers must have high credit scores to be approved for unsecured loans.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> An unsecured loan stands in contrast to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secureddebt.asp">secured loan</a>, in which a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lender</a>’s “security” for providing the loan. Examples of secured loans include mortgages and car loans.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Because unsecured loans require higher credit scores than secured loans, in some instances, lenders will allow loan applicants with insufficient credit to provide a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_sign.asp">co-signer</a>. A co-signer takes on the legal obligation to fulfill a debt if the borrower <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">defaults</a>. This occurs when a borrower fails to repay the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a> payments of a loan or debt.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Because unsecured loans are not backed by collateral, they are riskier for lenders. As a result, these loans typically come with higher <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>.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup the losses. In contrast, if a borrower defaults on an unsecured loan, the lender cannot claim any property. But the lender can take other actions, such as commissioning a collection agency to collect the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt.asp">debt</a> or taking the borrower to court. If the court rules in the lender’s favor, the borrower’s wages may be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/garnishment.asp">garnished</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Also, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lien.asp">lien</a> can be placed on the borrower’s home (if they own one), or the borrower may be otherwise ordered to pay the debt. Defaults can have consequences for borrowers, such as lower credit scores.
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<span class="heading-toc" id="toc-types-of-unsecured-loans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Types of Unsecured Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Unsecured loans include personal loans, student loans, and most credit cards—all of which can be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revolvingcredit.asp">revolving</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/termloan.asp">term loans</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> A revolving loan is a loan that has a credit limit that can be spent, repaid, and spent again. Examples of revolving unsecured loans include <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 personal <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">lines of credit</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A term loan, in contrast, is a loan that the borrower repays in equal installments until the loan is paid off at the end of its term. While these types of loans are often affiliated with secured loans, there are also unsecured term loans. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtconsolidation.asp">consolidation loan</a> to pay off credit card debt or a signature loan from a bank would also be considered unsecured term loans.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> In recent years, the unsecured loan market has experienced growth, powered partly by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fintech.asp">financial technology (fintech)</a> firms. The past decade, for example, has seen the rise of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/peer-to-peer-lending.asp">peer-to-peer (P2P) lending</a> via online and mobile lenders.
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<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 with-title" id="mntl-sc-block-callout-heading_3-0">$1.295 Trillion</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The amount of U.S. consumer revolving debt in Oct. 2023, according to the Federal Reserve.<span class="ql-inline-citation" data-cite="9"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> If you’re looking to take out an unsecured loan to pay for personal expenses, 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> is an excellent tool for determining what the monthly payment and total interest should be for the amount you’re hoping to borrow.
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<span class="heading-toc" id="toc-unsecured-loan-vs-payday-loan"></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"> Unsecured Loan vs. Payday Loan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Alternative lenders, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payday-loans.asp">payday lenders</a> or companies that offer merchant <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashadvance.asp">cash advances</a>, do not offer secured loans in the traditional sense. Their loans are not secured by tangible collateral in the way that mortgages and car loans are. However, these lenders take other measures to secure repayment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Payday lenders, for example, require that borrowers give them a postdated check or agree to an automatic withdrawal from their checking accounts to repay the loan. Many online merchant cash advance lenders require the borrower to pay a certain percentage of online sales through a payment-processing service such as PayPal. These loans are considered unsecured even though they are partially secured.<span class="ql-inline-citation" data-cite="8"></span>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Payday loans may be considered <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/predatory_lending.asp">predatory loans</a>, as they have a reputation for extremely high interest and hidden terms that charge borrowers added fees. In fact, some states have banned them.<span class="ql-inline-citation" data-cite="8"></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"> While lenders can decide whether or not to approve an unsecured loan based on your creditworthiness, laws protect borrowers from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-history-of-lending-discrimination-5076948">discriminatory lending practices</a>. The enactment of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecoa.asp">Equal Credit Opportunity Act (ECOA)</a> in 1974, for example, made it illegal for lenders to use race, color, sex, religion, or other non-creditworthiness factors when evaluating a loan application, establishing terms of a loan, or any other aspect of a credit transaction.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> While lending practices have gradually become more equitable in the United States, discrimination still occurs. In July 2020, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp">Consumer Financial Protection Bureau (CFPB)</a>, which takes the lead in supervising compliance and enforcing the ECOA, issued a Request for Information soliciting public comments to identify opportunities for improving what the ECOA does to ensure nondiscriminatory access to credit. “Clear standards help protect African Americans and other minorities, but the CFPB must back them up with action to make sure lenders and others follow the law,” stated Kathleen L. Kraninger, then-director of the CFPB.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span>
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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-considered-collateral"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Considered Collateral?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Collateral is any item that can be taken to satisfy the value of a loan. Common forms of collateral include real estate, automobiles, jewelry, and other items of value.</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-is-a-co-signed-loan-considered-secured"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Co-Signed Loan Considered Secured?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Although having a co-signer may help you get approved for a loan, it doesn’t make the loan secured. In the case of a default, the lender would require the co-signer to repay the loan.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-can-bankruptcy-eliminate-all-unsecured-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Bankruptcy Eliminate all Unsecured Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Declaring <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a> is a serious undertaking, but in most cases, it will clear your unsecured loans. There is one exception, though: <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/education-loan.asp">student loans</a>. To have student loans forgiven, the debtor must prove that the loans present an undue hardship during an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-file-student-loan-bankruptcy-4772237">adversary proceeding</a>. Private student loans used to pay for living expenses are more likely to be forgiven, though a new streamlined adversary proceeding paperwork is making it easier for even federal student loans to be discharged.<span class="ql-inline-citation" data-cite="11"></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_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"> Unsecured loans are common but can bear significant risk for both the lender and the borrower. Before taking out any unsecured loan, assess your financial health and your ability to repay the loan. Borrowing money that you can’t repay can result in garnishment of wages and tax returns and put the borrower on a difficult path back to solvency.<br/>
</p></div> | ## What Is an Unsecured Loan?
An unsecured loan is a loan that doesn’t require any type of [collateral](https://www.investopedia.com/terms/c/collateral.asp). Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp).
Examples of unsecured loans include personal loans, student loans, and credit cards.
### Key Takeaways
* An unsecured loan is supported only by the borrower’s creditworthiness, rather than by any collateral, such as property or other assets.
* Unsecured loans are riskier than secured loans for lenders, so they require higher credit scores for approval.
* Credit cards, student loans, and personal loans are examples of unsecured loans.
* If a borrower defaults on an unsecured loan, the lender may commission a collection agency to collect the debt or take the borrower to court.
* Lenders can decide whether or not to approve an unsecured loan based on a borrower’s creditworthiness, but laws protect borrowers from discriminatory lending practices.
![Unsecured Loan]()
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Investopedia / Julie Bang
## How an Unsecured Loan Works
Unsecured loans—sometimes referred to as [signature loans](https://www.investopedia.com/terms/s/signature_loan.asp) or [personal loans](https://www.investopedia.com/best-personal-loans-4773300)—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower’s [credit score](https://www.investopedia.com/terms/c/credit_score.asp). Typically, borrowers must have high credit scores to be approved for unsecured loans.
An unsecured loan stands in contrast to a [secured loan](https://www.investopedia.com/terms/s/secureddebt.asp), in which a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the [lender](https://www.investopedia.com/terms/l/lender.asp)’s “security” for providing the loan. Examples of secured loans include mortgages and car loans.
Because unsecured loans require higher credit scores than secured loans, in some instances, lenders will allow loan applicants with insufficient credit to provide a [co-signer](https://www.investopedia.com/terms/c/co_sign.asp). A co-signer takes on the legal obligation to fulfill a debt if the borrower [defaults](https://www.investopedia.com/terms/d/default2.asp). This occurs when a borrower fails to repay the [interest](https://www.investopedia.com/terms/i/interest.asp) and [principal](https://www.investopedia.com/terms/p/principal.asp) payments of a loan or debt.
###
Because unsecured loans are not backed by collateral, they are riskier for lenders. As a result, these loans typically come with higher [interest rates](https://www.investopedia.com/terms/i/interestrate.asp).
If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup the losses. In contrast, if a borrower defaults on an unsecured loan, the lender cannot claim any property. But the lender can take other actions, such as commissioning a collection agency to collect the [debt](https://www.investopedia.com/terms/d/debt.asp) or taking the borrower to court. If the court rules in the lender’s favor, the borrower’s wages may be [garnished](https://www.investopedia.com/terms/g/garnishment.asp).
Also, a [lien](https://www.investopedia.com/terms/l/lien.asp) can be placed on the borrower’s home (if they own one), or the borrower may be otherwise ordered to pay the debt. Defaults can have consequences for borrowers, such as lower credit scores.
## Types of Unsecured Loans
Unsecured loans include personal loans, student loans, and most credit cards—all of which can be [revolving](https://www.investopedia.com/terms/r/revolvingcredit.asp) or [term loans](https://www.investopedia.com/terms/t/termloan.asp).
A revolving loan is a loan that has a credit limit that can be spent, repaid, and spent again. Examples of revolving unsecured loans include [credit cards](https://www.investopedia.com/terms/c/creditcard.asp) and personal [lines of credit](https://www.investopedia.com/terms/l/lineofcredit.asp).
A term loan, in contrast, is a loan that the borrower repays in equal installments until the loan is paid off at the end of its term. While these types of loans are often affiliated with secured loans, there are also unsecured term loans. A [consolidation loan](https://www.investopedia.com/terms/d/debtconsolidation.asp) to pay off credit card debt or a signature loan from a bank would also be considered unsecured term loans.
In recent years, the unsecured loan market has experienced growth, powered partly by [financial technology (fintech)](https://www.investopedia.com/terms/f/fintech.asp) firms. The past decade, for example, has seen the rise of [peer-to-peer (P2P) lending](https://www.investopedia.com/terms/p/peer-to-peer-lending.asp) via online and mobile lenders.
### $1.295 Trillion
The amount of U.S. consumer revolving debt in Oct. 2023, according to the Federal Reserve.
If you’re looking to take out an unsecured loan to pay for personal expenses, a [personal loan calculator](https://www.investopedia.com/personal-loan-calculator-5082130) is an excellent tool for determining what the monthly payment and total interest should be for the amount you’re hoping to borrow.
## Unsecured Loan vs. Payday Loan
Alternative lenders, such as [payday lenders](https://www.investopedia.com/terms/p/payday-loans.asp) or companies that offer merchant [cash advances](https://www.investopedia.com/terms/c/cashadvance.asp), do not offer secured loans in the traditional sense. Their loans are not secured by tangible collateral in the way that mortgages and car loans are. However, these lenders take other measures to secure repayment.
Payday lenders, for example, require that borrowers give them a postdated check or agree to an automatic withdrawal from their checking accounts to repay the loan. Many online merchant cash advance lenders require the borrower to pay a certain percentage of online sales through a payment-processing service such as PayPal. These loans are considered unsecured even though they are partially secured.
###
Payday loans may be considered [predatory loans](https://www.investopedia.com/terms/p/predatory_lending.asp), as they have a reputation for extremely high interest and hidden terms that charge borrowers added fees. In fact, some states have banned them.
## Special Considerations
While lenders can decide whether or not to approve an unsecured loan based on your creditworthiness, laws protect borrowers from [discriminatory lending practices](https://www.investopedia.com/the-history-of-lending-discrimination-5076948). The enactment of the [Equal Credit Opportunity Act (ECOA)](https://www.investopedia.com/terms/e/ecoa.asp) in 1974, for example, made it illegal for lenders to use race, color, sex, religion, or other non-creditworthiness factors when evaluating a loan application, establishing terms of a loan, or any other aspect of a credit transaction.
While lending practices have gradually become more equitable in the United States, discrimination still occurs. In July 2020, the [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp), which takes the lead in supervising compliance and enforcing the ECOA, issued a Request for Information soliciting public comments to identify opportunities for improving what the ECOA does to ensure nondiscriminatory access to credit. “Clear standards help protect African Americans and other minorities, but the CFPB must back them up with action to make sure lenders and others follow the law,” stated Kathleen L. Kraninger, then-director of the CFPB.
## What Is Considered Collateral?
Collateral is any item that can be taken to satisfy the value of a loan. Common forms of collateral include real estate, automobiles, jewelry, and other items of value.
## Is a Co-Signed Loan Considered Secured?
Although having a co-signer may help you get approved for a loan, it doesn’t make the loan secured. In the case of a default, the lender would require the co-signer to repay the loan.
## Can Bankruptcy Eliminate all Unsecured Loans?
Declaring [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) is a serious undertaking, but in most cases, it will clear your unsecured loans. There is one exception, though: [student loans](https://www.investopedia.com/terms/e/education-loan.asp). To have student loans forgiven, the debtor must prove that the loans present an undue hardship during an [adversary proceeding](https://www.investopedia.com/how-to-file-student-loan-bankruptcy-4772237). Private student loans used to pay for living expenses are more likely to be forgiven, though a new streamlined adversary proceeding paperwork is making it easier for even federal student loans to be discharged.
## The Bottom Line
Unsecured loans are common but can bear significant risk for both the lender and the borrower. Before taking out any unsecured loan, assess your financial health and your ability to repay the loan. Borrowing money that you can’t repay can result in garnishment of wages and tax returns and put the borrower on a difficult path back to solvency.
| What Is an Unsecured Loan?
An unsecured loan is a loan that doesn’t require any type of collateral. Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s creditworthiness.
Examples of unsecured loans include personal loans, student loans, and credit cards.
Key Takeaways
An unsecured loan is supported only by the borrower’s creditworthiness, rather than by any collateral, such as property or other assets.Unsecured loans are riskier than secured loans for lenders, so they require higher credit scores for approval.Credit cards, student loans, and personal loans are examples of unsecured loans.If a borrower defaults on an unsecured loan, the lender may commission a collection agency to collect the debt or take the borrower to court.Lenders can decide whether or not to approve an unsecured loan based on a borrower’s creditworthiness, but laws protect borrowers from discriminatory lending practices.
Investopedia / Julie Bang
How an Unsecured Loan Works
Unsecured loans—sometimes referred to as signature loans or personal loans—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower’s credit score. Typically, borrowers must have high credit scores to be approved for unsecured loans.
An unsecured loan stands in contrast to a secured loan, in which a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the lender’s “security” for providing the loan. Examples of secured loans include mortgages and car loans.
Because unsecured loans require higher credit scores than secured loans, in some instances, lenders will allow loan applicants with insufficient credit to provide a co-signer. A co-signer takes on the legal obligation to fulfill a debt if the borrower defaults. This occurs when a borrower fails to repay the interest and principal payments of a loan or debt.
Because unsecured loans are not backed by collateral, they are riskier for lenders. As a result, these loans typically come with higher interest rates.
If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup the losses. In contrast, if a borrower defaults on an unsecured loan, the lender cannot claim any property. But the lender can take other actions, such as commissioning a collection agency to collect the debt or taking the borrower to court. If the court rules in the lender’s favor, the borrower’s wages may be garnished.
Also, a lien can be placed on the borrower’s home (if they own one), or the borrower may be otherwise ordered to pay the debt. Defaults can have consequences for borrowers, such as lower credit scores.
Types of Unsecured Loans
Unsecured loans include personal loans, student loans, and most credit cards—all of which can be revolving or term loans.
A revolving loan is a loan that has a credit limit that can be spent, repaid, and spent again. Examples of revolving unsecured loans include credit cards and personal lines of credit.
A term loan, in contrast, is a loan that the borrower repays in equal installments until the loan is paid off at the end of its term. While these types of loans are often affiliated with secured loans, there are also unsecured term loans. A consolidation loan to pay off credit card debt or a signature loan from a bank would also be considered unsecured term loans.
In recent years, the unsecured loan market has experienced growth, powered partly by financial technology (fintech) firms. The past decade, for example, has seen the rise of peer-to-peer (P2P) lending via online and mobile lenders.
$1.295 Trillion
The amount of U.S. consumer revolving debt in Oct. 2023, according to the Federal Reserve.
If you’re looking to take out an unsecured loan to pay for personal expenses, a personal loan calculator is an excellent tool for determining what the monthly payment and total interest should be for the amount you’re hoping to borrow.
Unsecured Loan vs. Payday Loan
Alternative lenders, such as payday lenders or companies that offer merchant cash advances, do not offer secured loans in the traditional sense. Their loans are not secured by tangible collateral in the way that mortgages and car loans are. However, these lenders take other measures to secure repayment.
Payday lenders, for example, require that borrowers give them a postdated check or agree to an automatic withdrawal from their checking accounts to repay the loan. Many online merchant cash advance lenders require the borrower to pay a certain percentage of online sales through a payment-processing service such as PayPal. These loans are considered unsecured even though they are partially secured.
Payday loans may be considered predatory loans, as they have a reputation for extremely high interest and hidden terms that charge borrowers added fees. In fact, some states have banned them.
Special Considerations
While lenders can decide whether or not to approve an unsecured loan based on your creditworthiness, laws protect borrowers from discriminatory lending practices. The enactment of the Equal Credit Opportunity Act (ECOA) in 1974, for example, made it illegal for lenders to use race, color, sex, religion, or other non-creditworthiness factors when evaluating a loan application, establishing terms of a loan, or any other aspect of a credit transaction.
While lending practices have gradually become more equitable in the United States, discrimination still occurs. In July 2020, the Consumer Financial Protection Bureau (CFPB), which takes the lead in supervising compliance and enforcing the ECOA, issued a Request for Information soliciting public comments to identify opportunities for improving what the ECOA does to ensure nondiscriminatory access to credit. “Clear standards help protect African Americans and other minorities, but the CFPB must back them up with action to make sure lenders and others follow the law,” stated Kathleen L. Kraninger, then-director of the CFPB.
What Is Considered Collateral?
Collateral is any item that can be taken to satisfy the value of a loan. Common forms of collateral include real estate, automobiles, jewelry, and other items of value.
Is a Co-Signed Loan Considered Secured?
Although having a co-signer may help you get approved for a loan, it doesn’t make the loan secured. In the case of a default, the lender would require the co-signer to repay the loan.
Can Bankruptcy Eliminate all Unsecured Loans?
Declaring bankruptcy is a serious undertaking, but in most cases, it will clear your unsecured loans. There is one exception, though: student loans. To have student loans forgiven, the debtor must prove that the loans present an undue hardship during an adversary proceeding. Private student loans used to pay for living expenses are more likely to be forgiven, though a new streamlined adversary proceeding paperwork is making it easier for even federal student loans to be discharged.
The Bottom Line
Unsecured loans are common but can bear significant risk for both the lender and the borrower. Before taking out any unsecured loan, assess your financial health and your ability to repay the loan. Borrowing money that you can’t repay can result in garnishment of wages and tax returns and put the borrower on a difficult path back to solvency.
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https://www.investopedia.com/terms/a/announcment-effect.asp | Announcement Effect | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-announcement-effect"></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 Announcement Effect? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The announcement effect broadly refers to the impact that any type of news or public announcement—especially when issued by government or monetary authorities—has on financial markets. It is most often used when speaking of a change in security prices or market volatility that results directly from a piece of significant news or a public announcement. This potential for negative outcomes is known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/headline-risk.asp" rel="noopener noreferrer">headline risk</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"> It also could refer to how the market <em>would</em> react upon hearing the news that a change will occur at some point in the future. The announcement effect may also go by the terms "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/headlineeffect.asp" rel="noopener noreferrer">headline effect</a>" or "<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/media_effect.asp" rel="noopener noreferrer">media effect</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>The announcement effect refers to the influence that company headlines, news stories, and social media play in influencing investor behavior.</li><li>Stock prices can quickly move up or down upon release of a positive or negative story, respectively, presenting investors with headline risk and providing day traders opportunities to make short-term profits.</li><li>Government-issued announcements, economic data releases, or guidance from the Fed can also move broader markets and investor sentiment.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-announcement-effect"></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 Announcement Effect </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The announcement effect assumes that the behavior of systems (such as financial markets) or people (such as individual investors) can change merely by announcing a future policy change or divulging a newsworthy item. The news may come in the form of a press release or report.
</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"> Topics that can spur investor reaction, either positively or negatively, are things like company <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mergersandacquisitions.asp" rel="noopener noreferrer">mergers and acquisitions</a> (M&A); growth in money supply, inflation, and trade figures; changes in monetary policy, such as a hike or cut in a key interest rate; or developments that affect trading, like a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stocksplit.asp" rel="noopener noreferrer">stock split</a> or change in dividend policy.
</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, if a company announces an acquisition, then its stock price may rise. Alternatively, if the government says that the gasoline tax will increase in six months, then commuters who drive to work every day might look for other modes of transportation, or spend less money now in anticipation of the greater expense going forward.
</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"> News released by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp" rel="noopener noreferrer">central banks</a> can have an especially dynamic and complicated effect on financial systems. Information about monetary policy or real factors, like productivity, can hugely affect the markets for goods, equity, housing, credit, and foreign exchange. Even neutral news about monetary policy can induce cyclic or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp" rel="noopener noreferrer">boom-and-bust</a> responses. Moreover, central bank announcements can <em>induce rather than reduce </em>volatility.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<span class="heading-toc" id="toc-the-announcement-effect-and-the-federal-reserve-system"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> The Announcement Effect and the Federal Reserve System </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> An announcement from the Federal Reserve ("the Fed") about a change in interest rates generally correlates directly to stock prices and trading activity. For example, if the Fed raises interest rates, then stock prices are liable to fall. Prior to 1994, monetary policy objectives for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp" rel="noopener noreferrer">federal funds rate</a>—any outcome of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fomc.asp" rel="noopener noreferrer">Federal Open Market Committee</a> (FOMC) meeting—were strictly confidential.
</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"> At its February 1994 meeting, the FOMC decided to modify the federal funds rate target, which it had not done for two years. To ensure that this important policy decision was communicated clearly to the markets, the FOMC decided to disclose it via public announcement. Thus began the custom of "Fed days”—when the FMOC makes announcements about interest rates— which now is shared by numerous central banks.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> A practical outcome of sharing the decisions made at FOMC meetings is a kind of announcement effect—which, in this case, means that because the market knows what to expect from the Fed—the behavior of market rates can adjust accordingly with little or no immediate action by the trading desk.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> In general, traders eagerly await announcements that come from the Federal Reserve. On Fed days, trading volume is notably higher; and on the day preceding a Fed day, trading is usually relatively calm.
</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-good-news-bad-news-and-market-surprises"></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"> Good News, Bad News, and Market Surprises </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Economists, technical analysts, traders, and researchers spend a great deal of time trying to predict the effect of news or public announcements on stock prices in order to discern, among other investing strategies, the wisdom of switching between asset classes or moving in and out of the market altogether.
</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"> Although investment professionals often disagree on the finer points of technical theory, they do agree that the stock market is driven by news. Researchers have suggested that bad news has a larger impact on markets than good news, and that good news does not lift the market as much as bad news depresses it. Also, bad news during a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearmarket.asp" rel="noopener noreferrer">bear market</a> has a bigger negative impact than bad news during a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp" rel="noopener noreferrer">bull market</a>, and negative surprises often have a greater impact than positive surprises.
</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"> Whether negative or positive, the announcement effect always carries the potential to cause drastic changes in stock prices or other market values, especially if the news is a surprise. For a taste of just how volatile a reaction the markets can have to unexpected commentary, take a look at the graphic below. It shows that the dollar swung wildly between gains and losses on July 19, 2018, after President Donald Trump publicly criticized <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp" rel="noopener noreferrer">the Federal Reserve</a> for raising interest rates—a comment that broke with the long tradition that United States presidents do not interfere with the business of the Fed.
</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-minimizing-the-effect-of-announcements"></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"> Minimizing the Effect of Announcements </span> </h2>
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<img alt="Dollar Volatility July 19, 2018" class="img--noscript universal-image__image" height="435" sizes="750px" src="https://www.investopedia.com/thmb/fFIJFGO6ayRLlNUaTXmtIku4Gy8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/bloom-5bfd70a446e0fb005153f74f" srcset="https://www.investopedia.com/thmb/IXtqAOcXml1obiBDmXnd7OkW0Tc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/bloom-5bfd70a446e0fb005153f74f 750w" width="775"/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> In order to minimize surprises and defend against radical reactions like the one pictured above, companies and governments often selectively leak, or hint at, announcements before they actually occur. Leaking critical news can allow the market to find equilibrium, or to “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discounting-mechanism.asp" rel="noopener noreferrer">discount the stock</a>”—that is, to incorporate the unexpected news into the price of a stock.
</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"> For instance, if a company's earnings are especially greater than usual one quarter, it might choose to leak the information to help ease the pressure for an unsustainable price spike at the time of the official earnings release. Likewise, on its Fed days, the Federal Reserve discloses what policy changes it <em>might</em> make before it actually makes them, so that the market can adjust smoothly to the new information.
</p></div> | ## What Is the Announcement Effect?
The announcement effect broadly refers to the impact that any type of news or public announcement—especially when issued by government or monetary authorities—has on financial markets. It is most often used when speaking of a change in security prices or market volatility that results directly from a piece of significant news or a public announcement. This potential for negative outcomes is known as [headline risk](https://www.investopedia.com/terms/h/headline-risk.asp).
It also could refer to how the market *would* react upon hearing the news that a change will occur at some point in the future. The announcement effect may also go by the terms "[headline effect](https://www.investopedia.com/terms/h/headlineeffect.asp)" or "[media effect](https://www.investopedia.com/terms/m/media_effect.asp)."
### Key Takeaways
* The announcement effect refers to the influence that company headlines, news stories, and social media play in influencing investor behavior.
* Stock prices can quickly move up or down upon release of a positive or negative story, respectively, presenting investors with headline risk and providing day traders opportunities to make short-term profits.
* Government-issued announcements, economic data releases, or guidance from the Fed can also move broader markets and investor sentiment.
## Understanding the Announcement Effect
The announcement effect assumes that the behavior of systems (such as financial markets) or people (such as individual investors) can change merely by announcing a future policy change or divulging a newsworthy item. The news may come in the form of a press release or report.
Topics that can spur investor reaction, either positively or negatively, are things like company [mergers and acquisitions](https://www.investopedia.com/terms/m/mergersandacquisitions.asp) (M&A); growth in money supply, inflation, and trade figures; changes in monetary policy, such as a hike or cut in a key interest rate; or developments that affect trading, like a [stock split](https://www.investopedia.com/terms/s/stocksplit.asp) or change in dividend policy.
For example, if a company announces an acquisition, then its stock price may rise. Alternatively, if the government says that the gasoline tax will increase in six months, then commuters who drive to work every day might look for other modes of transportation, or spend less money now in anticipation of the greater expense going forward.
News released by [central banks](https://www.investopedia.com/terms/c/centralbank.asp) can have an especially dynamic and complicated effect on financial systems. Information about monetary policy or real factors, like productivity, can hugely affect the markets for goods, equity, housing, credit, and foreign exchange. Even neutral news about monetary policy can induce cyclic or [boom-and-bust](https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp) responses. Moreover, central bank announcements can *induce rather than reduce* volatility.
## The Announcement Effect and the Federal Reserve System
An announcement from the Federal Reserve ("the Fed") about a change in interest rates generally correlates directly to stock prices and trading activity. For example, if the Fed raises interest rates, then stock prices are liable to fall. Prior to 1994, monetary policy objectives for the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp)—any outcome of the [Federal Open Market Committee](https://www.investopedia.com/terms/f/fomc.asp) (FOMC) meeting—were strictly confidential.
At its February 1994 meeting, the FOMC decided to modify the federal funds rate target, which it had not done for two years. To ensure that this important policy decision was communicated clearly to the markets, the FOMC decided to disclose it via public announcement. Thus began the custom of "Fed days”—when the FMOC makes announcements about interest rates— which now is shared by numerous central banks.
A practical outcome of sharing the decisions made at FOMC meetings is a kind of announcement effect—which, in this case, means that because the market knows what to expect from the Fed—the behavior of market rates can adjust accordingly with little or no immediate action by the trading desk.
In general, traders eagerly await announcements that come from the Federal Reserve. On Fed days, trading volume is notably higher; and on the day preceding a Fed day, trading is usually relatively calm.
## Good News, Bad News, and Market Surprises
Economists, technical analysts, traders, and researchers spend a great deal of time trying to predict the effect of news or public announcements on stock prices in order to discern, among other investing strategies, the wisdom of switching between asset classes or moving in and out of the market altogether.
Although investment professionals often disagree on the finer points of technical theory, they do agree that the stock market is driven by news. Researchers have suggested that bad news has a larger impact on markets than good news, and that good news does not lift the market as much as bad news depresses it. Also, bad news during a [bear market](https://www.investopedia.com/terms/b/bearmarket.asp) has a bigger negative impact than bad news during a [bull market](https://www.investopedia.com/terms/b/bullmarket.asp), and negative surprises often have a greater impact than positive surprises.
Whether negative or positive, the announcement effect always carries the potential to cause drastic changes in stock prices or other market values, especially if the news is a surprise. For a taste of just how volatile a reaction the markets can have to unexpected commentary, take a look at the graphic below. It shows that the dollar swung wildly between gains and losses on July 19, 2018, after President Donald Trump publicly criticized [the Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) for raising interest rates—a comment that broke with the long tradition that United States presidents do not interfere with the business of the Fed.
## Minimizing the Effect of Announcements
![Dollar Volatility July 19, 2018]()
:max_bytes(150000):strip_icc()/bloom-5bfd70a446e0fb005153f74f)
In order to minimize surprises and defend against radical reactions like the one pictured above, companies and governments often selectively leak, or hint at, announcements before they actually occur. Leaking critical news can allow the market to find equilibrium, or to “[discount the stock](https://www.investopedia.com/terms/d/discounting-mechanism.asp)”—that is, to incorporate the unexpected news into the price of a stock.
For instance, if a company's earnings are especially greater than usual one quarter, it might choose to leak the information to help ease the pressure for an unsustainable price spike at the time of the official earnings release. Likewise, on its Fed days, the Federal Reserve discloses what policy changes it *might* make before it actually makes them, so that the market can adjust smoothly to the new information.
| What Is the Announcement Effect?
The announcement effect broadly refers to the impact that any type of news or public announcement—especially when issued by government or monetary authorities—has on financial markets. It is most often used when speaking of a change in security prices or market volatility that results directly from a piece of significant news or a public announcement. This potential for negative outcomes is known as headline risk.
It also could refer to how the market would react upon hearing the news that a change will occur at some point in the future. The announcement effect may also go by the terms "headline effect" or "media effect."
Key Takeaways
The announcement effect refers to the influence that company headlines, news stories, and social media play in influencing investor behavior.Stock prices can quickly move up or down upon release of a positive or negative story, respectively, presenting investors with headline risk and providing day traders opportunities to make short-term profits.Government-issued announcements, economic data releases, or guidance from the Fed can also move broader markets and investor sentiment.
Understanding the Announcement Effect
The announcement effect assumes that the behavior of systems (such as financial markets) or people (such as individual investors) can change merely by announcing a future policy change or divulging a newsworthy item. The news may come in the form of a press release or report.
Topics that can spur investor reaction, either positively or negatively, are things like company mergers and acquisitions (M&A); growth in money supply, inflation, and trade figures; changes in monetary policy, such as a hike or cut in a key interest rate; or developments that affect trading, like a stock split or change in dividend policy.
For example, if a company announces an acquisition, then its stock price may rise. Alternatively, if the government says that the gasoline tax will increase in six months, then commuters who drive to work every day might look for other modes of transportation, or spend less money now in anticipation of the greater expense going forward.
News released by central banks can have an especially dynamic and complicated effect on financial systems. Information about monetary policy or real factors, like productivity, can hugely affect the markets for goods, equity, housing, credit, and foreign exchange. Even neutral news about monetary policy can induce cyclic or boom-and-bust responses. Moreover, central bank announcements can induce rather than reduce volatility.
The Announcement Effect and the Federal Reserve System
An announcement from the Federal Reserve ("the Fed") about a change in interest rates generally correlates directly to stock prices and trading activity. For example, if the Fed raises interest rates, then stock prices are liable to fall. Prior to 1994, monetary policy objectives for the federal funds rate—any outcome of the Federal Open Market Committee (FOMC) meeting—were strictly confidential.
At its February 1994 meeting, the FOMC decided to modify the federal funds rate target, which it had not done for two years. To ensure that this important policy decision was communicated clearly to the markets, the FOMC decided to disclose it via public announcement. Thus began the custom of "Fed days”—when the FMOC makes announcements about interest rates— which now is shared by numerous central banks.
A practical outcome of sharing the decisions made at FOMC meetings is a kind of announcement effect—which, in this case, means that because the market knows what to expect from the Fed—the behavior of market rates can adjust accordingly with little or no immediate action by the trading desk.
In general, traders eagerly await announcements that come from the Federal Reserve. On Fed days, trading volume is notably higher; and on the day preceding a Fed day, trading is usually relatively calm.
Good News, Bad News, and Market Surprises
Economists, technical analysts, traders, and researchers spend a great deal of time trying to predict the effect of news or public announcements on stock prices in order to discern, among other investing strategies, the wisdom of switching between asset classes or moving in and out of the market altogether.
Although investment professionals often disagree on the finer points of technical theory, they do agree that the stock market is driven by news. Researchers have suggested that bad news has a larger impact on markets than good news, and that good news does not lift the market as much as bad news depresses it. Also, bad news during a bear market has a bigger negative impact than bad news during a bull market, and negative surprises often have a greater impact than positive surprises.
Whether negative or positive, the announcement effect always carries the potential to cause drastic changes in stock prices or other market values, especially if the news is a surprise. For a taste of just how volatile a reaction the markets can have to unexpected commentary, take a look at the graphic below. It shows that the dollar swung wildly between gains and losses on July 19, 2018, after President Donald Trump publicly criticized the Federal Reserve for raising interest rates—a comment that broke with the long tradition that United States presidents do not interfere with the business of the Fed.
Minimizing the Effect of Announcements
In order to minimize surprises and defend against radical reactions like the one pictured above, companies and governments often selectively leak, or hint at, announcements before they actually occur. Leaking critical news can allow the market to find equilibrium, or to “discount the stock”—that is, to incorporate the unexpected news into the price of a stock.
For instance, if a company's earnings are especially greater than usual one quarter, it might choose to leak the information to help ease the pressure for an unsustainable price spike at the time of the official earnings release. Likewise, on its Fed days, the Federal Reserve discloses what policy changes it might make before it actually makes them, so that the market can adjust smoothly to the new information.
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https://www.investopedia.com/preparing-for-multiples-6363242 | Preparing for Multiple Births | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Having a baby can be an expensive prospect. A study by the Kaiser Family Foundation estimates the average cost of pregnancy, childbirth, and postpartum care at $18,865. The same study found that for mothers who give birth via cesarean section, the average cost climbs to $26,280.<span class="ql-inline-citation" data-cite="1"></span> Then there’s the cost of raising a child to adulthood, which the U.S. Department of Agriculture (USDA) estimates at $284,570 when adjusted for inflation.<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"> If you’re expecting twins, triplets, or even higher multiple births, you may be wondering how you’ll be able to afford it all. Knowing how to financially prepare can make welcoming multiple babies less stressful.
</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 cost of giving birth can average close to $20,000, though it may be more expensive for mothers who deliver via cesarean section.</li>
<li>Parents who have multiple births may have higher medical bills if their babies need to spend time in the neonatal intensive care unit (NICU) after birth.</li>
<li>Financial planning for multiples includes looking at your budget and everyday spending, understanding what is and isn’t covered by your health insurance, building up adequate savings for emergencies, and prioritizing your financial goals.</li>
<li>Parents of multiples have various avenues for getting financial help, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ssi-medicaid-pregnancy-childbirth-5649313">Medicaid, Supplemental Security Income (SSI)</a> for babies born with health issues, and other forms of governmental assistance.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-create-an-expense-inventory"></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"> Create an Expense Inventory </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Different costs go along with having a baby. Some are one-time or short-term expenses; others are ongoing. You may feel overwhelmed if you’re <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/budgeting-for-baby.asp">trying to stretch your baby budget</a>, but it’s helpful to have an idea of what you’ll actually need to spend.
</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’re expecting multiples, it doesn’t mean all of your expenses will multiply,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://trueworthfp.com/about">Rachael Burns</a>, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfp.asp">Certified Financial Planner (CFP)</a> and founder of True Worth Financial Planning in Folsom, Calif. Burns, a mother of twins, says that while there are some things you’ll need to double up on, such as car seats and cribs, other items can be shared to save on costs.
</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"> Making a list of anticipated expenses can give you a better idea of how to shape your baby budget to accommodate twins, triplets, or higher multiples. For example, some of the main expense categories to plan for include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li>Basic baby gear (i.e., car seats, cribs, strollers, etc.)</li><li>Out-of-pocket healthcare not covered by insurance</li><li>Breastfeeding or formula-feeding expenses</li><li>Diapers</li><li>Basic clothing</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"> It’s also important to plan for unanticipated expenses. For instance, Burns says that even if you plan on breastfeeding, it’s a good idea to have a contingency plan in case formula feeding is necessary. There may be situations in which you’re unable to breastfeed or produce sufficient milk to meet the demands of multiple babies, in which case you may have to supplement with formula. That can get expensive quickly.
</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"> Neonatal intensive care is another cost for which parents of multiples may need to plan, says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://chachingqueen.com/about/" rel="nofollow">Greg Wilson</a>, co-owner of the frugal mom blog ChaChingQueen.com, a<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfa.asp"> chartered financial analyst (CFA)</a>, and the father of twins. A stay in a neonatal intensive care unit (NICU) may be necessary if multiples are born prematurely or have significant health issues that require specialized care at birth. The <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/managing-costs-for-nicu-stay-6260862">cost of an NICU stay</a> exceeds $10,000 for approximately one in 11 families, according to research conducted by the University of Michigan School of Medicine.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> “Not only are there medical expenses with this, but there is also the financial burden of your work situation and needing help from others, especially if there are other siblings,” Wilson says. “This is a big, unexpected cost, and common.”
</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>If one or more of your babies requires NICU care because of a disabling condition that’s expected to last 12 months or longer, you may be eligible to apply for <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> benefits on their behalf.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<span class="heading-toc" id="toc-evaluate-your-income"></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"> Evaluate Your Income </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Taking parental leave is an opportunity to spend time with your newborns before returning to work. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp">Family and Medical Leave Act (FMLA)</a> mandates 12 weeks of parental leave, but there’s one catch: Your employer is not required to pay you.<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_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Eleven states have publicly funded paid family leave—California, Colorado, Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Washington—as well as the District of Columbia.<span class="ql-inline-citation" data-cite="10"></span> In the rest, childbirth leave is unpaid.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> When evaluating your income, consider how much it might drop if you’re taking an extended unpaid leave period. If there’s a wide gap between your expected income and projected new-baby expenses, you may need to either build up a sizable savings balance to cover it or find ways to supplement your income. For example, you might start one or more side hustles to bring in money from home while out on leave.
</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"> Also, consider how your income might be affected if one parent opts to stay home to care for multiples. Childcare costs can be steep enough for just one child; they can be even more when you’re paying for two, three, or more infants. Doing the math can help you to decide if it makes sense financially for both parents to go back to work and pay for childcare—or for one to stay home and forgo their income.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<span class="heading-toc" id="toc-review-your-insurance-coverage"></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"> Review Your Insurance Coverage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/healthinsurance.asp">Health insurance</a> can help to ease the burden of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_plan.asp">financial planning</a> for multiples, but it may not cover everything. Review your coverage to determine what your policy will pay toward prenatal care, labor and delivery, and postpartum care—and what you might have to cover.
</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"> Once the babies are born, you can add them to your health insurance plan. If you don’t have health insurance, having a baby qualifies you for a special enrollment period under the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/affordable-care-act.asp">Affordable Care Act (ACA)</a>. Any plan you sign up for within 60 days of your babies’ birth can cover you, the babies, and any other members of your household.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Under the ACA, most health insurance plans are required to cover:
</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>Breastfeeding support</li><li>Lactation counseling</li><li>Breastfeeding equipment<span class="ql-inline-citation" data-cite="5"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Your insurance provider may require a plan of care from your doctor before it will cover these expenses. If they recommend breastfeeding or support your intention to do so, then your insurance plan should handle the expenses.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Carefully review each medical bill you receive for errors and discrepancies, and don’t hesitate to ask your insurance provider to correct them.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> What if you’re expecting multiples and don’t have health insurance? You may be eligible for <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medicaid.asp">Medicaid</a> based on your household size, income, and financial resources. You can apply for Medicaid through your local department of social services office. If you’re covered by Medicaid while pregnant, your babies are automatically covered at birth and will remain eligible for at least one year.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> You can also ask the hospital about discount programs or charity care. Similar to Medicaid, your ability to qualify for financial aid may depend on your household size, income, and financial resources. If you don’t qualify for charity care or Medicaid, you may be able to arrange a payment plan with the hospital at a discounted rate.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div>
<span class="heading-toc" id="toc-get-creative-with-saving"></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"> Get Creative with Saving </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Making your budget work with multiples may require you to flex your money-saving skills, especially if you expect your income to drop temporarily while on childbirth leave or permanently if one parent plans to stay home full time. Fortunately, there are a number of ways to save money when welcoming twins, triplets, or more.
</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"> Here are some of the money-saving tips that Burns suggests:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0">
<li><strong>Repurpose</strong>: Repurposing can save money—and space—if baby items do double duty. For example, adding a changing table insert to the top of a dresser means that you don’t need to purchase a separate changing table.</li>
<li><strong>Choose adaptable items</strong>: Certain baby items are must-haves. For example, you’ll need a car seat and crib for each baby. A simple way to save on those expenses is to choose items that “grow” with your babies. For example, you may purchase infant carriers that convert to toddler car seats or cribs that can be reconfigured into toddler beds.</li>
<li><strong>Buy in bulk</strong>: Buying in bulk can be a money saver if you’re paying a lower price per unit for baby essentials. For example, some of the best baby items to purchase in bulk include disposable diapers, wipes, and formula. It’s important to choose diaper size carefully, though, to ensure that you’re not wasting money if your multiples are growing quickly.</li>
<li><strong>Make your own baby food</strong>: A food processor and a few fresh ingredients may be all you need to make your own healthy baby food at home. You can prepare baby food in bulk and freeze it, which can save you from having to buy processed baby foods at the grocery store.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Buy used</strong>: It can be tempting to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/new-vs-used-baby-items-safety-5324723">buy all new items when expecting a baby</a>, but that may not be realistic with multiples. Some of the things you can buy used include baby baths, baby clothes, and cloth diapers. Keep in mind that certain items, such as cribs and car seats, should always be purchased new for safety reasons.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Also, consider whether using cloth diapers makes sense as a means of saving money. A typical infant requires up to 12 diapers per day, costing parents $70 to $80 per month, according to the National Diaper Bank Network.<span class="ql-inline-citation" data-cite="6"></span> Wilson’s family uses cloth diapers and says that it has been a money saver, as the twins are able to share them.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_59-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_60-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Local Facebook bargain groups or groups for parents of multiples can be a great place to find gently used baby items either inexpensively or for free.</p></div></div></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-how-much-should-i-save-for-twins"></span> <h2 class="mntl-sc-block-questionandanswer__question">How much should I save for twins?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The amount you’ll need to save for twins can depend on how much of your healthcare costs are covered by insurance, what you expect your expenses to be after giving birth, and whether welcoming twins will affect your income. It’s also important to understand which new expenses you may face, such as childcare, and how they will affect your baby budget.</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-is-it-cheaper-to-raise-twins-than-a-single-child"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is it cheaper to raise twins than a single child?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Having twins doesn’t necessarily mean your costs will double, but whether it’s cheaper to raise twins vs. a single child can depend on what you anticipate spending. For example, with twins you might spend more on childcare but less on diapers because you’re using cloth diapers and the babies are sharing.</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-how-much-money-should-you-have-saved-before-your-babies-arrive"></span> <h2 class="mntl-sc-block-questionandanswer__question">How much money should you have saved before your babies arrive?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It can be a good idea to save an amount that’s equivalent to at least three months of expenses before the babies arrive. Three months is the same amount of time that parents can take for unpaid leave under the Family and Medical Leave Act (FMLA).<span class="ql-inline-citation" data-cite="7"></span> If you anticipate having less income during that time, a three-month savings stash could help with covering expenses until both parents return to work. With multiples, more than three months could be helpful.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Planning financially for multiples can feel a little overwhelming, especially if you’re a first-time parent. Understanding what your costs are likely to be can help you formulate a plan for making sure that your newborns’ needs are met. You may also consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/updates/find-financial-advisor-planner/">reaching out to a financial advisor</a> or a CFP to get professional advice on long-term concerns, such as saving for college and planning your retirement.
</p></div> | Having a baby can be an expensive prospect. A study by the Kaiser Family Foundation estimates the average cost of pregnancy, childbirth, and postpartum care at $18,865. The same study found that for mothers who give birth via cesarean section, the average cost climbs to $26,280. Then there’s the cost of raising a child to adulthood, which the U.S. Department of Agriculture (USDA) estimates at $284,570 when adjusted for inflation.
If you’re expecting twins, triplets, or even higher multiple births, you may be wondering how you’ll be able to afford it all. Knowing how to financially prepare can make welcoming multiple babies less stressful.
### Key Takeaways
* The cost of giving birth can average close to $20,000, though it may be more expensive for mothers who deliver via cesarean section.
* Parents who have multiple births may have higher medical bills if their babies need to spend time in the neonatal intensive care unit (NICU) after birth.
* Financial planning for multiples includes looking at your budget and everyday spending, understanding what is and isn’t covered by your health insurance, building up adequate savings for emergencies, and prioritizing your financial goals.
* Parents of multiples have various avenues for getting financial help, including [Medicaid, Supplemental Security Income (SSI)](https://www.investopedia.com/ssi-medicaid-pregnancy-childbirth-5649313) for babies born with health issues, and other forms of governmental assistance.
## Create an Expense Inventory
Different costs go along with having a baby. Some are one-time or short-term expenses; others are ongoing. You may feel overwhelmed if you’re [trying to stretch your baby budget](https://www.investopedia.com/articles/pf/08/budgeting-for-baby.asp), but it’s helpful to have an idea of what you’ll actually need to spend.
“If you’re expecting multiples, it doesn’t mean all of your expenses will multiply,” says [Rachael Burns](https://trueworthfp.com/about), a [Certified Financial Planner (CFP)](https://www.investopedia.com/terms/c/cfp.asp) and founder of True Worth Financial Planning in Folsom, Calif. Burns, a mother of twins, says that while there are some things you’ll need to double up on, such as car seats and cribs, other items can be shared to save on costs.
Making a list of anticipated expenses can give you a better idea of how to shape your baby budget to accommodate twins, triplets, or higher multiples. For example, some of the main expense categories to plan for include:
* Basic baby gear (i.e., car seats, cribs, strollers, etc.)
* Out-of-pocket healthcare not covered by insurance
* Breastfeeding or formula-feeding expenses
* Diapers
* Basic clothing
It’s also important to plan for unanticipated expenses. For instance, Burns says that even if you plan on breastfeeding, it’s a good idea to have a contingency plan in case formula feeding is necessary. There may be situations in which you’re unable to breastfeed or produce sufficient milk to meet the demands of multiple babies, in which case you may have to supplement with formula. That can get expensive quickly.
Neonatal intensive care is another cost for which parents of multiples may need to plan, says [Greg Wilson](https://chachingqueen.com/about/), co-owner of the frugal mom blog ChaChingQueen.com, a [chartered financial analyst (CFA)](https://www.investopedia.com/terms/c/cfa.asp), and the father of twins. A stay in a neonatal intensive care unit (NICU) may be necessary if multiples are born prematurely or have significant health issues that require specialized care at birth. The [cost of an NICU stay](https://www.investopedia.com/managing-costs-for-nicu-stay-6260862) exceeds $10,000 for approximately one in 11 families, according to research conducted by the University of Michigan School of Medicine.
“Not only are there medical expenses with this, but there is also the financial burden of your work situation and needing help from others, especially if there are other siblings,” Wilson says. “This is a big, unexpected cost, and common.”
###
If one or more of your babies requires NICU care because of a disabling condition that’s expected to last 12 months or longer, you may be eligible to apply for [Supplemental Security Income (SSI)](https://www.investopedia.com/terms/s/ssi.asp) benefits on their behalf.
## Evaluate Your Income
Taking parental leave is an opportunity to spend time with your newborns before returning to work. The [Family and Medical Leave Act (FMLA)](https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp) mandates 12 weeks of parental leave, but there’s one catch: Your employer is not required to pay you.
Eleven states have publicly funded paid family leave—California, Colorado, Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Washington—as well as the District of Columbia. In the rest, childbirth leave is unpaid.
When evaluating your income, consider how much it might drop if you’re taking an extended unpaid leave period. If there’s a wide gap between your expected income and projected new-baby expenses, you may need to either build up a sizable savings balance to cover it or find ways to supplement your income. For example, you might start one or more side hustles to bring in money from home while out on leave.
Also, consider how your income might be affected if one parent opts to stay home to care for multiples. Childcare costs can be steep enough for just one child; they can be even more when you’re paying for two, three, or more infants. Doing the math can help you to decide if it makes sense financially for both parents to go back to work and pay for childcare—or for one to stay home and forgo their income.
## Review Your Insurance Coverage
[Health insurance](https://www.investopedia.com/terms/h/healthinsurance.asp) can help to ease the burden of [financial planning](https://www.investopedia.com/terms/f/financial_plan.asp) for multiples, but it may not cover everything. Review your coverage to determine what your policy will pay toward prenatal care, labor and delivery, and postpartum care—and what you might have to cover.
Once the babies are born, you can add them to your health insurance plan. If you don’t have health insurance, having a baby qualifies you for a special enrollment period under the [Affordable Care Act (ACA)](https://www.investopedia.com/terms/a/affordable-care-act.asp). Any plan you sign up for within 60 days of your babies’ birth can cover you, the babies, and any other members of your household.
Under the ACA, most health insurance plans are required to cover:
* Breastfeeding support
* Lactation counseling
* Breastfeeding equipment
Your insurance provider may require a plan of care from your doctor before it will cover these expenses. If they recommend breastfeeding or support your intention to do so, then your insurance plan should handle the expenses.
###
Carefully review each medical bill you receive for errors and discrepancies, and don’t hesitate to ask your insurance provider to correct them.
What if you’re expecting multiples and don’t have health insurance? You may be eligible for [Medicaid](https://www.investopedia.com/terms/m/medicaid.asp) based on your household size, income, and financial resources. You can apply for Medicaid through your local department of social services office. If you’re covered by Medicaid while pregnant, your babies are automatically covered at birth and will remain eligible for at least one year.
You can also ask the hospital about discount programs or charity care. Similar to Medicaid, your ability to qualify for financial aid may depend on your household size, income, and financial resources. If you don’t qualify for charity care or Medicaid, you may be able to arrange a payment plan with the hospital at a discounted rate.
## Get Creative with Saving
Making your budget work with multiples may require you to flex your money-saving skills, especially if you expect your income to drop temporarily while on childbirth leave or permanently if one parent plans to stay home full time. Fortunately, there are a number of ways to save money when welcoming twins, triplets, or more.
Here are some of the money-saving tips that Burns suggests:
* **Repurpose**: Repurposing can save money—and space—if baby items do double duty. For example, adding a changing table insert to the top of a dresser means that you don’t need to purchase a separate changing table.
* **Choose adaptable items**: Certain baby items are must-haves. For example, you’ll need a car seat and crib for each baby. A simple way to save on those expenses is to choose items that “grow” with your babies. For example, you may purchase infant carriers that convert to toddler car seats or cribs that can be reconfigured into toddler beds.
* **Buy in bulk**: Buying in bulk can be a money saver if you’re paying a lower price per unit for baby essentials. For example, some of the best baby items to purchase in bulk include disposable diapers, wipes, and formula. It’s important to choose diaper size carefully, though, to ensure that you’re not wasting money if your multiples are growing quickly.
* **Make your own baby food**: A food processor and a few fresh ingredients may be all you need to make your own healthy baby food at home. You can prepare baby food in bulk and freeze it, which can save you from having to buy processed baby foods at the grocery store.
* **Buy used**: It can be tempting to [buy all new items when expecting a baby](https://www.investopedia.com/new-vs-used-baby-items-safety-5324723), but that may not be realistic with multiples. Some of the things you can buy used include baby baths, baby clothes, and cloth diapers. Keep in mind that certain items, such as cribs and car seats, should always be purchased new for safety reasons.
Also, consider whether using cloth diapers makes sense as a means of saving money. A typical infant requires up to 12 diapers per day, costing parents $70 to $80 per month, according to the National Diaper Bank Network. Wilson’s family uses cloth diapers and says that it has been a money saver, as the twins are able to share them.
###
Local Facebook bargain groups or groups for parents of multiples can be a great place to find gently used baby items either inexpensively or for free.
## How much should I save for twins?
The amount you’ll need to save for twins can depend on how much of your healthcare costs are covered by insurance, what you expect your expenses to be after giving birth, and whether welcoming twins will affect your income. It’s also important to understand which new expenses you may face, such as childcare, and how they will affect your baby budget.
## Is it cheaper to raise twins than a single child?
Having twins doesn’t necessarily mean your costs will double, but whether it’s cheaper to raise twins vs. a single child can depend on what you anticipate spending. For example, with twins you might spend more on childcare but less on diapers because you’re using cloth diapers and the babies are sharing.
## How much money should you have saved before your babies arrive?
It can be a good idea to save an amount that’s equivalent to at least three months of expenses before the babies arrive. Three months is the same amount of time that parents can take for unpaid leave under the Family and Medical Leave Act (FMLA). If you anticipate having less income during that time, a three-month savings stash could help with covering expenses until both parents return to work. With multiples, more than three months could be helpful.
## The Bottom Line
Planning financially for multiples can feel a little overwhelming, especially if you’re a first-time parent. Understanding what your costs are likely to be can help you formulate a plan for making sure that your newborns’ needs are met. You may also consider [reaching out to a financial advisor](https://www.investopedia.com/updates/find-financial-advisor-planner/) or a CFP to get professional advice on long-term concerns, such as saving for college and planning your retirement.
| Having a baby can be an expensive prospect. A study by the Kaiser Family Foundation estimates the average cost of pregnancy, childbirth, and postpartum care at $18,865. The same study found that for mothers who give birth via cesarean section, the average cost climbs to $26,280. Then there’s the cost of raising a child to adulthood, which the U.S. Department of Agriculture (USDA) estimates at $284,570 when adjusted for inflation.
If you’re expecting twins, triplets, or even higher multiple births, you may be wondering how you’ll be able to afford it all. Knowing how to financially prepare can make welcoming multiple babies less stressful.
Key Takeaways
The cost of giving birth can average close to $20,000, though it may be more expensive for mothers who deliver via cesarean section.
Parents who have multiple births may have higher medical bills if their babies need to spend time in the neonatal intensive care unit (NICU) after birth.
Financial planning for multiples includes looking at your budget and everyday spending, understanding what is and isn’t covered by your health insurance, building up adequate savings for emergencies, and prioritizing your financial goals.
Parents of multiples have various avenues for getting financial help, including Medicaid, Supplemental Security Income (SSI) for babies born with health issues, and other forms of governmental assistance.
Create an Expense Inventory
Different costs go along with having a baby. Some are one-time or short-term expenses; others are ongoing. You may feel overwhelmed if you’re trying to stretch your baby budget, but it’s helpful to have an idea of what you’ll actually need to spend.
“If you’re expecting multiples, it doesn’t mean all of your expenses will multiply,” says Rachael Burns, a Certified Financial Planner (CFP) and founder of True Worth Financial Planning in Folsom, Calif. Burns, a mother of twins, says that while there are some things you’ll need to double up on, such as car seats and cribs, other items can be shared to save on costs.
Making a list of anticipated expenses can give you a better idea of how to shape your baby budget to accommodate twins, triplets, or higher multiples. For example, some of the main expense categories to plan for include:
Basic baby gear (i.e., car seats, cribs, strollers, etc.)Out-of-pocket healthcare not covered by insuranceBreastfeeding or formula-feeding expensesDiapersBasic clothing
It’s also important to plan for unanticipated expenses. For instance, Burns says that even if you plan on breastfeeding, it’s a good idea to have a contingency plan in case formula feeding is necessary. There may be situations in which you’re unable to breastfeed or produce sufficient milk to meet the demands of multiple babies, in which case you may have to supplement with formula. That can get expensive quickly.
Neonatal intensive care is another cost for which parents of multiples may need to plan, says Greg Wilson, co-owner of the frugal mom blog ChaChingQueen.com, a chartered financial analyst (CFA), and the father of twins. A stay in a neonatal intensive care unit (NICU) may be necessary if multiples are born prematurely or have significant health issues that require specialized care at birth. The cost of an NICU stay exceeds $10,000 for approximately one in 11 families, according to research conducted by the University of Michigan School of Medicine.
“Not only are there medical expenses with this, but there is also the financial burden of your work situation and needing help from others, especially if there are other siblings,” Wilson says. “This is a big, unexpected cost, and common.”
If one or more of your babies requires NICU care because of a disabling condition that’s expected to last 12 months or longer, you may be eligible to apply for Supplemental Security Income (SSI) benefits on their behalf.
Evaluate Your Income
Taking parental leave is an opportunity to spend time with your newborns before returning to work. The Family and Medical Leave Act (FMLA) mandates 12 weeks of parental leave, but there’s one catch: Your employer is not required to pay you.
Eleven states have publicly funded paid family leave—California, Colorado, Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Washington—as well as the District of Columbia. In the rest, childbirth leave is unpaid.
When evaluating your income, consider how much it might drop if you’re taking an extended unpaid leave period. If there’s a wide gap between your expected income and projected new-baby expenses, you may need to either build up a sizable savings balance to cover it or find ways to supplement your income. For example, you might start one or more side hustles to bring in money from home while out on leave.
Also, consider how your income might be affected if one parent opts to stay home to care for multiples. Childcare costs can be steep enough for just one child; they can be even more when you’re paying for two, three, or more infants. Doing the math can help you to decide if it makes sense financially for both parents to go back to work and pay for childcare—or for one to stay home and forgo their income.
Review Your Insurance Coverage
Health insurance can help to ease the burden of financial planning for multiples, but it may not cover everything. Review your coverage to determine what your policy will pay toward prenatal care, labor and delivery, and postpartum care—and what you might have to cover.
Once the babies are born, you can add them to your health insurance plan. If you don’t have health insurance, having a baby qualifies you for a special enrollment period under the Affordable Care Act (ACA). Any plan you sign up for within 60 days of your babies’ birth can cover you, the babies, and any other members of your household.
Under the ACA, most health insurance plans are required to cover:
Breastfeeding supportLactation counselingBreastfeeding equipment
Your insurance provider may require a plan of care from your doctor before it will cover these expenses. If they recommend breastfeeding or support your intention to do so, then your insurance plan should handle the expenses.
Carefully review each medical bill you receive for errors and discrepancies, and don’t hesitate to ask your insurance provider to correct them.
What if you’re expecting multiples and don’t have health insurance? You may be eligible for Medicaid based on your household size, income, and financial resources. You can apply for Medicaid through your local department of social services office. If you’re covered by Medicaid while pregnant, your babies are automatically covered at birth and will remain eligible for at least one year.
You can also ask the hospital about discount programs or charity care. Similar to Medicaid, your ability to qualify for financial aid may depend on your household size, income, and financial resources. If you don’t qualify for charity care or Medicaid, you may be able to arrange a payment plan with the hospital at a discounted rate.
Get Creative with Saving
Making your budget work with multiples may require you to flex your money-saving skills, especially if you expect your income to drop temporarily while on childbirth leave or permanently if one parent plans to stay home full time. Fortunately, there are a number of ways to save money when welcoming twins, triplets, or more.
Here are some of the money-saving tips that Burns suggests:
Repurpose: Repurposing can save money—and space—if baby items do double duty. For example, adding a changing table insert to the top of a dresser means that you don’t need to purchase a separate changing table.
Choose adaptable items: Certain baby items are must-haves. For example, you’ll need a car seat and crib for each baby. A simple way to save on those expenses is to choose items that “grow” with your babies. For example, you may purchase infant carriers that convert to toddler car seats or cribs that can be reconfigured into toddler beds.
Buy in bulk: Buying in bulk can be a money saver if you’re paying a lower price per unit for baby essentials. For example, some of the best baby items to purchase in bulk include disposable diapers, wipes, and formula. It’s important to choose diaper size carefully, though, to ensure that you’re not wasting money if your multiples are growing quickly.
Make your own baby food: A food processor and a few fresh ingredients may be all you need to make your own healthy baby food at home. You can prepare baby food in bulk and freeze it, which can save you from having to buy processed baby foods at the grocery store.
Buy used: It can be tempting to buy all new items when expecting a baby, but that may not be realistic with multiples. Some of the things you can buy used include baby baths, baby clothes, and cloth diapers. Keep in mind that certain items, such as cribs and car seats, should always be purchased new for safety reasons.
Also, consider whether using cloth diapers makes sense as a means of saving money. A typical infant requires up to 12 diapers per day, costing parents $70 to $80 per month, according to the National Diaper Bank Network. Wilson’s family uses cloth diapers and says that it has been a money saver, as the twins are able to share them.
Local Facebook bargain groups or groups for parents of multiples can be a great place to find gently used baby items either inexpensively or for free.
How much should I save for twins?
The amount you’ll need to save for twins can depend on how much of your healthcare costs are covered by insurance, what you expect your expenses to be after giving birth, and whether welcoming twins will affect your income. It’s also important to understand which new expenses you may face, such as childcare, and how they will affect your baby budget.
Is it cheaper to raise twins than a single child?
Having twins doesn’t necessarily mean your costs will double, but whether it’s cheaper to raise twins vs. a single child can depend on what you anticipate spending. For example, with twins you might spend more on childcare but less on diapers because you’re using cloth diapers and the babies are sharing.
How much money should you have saved before your babies arrive?
It can be a good idea to save an amount that’s equivalent to at least three months of expenses before the babies arrive. Three months is the same amount of time that parents can take for unpaid leave under the Family and Medical Leave Act (FMLA). If you anticipate having less income during that time, a three-month savings stash could help with covering expenses until both parents return to work. With multiples, more than three months could be helpful.
The Bottom Line
Planning financially for multiples can feel a little overwhelming, especially if you’re a first-time parent. Understanding what your costs are likely to be can help you formulate a plan for making sure that your newborns’ needs are met. You may also consider reaching out to a financial advisor or a CFP to get professional advice on long-term concerns, such as saving for college and planning your retirement.
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https://www.investopedia.com/terms/p/primary-distribution.asp | Primary Distribution: 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-a-primary-distribution"></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 Primary Distribution? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> In finance, the term primary distribution refers to the original sale of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> issue to the investing public. One of the most well-known examples of a primary distribution is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering</a> (IPO), in which a new company sells its shares for the first time.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> A primary distribution may also involve the issuance of preferred shares, debt securities, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/bonds/10/structured-notes.asp">structured notes</a>, among others. A primary distribution is similar in many ways to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primaryoffering.asp">primary offering</a> and the two terms are often used interchangeably.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The proceeds from a primary distribution are received directly by the issuer of the security in question. For example, in the case of an IPO, the newly-listed company receives the proceeds from the sale of stock to the public, raising equity capital for itself.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A primary distribution is an initial sale of securities on the secondary market, such as in the case of an IPO.</li><li>By contrast, a secondary distribution refers to the sale of existing securities among buyers and sellers on the secondary market.</li><li>Unlike secondary distributions, primary distributions are a direct source of funds for the company issuing securities to raise capital.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-primary-distributions-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> How Primary Distributions Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Primary distributions are a critical component of the overall <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-market.asp" rel="noopener noreferrer">financial markets</a>, as they are the primary mechanism whereby issuers raise capital from investors in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/public.asp" rel="noopener noreferrer">public market</a>. By contrast, secondary distributions do not raise capital for issuers because their proceeds are paid only to the current owner of those securities.
</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"> Unlike primary distributions, secondary distributions do not increase a company’s shares outstanding. This is because they do not involve the creation of any new shares. Instead, the same shares which were first issued in the IPO are simply changing hands among different investors. Nevertheless, secondary distributions can have an effect on the company in question because the price at which the trades are made can influence the company’s overall share price.
</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"> There is also an important distinction between the terms “secondary distribution” and “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondaryoffering.asp" rel="noopener noreferrer">secondary offering</a>.” Whereas a secondary distribution only refers to the sale of an existing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/block.asp" rel="noopener noreferrer">block</a> of shares, a secondary offering consists of the issuance of new shares.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In this sense, a secondary offering can be viewed as a “second IPO.” For this reason, secondary offerings will increase the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outstandingshares.asp" rel="noopener noreferrer">shares outstanding</a> of a company, which can result in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://economictimes.indiatimes.com/definition/equity-dilution" rel="noopener noreferrer">equity dilution</a> for the existing shareholders.
</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-real-world-example-of-a-primary-distribution"></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"> Real-World Example of a Primary Distribution </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> To illustrate, consider the case of a newly-listed company. During its IPO, the company received the proceeds from the initial sale of its shares to investors. However, if those same investors then want to sell their shares to someone else, that second sale would be considered a secondary distribution and would not lead to any direct cash inflow to the company.
</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"> Oftentimes, secondary distributions are made by company officers, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hnwi.asp" rel="noopener noreferrer">high-net-worth</a> (HNW) individuals, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp" rel="noopener noreferrer">institutional investors</a> who hold large blocks of an existing security. For example, a secondary distribution might be made by a venture capital (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/venturecapitalist.asp" rel="noopener noreferrer">VC</a>) firm that helped fund a recently listed company in the years prior to its IPO. Now that the company is publicly listed, the VC firm may wish to cash out on their position by selling their shares through a secondary distribution.
</p></div> | ## What Is a Primary Distribution?
In finance, the term primary distribution refers to the original sale of a [security](https://www.investopedia.com/terms/s/security.asp) issue to the investing public. One of the most well-known examples of a primary distribution is the [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO), in which a new company sells its shares for the first time.
A primary distribution may also involve the issuance of preferred shares, debt securities, or [structured notes](https://www.investopedia.com/articles/bonds/10/structured-notes.asp), among others. A primary distribution is similar in many ways to a [primary offering](https://www.investopedia.com/terms/p/primaryoffering.asp) and the two terms are often used interchangeably.
The proceeds from a primary distribution are received directly by the issuer of the security in question. For example, in the case of an IPO, the newly-listed company receives the proceeds from the sale of stock to the public, raising equity capital for itself.
### Key Takeaways
* A primary distribution is an initial sale of securities on the secondary market, such as in the case of an IPO.
* By contrast, a secondary distribution refers to the sale of existing securities among buyers and sellers on the secondary market.
* Unlike secondary distributions, primary distributions are a direct source of funds for the company issuing securities to raise capital.
## How Primary Distributions Work
Primary distributions are a critical component of the overall [financial markets](https://www.investopedia.com/terms/f/financial-market.asp), as they are the primary mechanism whereby issuers raise capital from investors in the [public market](https://www.investopedia.com/terms/p/public.asp). By contrast, secondary distributions do not raise capital for issuers because their proceeds are paid only to the current owner of those securities.
Unlike primary distributions, secondary distributions do not increase a company’s shares outstanding. This is because they do not involve the creation of any new shares. Instead, the same shares which were first issued in the IPO are simply changing hands among different investors. Nevertheless, secondary distributions can have an effect on the company in question because the price at which the trades are made can influence the company’s overall share price.
There is also an important distinction between the terms “secondary distribution” and “[secondary offering](https://www.investopedia.com/terms/s/secondaryoffering.asp).” Whereas a secondary distribution only refers to the sale of an existing [block](https://www.investopedia.com/terms/b/block.asp) of shares, a secondary offering consists of the issuance of new shares.
In this sense, a secondary offering can be viewed as a “second IPO.” For this reason, secondary offerings will increase the [shares outstanding](https://www.investopedia.com/terms/o/outstandingshares.asp) of a company, which can result in [equity dilution](https://economictimes.indiatimes.com/definition/equity-dilution) for the existing shareholders.
## Real-World Example of a Primary Distribution
To illustrate, consider the case of a newly-listed company. During its IPO, the company received the proceeds from the initial sale of its shares to investors. However, if those same investors then want to sell their shares to someone else, that second sale would be considered a secondary distribution and would not lead to any direct cash inflow to the company.
Oftentimes, secondary distributions are made by company officers, [high-net-worth](https://www.investopedia.com/terms/h/hnwi.asp) (HNW) individuals, or [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) who hold large blocks of an existing security. For example, a secondary distribution might be made by a venture capital ([VC](https://www.investopedia.com/terms/v/venturecapitalist.asp)) firm that helped fund a recently listed company in the years prior to its IPO. Now that the company is publicly listed, the VC firm may wish to cash out on their position by selling their shares through a secondary distribution.
| What Is a Primary Distribution?
In finance, the term primary distribution refers to the original sale of a security issue to the investing public. One of the most well-known examples of a primary distribution is the initial public offering (IPO), in which a new company sells its shares for the first time.
A primary distribution may also involve the issuance of preferred shares, debt securities, or structured notes, among others. A primary distribution is similar in many ways to a primary offering and the two terms are often used interchangeably.
The proceeds from a primary distribution are received directly by the issuer of the security in question. For example, in the case of an IPO, the newly-listed company receives the proceeds from the sale of stock to the public, raising equity capital for itself.
Key Takeaways
A primary distribution is an initial sale of securities on the secondary market, such as in the case of an IPO.By contrast, a secondary distribution refers to the sale of existing securities among buyers and sellers on the secondary market.Unlike secondary distributions, primary distributions are a direct source of funds for the company issuing securities to raise capital.
How Primary Distributions Work
Primary distributions are a critical component of the overall financial markets, as they are the primary mechanism whereby issuers raise capital from investors in the public market. By contrast, secondary distributions do not raise capital for issuers because their proceeds are paid only to the current owner of those securities.
Unlike primary distributions, secondary distributions do not increase a company’s shares outstanding. This is because they do not involve the creation of any new shares. Instead, the same shares which were first issued in the IPO are simply changing hands among different investors. Nevertheless, secondary distributions can have an effect on the company in question because the price at which the trades are made can influence the company’s overall share price.
There is also an important distinction between the terms “secondary distribution” and “secondary offering.” Whereas a secondary distribution only refers to the sale of an existing block of shares, a secondary offering consists of the issuance of new shares.
In this sense, a secondary offering can be viewed as a “second IPO.” For this reason, secondary offerings will increase the shares outstanding of a company, which can result in equity dilution for the existing shareholders.
Real-World Example of a Primary Distribution
To illustrate, consider the case of a newly-listed company. During its IPO, the company received the proceeds from the initial sale of its shares to investors. However, if those same investors then want to sell their shares to someone else, that second sale would be considered a secondary distribution and would not lead to any direct cash inflow to the company.
Oftentimes, secondary distributions are made by company officers, high-net-worth (HNW) individuals, or institutional investors who hold large blocks of an existing security. For example, a secondary distribution might be made by a venture capital (VC) firm that helped fund a recently listed company in the years prior to its IPO. Now that the company is publicly listed, the VC firm may wish to cash out on their position by selling their shares through a secondary distribution.
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https://www.investopedia.com/meta-stock-gains-as-jefferies-raises-price-target-on-projected-ai-driven-ad-growth-8624802 | Meta Stock Gains as Jefferies Raises Price Target on Projected AI-Driven Ad Growth | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Meta shares gained Thursday as Jefferies analysts raised their price target for the stock to $585 from $550, saying the company has a competitive advantage to gain in the digital ad market as it integrates artificial intelligence (AI) tools.</li><li>The analysts estimated Meta could capture 50% of the incremental industry ad spend in 2024, the most in the company's history.</li><li>Meta shares were up over 3% at $526.07 as of 2 p.m. ET Thursday, contributing to the stock's more than 50% rise since the start of 2024.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Meta (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=META">META</a>) shares gained over 3% in intraday trading Thursday as Jefferies analysts raised their price target for the stock, saying the company is well-positioned to outpace peers in the digital ad space as it leverages <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> tools.<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"> Jefferies analysts said that Meta "could capture 50% of incremental industry ad dollars in 2024, which would be its highest ever and well above its 33% in 2023" as "scaling Gen AI ad tools supplement Meta's already best-in-class Advantage+ product suite."
</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 analysts noted Meta's ad business in 2024 could also outgrow Amazon's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>) for the first time since 2015.
</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"> Jefferies highlighted that Meta's $27 billion invested 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> in 2023 has "helped the company develop several strategic advantages over peers," including the AI recommender tool on Reels, additional tools for its advertiser campaign platform Advantage+, and "impressive momentum" for its click-to-message ads.
</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"> Meta's competitive advantage "is likely to continue growing with new Gen AI ad tools," the analysts said.<br/><br/>Jefferies analysts lifted their price objective to $585 from $550, and reiterated a "buy" <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0512/understanding-analyst-ratings.aspx">rating</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Meta shares were up 3.8% trading at $526.07 as of about 2 p.m. ET Thursday. The stock has gained more than 50% since the start of 2024.<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
* Meta shares gained Thursday as Jefferies analysts raised their price target for the stock to $585 from $550, saying the company has a competitive advantage to gain in the digital ad market as it integrates artificial intelligence (AI) tools.
* The analysts estimated Meta could capture 50% of the incremental industry ad spend in 2024, the most in the company's history.
* Meta shares were up over 3% at $526.07 as of 2 p.m. ET Thursday, contributing to the stock's more than 50% rise since the start of 2024.
Meta ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META)) shares gained over 3% in intraday trading Thursday as Jefferies analysts raised their price target for the stock, saying the company is well-positioned to outpace peers in the digital ad space as it leverages [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) tools.
Jefferies analysts said that Meta "could capture 50% of incremental industry ad dollars in 2024, which would be its highest ever and well above its 33% in 2023" as "scaling Gen AI ad tools supplement Meta's already best-in-class Advantage+ product suite."
The analysts noted Meta's ad business in 2024 could also outgrow Amazon's ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)) for the first time since 2015.
Jefferies highlighted that Meta's $27 billion invested in [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) in 2023 has "helped the company develop several strategic advantages over peers," including the AI recommender tool on Reels, additional tools for its advertiser campaign platform Advantage+, and "impressive momentum" for its click-to-message ads.
Meta's competitive advantage "is likely to continue growing with new Gen AI ad tools," the analysts said.
Jefferies analysts lifted their price objective to $585 from $550, and reiterated a "buy" [rating](https://www.investopedia.com/financial-edge/0512/understanding-analyst-ratings.aspx).
Meta shares were up 3.8% trading at $526.07 as of about 2 p.m. ET Thursday. The stock has gained more than 50% since the start of 2024.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
Meta shares gained Thursday as Jefferies analysts raised their price target for the stock to $585 from $550, saying the company has a competitive advantage to gain in the digital ad market as it integrates artificial intelligence (AI) tools.The analysts estimated Meta could capture 50% of the incremental industry ad spend in 2024, the most in the company's history.Meta shares were up over 3% at $526.07 as of 2 p.m. ET Thursday, contributing to the stock's more than 50% rise since the start of 2024.
Meta (META) shares gained over 3% in intraday trading Thursday as Jefferies analysts raised their price target for the stock, saying the company is well-positioned to outpace peers in the digital ad space as it leverages artificial intelligence (AI) tools.
Jefferies analysts said that Meta "could capture 50% of incremental industry ad dollars in 2024, which would be its highest ever and well above its 33% in 2023" as "scaling Gen AI ad tools supplement Meta's already best-in-class Advantage+ product suite."
The analysts noted Meta's ad business in 2024 could also outgrow Amazon's (AMZN) for the first time since 2015.
Jefferies highlighted that Meta's $27 billion invested in capital expenditures in 2023 has "helped the company develop several strategic advantages over peers," including the AI recommender tool on Reels, additional tools for its advertiser campaign platform Advantage+, and "impressive momentum" for its click-to-message ads.
Meta's competitive advantage "is likely to continue growing with new Gen AI ad tools," the analysts said.Jefferies analysts lifted their price objective to $585 from $550, and reiterated a "buy" rating.
Meta shares were up 3.8% trading at $526.07 as of about 2 p.m. ET Thursday. The stock has gained more than 50% since the start of 2024.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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"META",
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],
[
"artificial intelligence (AI)",
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],
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https://www.investopedia.com/terms/l/lameduck.asp | Lame Duck: What It Means and how It Works | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-lame-duck"></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 Lame Duck? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Lame duck is an out-of-use British term used with reference to a trader who had defaulted on their obligations or gone bankrupt due to an inability to cover trading losses.
</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>Lame duck was a British term used to describe members of the London Stock Exchange who were unable to meet their claims on settlement day.</li><li>Such traders were described as lame ducks because they <em>waddled </em>out of the exchange alley.</li><li>A lame duck could not trade again until all their debts had been settled and paid.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-lame-duck"></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 Lame Duck </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The phrase "lame duck" can be traced to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lse.asp" rel="noopener noreferrer">London Stock Exchange</a>. A member who was unable to meet their claims on settlement day was described as a "lame duck" and would lose their membership on the exchange.<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"> One of the earliest recorded uses of "lame duck" appears in <em>A Classical Dictionary of the Vulgar Tongue</em>, published in 1788. It describes a "lame duck" as an "Exchange-alley phrase for a flock jobber, who either cannot or will not pay his losses, or differences, in which case he is said to <em>waddle out of the alley</em>, as he cannot appear there again till his debts are settled and paid; should he attempt it, he would be hustled out by the fraternity."<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 image of a financially injured trader <em>waddling </em>away from the exchange helps to illustrate how this colorful phrase came into usage. The terms <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/bull-bear-market-names/" rel="noopener noreferrer">bull and bear</a> date from the same period.<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"> The term "lame ducks" often appeared in newspaper accounts from the time, particularly when the market suffered losses. For example, this account recorded on July 19, 1787:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The Stock Exchange has not exhibited for these many years, such a scene as took place there this day, on the settling of accounts: there were no less than <em>twenty-nine lame Ducks</em> waddled out of the Alley! Their deficiencies amount to <em>two hundred and fifty thousand pounds</em>.<span class="ql-inline-citation" data-cite="4"></span>
</blockquote>
<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"> Eventually, "lame duck" found its way to the United States, where it first became a descriptor of an underfinanced business scheme. It has also described a politician who is ineffective, has chosen not to seek re-election, is ineligible to run for office again or has lost an election but is still in office until the election winner takes control of the office.
</p></div> | ## What is a Lame Duck?
Lame duck is an out-of-use British term used with reference to a trader who had defaulted on their obligations or gone bankrupt due to an inability to cover trading losses.
### Key Takeaways
* Lame duck was a British term used to describe members of the London Stock Exchange who were unable to meet their claims on settlement day.
* Such traders were described as lame ducks because they *waddled* out of the exchange alley.
* A lame duck could not trade again until all their debts had been settled and paid.
## Understanding Lame Duck
The phrase "lame duck" can be traced to the [London Stock Exchange](https://www.investopedia.com/terms/l/lse.asp). A member who was unable to meet their claims on settlement day was described as a "lame duck" and would lose their membership on the exchange.
One of the earliest recorded uses of "lame duck" appears in *A Classical Dictionary of the Vulgar Tongue*, published in 1788. It describes a "lame duck" as an "Exchange-alley phrase for a flock jobber, who either cannot or will not pay his losses, or differences, in which case he is said to *waddle out of the alley*, as he cannot appear there again till his debts are settled and paid; should he attempt it, he would be hustled out by the fraternity."
The image of a financially injured trader *waddling* away from the exchange helps to illustrate how this colorful phrase came into usage. The terms [bull and bear](https://www.investopedia.com/ask/answers/bull-bear-market-names/) date from the same period.
The term "lame ducks" often appeared in newspaper accounts from the time, particularly when the market suffered losses. For example, this account recorded on July 19, 1787:
> The Stock Exchange has not exhibited for these many years, such a scene as took place there this day, on the settling of accounts: there were no less than *twenty-nine lame Ducks* waddled out of the Alley! Their deficiencies amount to *two hundred and fifty thousand pounds*.
Eventually, "lame duck" found its way to the United States, where it first became a descriptor of an underfinanced business scheme. It has also described a politician who is ineffective, has chosen not to seek re-election, is ineligible to run for office again or has lost an election but is still in office until the election winner takes control of the office.
| What is a Lame Duck?
Lame duck is an out-of-use British term used with reference to a trader who had defaulted on their obligations or gone bankrupt due to an inability to cover trading losses.
Key Takeaways
Lame duck was a British term used to describe members of the London Stock Exchange who were unable to meet their claims on settlement day.Such traders were described as lame ducks because they waddled out of the exchange alley.A lame duck could not trade again until all their debts had been settled and paid.
Understanding Lame Duck
The phrase "lame duck" can be traced to the London Stock Exchange. A member who was unable to meet their claims on settlement day was described as a "lame duck" and would lose their membership on the exchange.
One of the earliest recorded uses of "lame duck" appears in A Classical Dictionary of the Vulgar Tongue, published in 1788. It describes a "lame duck" as an "Exchange-alley phrase for a flock jobber, who either cannot or will not pay his losses, or differences, in which case he is said to waddle out of the alley, as he cannot appear there again till his debts are settled and paid; should he attempt it, he would be hustled out by the fraternity."
The image of a financially injured trader waddling away from the exchange helps to illustrate how this colorful phrase came into usage. The terms bull and bear date from the same period.
The term "lame ducks" often appeared in newspaper accounts from the time, particularly when the market suffered losses. For example, this account recorded on July 19, 1787:
The Stock Exchange has not exhibited for these many years, such a scene as took place there this day, on the settling of accounts: there were no less than twenty-nine lame Ducks waddled out of the Alley! Their deficiencies amount to two hundred and fifty thousand pounds.
Eventually, "lame duck" found its way to the United States, where it first became a descriptor of an underfinanced business scheme. It has also described a politician who is ineffective, has chosen not to seek re-election, is ineligible to run for office again or has lost an election but is still in office until the election winner takes control of the office.
| [
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],
[
"bull and bear",
"https://www.investopedia.com/ask/answers/bull-bear-market-names/"
]
] |
https://www.investopedia.com/how-to-stake-solana-7378275 | How to Stake Solana | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-solana"></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 Solana? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> On the Solana blockchain, staking is the process of assigning your tokens to a validator node. Staking Solana (SOL) allows you to "vote" for the validator you trust. The more votes a validator has, the more weight it has in the consensus process. As a reward, you receive a staking yield based on the amount you have staked.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> You can stake your Solana tokens from a compatible <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin-wallet.asp">cryptocurrency wallet</a> that is connected to a validator node. Staking wallets and validator nodes can be managed independently or by a third-party service, such as a staking pool or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/software-as-a-service-saas.asp">staking-as-a-service</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>Solana's staking mechanism rewards a share of newly minted tokens and transaction fees to users who delegate SOL to validators in charge of processing transactions and securing the network.</li><li>The upsides of staking Solana include earning passive income and contributing to network security, but the downsides include financial penalties, market volatility, and technical issues.</li><li>You need a software wallet and a powerful hardware setup to stake Solana independently, while a third-party service typically requires just an online account and minimal technical knowledge.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-solana-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 Solana Staking </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Solana was designed as a high-performance solution to combat <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/scalability.asp">scalability</a> issues plaguing other blockchains. Unlike <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum</a>, which struggles with a few dozen transactions per second, Solana claims the ability to process thousands.<span class="ql-inline-citation" data-cite="10"></span> This network <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/throughput.asp">throughput</a> has catapulted Solana to becoming a favorite for <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/decentralized-applications-dapps.asp">decentralized application (dApp)</a> development, particularly for <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/decentralized-finance-defi-5113835">decentralized finance (DeFi)</a> services related to lending, trading, and borrowing.<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_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"> Proofs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> To facilitate faster transaction speeds and lower fees, Solana secures its network with <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 (PoS)</a> and Proof-of-History (PoH) <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp">consensus mechanisms</a>. This contrasts Bitcoin's <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proof-work.asp">Proof-of-Work (PoW)</a> consensus mechanism, where miners use computational power to solve cryptographic puzzles.
</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 PoS and PoH consensus mechanisms allow validators to keep Solana running asynchronously by simply staking SOL <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crypto-token.asp">cryptocurrency tokens</a> that have been delegated to them by users. The PoH consensus mechanism's cryptographic function generates readily available block timestamps to allow validators to agree on the order of transactions without needing to wait for external time sources and confirmations from others, significantly speeding up transaction times.<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_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"> Staking </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When the staked SOL is locked up, it cannot be used or traded by the users who delegated the token. Validators control the SOL tokens for a certain period so that they can run groups of specialized computer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/master-node-cryptocurrency.asp">nodes</a> to process transactions and add them to the blockchain. The greater the amount of delegated SOL, the greater the probability a validator will be chosen to perform assigned network tasks and earn rewards in the form of additional SOL tokens.<span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<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"> Rewards </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The majority of Solana's staking rewards consist of newly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mint.asp">minted</a> SOL tokens that are automatically distributed to validators and delegators based on their stake weights and network <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, which will gradually decrease over time until it reaches a sustainable level.<span class="ql-inline-citation" data-cite="18"></span> The other fraction of rewards is <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transactioncosts.asp">transaction fees</a> paid by users when they send transactions on the Solana network. Validators collect these transaction fees and share a portion with their delegators at a rate that depends on their transaction processing volume and the percentage the delegator has staked.<span class="ql-inline-citation" data-cite="19"></span><span class="ql-inline-citation" data-cite="18"></span><br/>
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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"> Independent Staking </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Staking independently offers greater control and privacy than third-party staking. When you stake on your own, you aren't subjected to customer screening; you can directly interact with the Solana blockchain, and you can hold onto your tokens yourself, assuming you choose a non-custodial wallet that places <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/private-key.asp">private keys</a> squarely in your possession. However, to pull off solo staking successfully, you will need technical expertise, coding knowledge, financial resources, and dedicated hours of effort.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Carefully shopping around for and setting up the validator node's hardware and wallet are musts in order to avoid going over budgetary constraints and opening yourself up to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cybersecurity.asp">cybersecurity</a> risks. Experience with computer programming and electronic goods is required to install and execute commands from a command-line interface, to synchronize the software with the hardware for the validator node, and to physically integrate the hardware parts into a working system.<span class="ql-inline-citation" data-cite="16"></span>
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<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"> Staking Services </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Staking your SOL is a relatively simple process, if you decline to run your own validator node and accept that you will give control of your tokens to a third-party staking service. All you need to do to stake cryptocurrency with a staking service is complete a sign-up form, provide personal information to satisfy <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aml.asp">Anti-Money Laundering (AML)</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/knowyourclient.asp">Know-Your-Customer (KYC)</a> checks, and let it automatically handle the staking process for you.
</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"> A third-party service's staking wallet is almost always included with the service and can be accessed through conventional website and mobile app interfaces without needing to save and enter wallet keys every time you want to log in and monitor your staking performance. The staking service owns the wallet keys and seamlessly authenticates it for you.
</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"> A staking pool won't require you to run your own validator node, but it will require more effort than a staking service to set up a wallet. While staking services oversee both the validator and wallet on your behalf, a staking pool asks you to open a wallet and hook it up to one of the pool's many validator nodes by yourself, just as if you were staking independently.
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<span class="heading-toc" id="toc-benefits-and-risks-of-solana-staking"></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"> Benefits and Risks of Solana Staking </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Staking SOL provides a recurring, low-effort source of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveincome.asp">passive income</a> that doesn't need to be actively managed unless you are staking independently. With the rapid growth and development of the Solana's network, the staking rewards could potentially even increase and become a lucrative long-term investment opportunity.
</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"> Staking also contributes to the security, stability, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/decentralizedmarket.asp">decentralization</a> of the Solana network. Staked SOL incentivizes validators to participate in the network while behaving honestly and upholding the network's rules. More participants means more voices can shape the future of the Solana network and defend it from attacks. Power can become distributed across the Solana community rather than concentrated in the hands of a few large entities when <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/onchain-governance.asp">governance proposals</a> are considered, leading to a more decentralized, resilient, and censorship-resistant network.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Nonetheless, staking cryptocurrency involves certain technical, financial, centralization, and regulatory risks that investors should be aware of before participating. It's important to conduct thorough research and understand these risks before making any investment decisions.
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<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"> Technical Aspects </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> As with any technology, the Solana blockchain and its software are susceptible to bugs and vulnerabilities, and validator nodes rely on hardware components that can fail. Downtime and outages could lead to the loss of staked SOL and interruptions in your staking rewards due to security breaches and missed validation opportunities. When using a custodial wallet, staking pool, or staking service, you are trusting a third party with your SOL and exposing yourself to the risk of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insolvency.asp">insolvency</a> or mismanagement.
</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"> Financial Aspects </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Staked SOL is locked up for a period of time and inaccessible for trading or other purposes, eliciting an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/opportunitycost.asp">opportunity cost</a> if other investments you could have alternatively made perform more positively. During that time, the price of SOL can also be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/010915/volatility-good-thing-or-bad-thing-investors-point-view-and-why.asp">volatile</a>, causing the value of your staked SOL and earned rewards to fluctuate significantly and potentially drop in value. If your chosen validator engages in malicious activity or performs poorly, you could also lose a portion of your staked SOL as a penalty. The Solana network punishes errant behavior and confiscates staked SOL in a process known as slashing.<span class="ql-inline-citation" data-cite="17"></span>
</p>
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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"> Centralization Aspects </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Solana tries to stay decentralized, but the network is still under development and relies on a relatively small number of validators, raising <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralizedmarket.asp">centralization</a> issues. A small group of validators has an easier chance of rewriting the rules of a blockchain and manipulating the network in their favor through collusion, rent capture, abusive slashing, or network forks, potentially imperiling the value of the SOL cryptocurrency and staking rewards.
</p>
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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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collusion.asp">Collusion</a> could involve agreements to exclude certain validators from receiving rewards and artificially inflate the stake weight of specific validators. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rentseeking.asp">Rent capture, also called rent seeking</a>, could involve capturing a greater share of the network's inflation rewards. This could cause the overall rewards available to individual stakers to become lower. It would increase the minimum stake requirement, introduce new fees for participants, and reduce the network inflation rate.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Abusive slashing mechanisms could involve fabricating evidence of malicious activity or manipulating votes to trigger unwarranted slashing events, unfairly penalize other validators, and gain an advantage in terms of stake weight and rewards. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/soft-fork.asp">Soft forks</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hard-fork.asp">hard forks</a>—splitting into two separate chains—could involve disagreements among validators regarding protocol changes or network governance that affect the value of SOL and the distribution of staking rewards.
</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"> Regulatory Aspects </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Depending on your jurisdiction, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxation.asp">taxation</a> and regulatory changes could impact the profitability and legality of staking practices. Staking rewards are considered <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxableincome.asp">taxable income</a> in many countries, and tax burdens reduce the overall returns from staking and could potentially be raised by law over time. New <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/functional-regulation.asp">regulations</a> could introduce additional <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compliance-program.asp">compliance</a> requirements for staking providers and participants. Regulations could impose restrictions on staking activities, increasing administrative complexity and costs and limiting staking accessibility and rewards.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_57-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_58-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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 average <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> on Solana staking is around 7.41%, as of March 2024.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div>
<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_59-0"> <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_60-0"> Taking into account the quality, costs, and commitment of certain wallets and validators can help ensure the safety and profitability of your staking investment. Here is a discussion of factors to look for when choosing a third-party service that provides a staking wallet and validator node:
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-subheading__text"> Cybersecurity </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> A staking platform that protects your private keys and other sensitive information can prevent losses from hacking and thefts. Lean towards wallets and validators with proven track records of independent security <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/audit.asp">audits</a> and little to no vulnerabilities. Look for proactive vulnerability resolution, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cybersecurity-4427739">cybersecurity management</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cyber-and-privacy-insurance.asp">insurance</a>, and wide selections of available security features, such as private key storage with <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/multi-signature-wallets-definition-5271193">multi-signature</a> options.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-subheading__text"> Staking Fees </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Fees from both wallets and validators will directly reduce your staking rewards and a higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fee-structure.asp">fee structure</a> will result in a lower net return on your staked SOL. Every transaction on the Solana blockchain incurs a network fee, and wallet providers and validator nodes charge commission, referral, deposit, or withdrawal fees to cover their operating cost.<span class="ql-inline-citation" data-cite="11"></span>
</p>
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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"> Customer Service </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Customer service provides crucial assistance in troubleshooting technical issues, resolving errors, and keeping users informed of updates, notifications, and risks. Certain security concerns that aren't addressed or raised promptly could lead to issues becoming more severe or permanently unresolved down the line.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-subheading__text"> Validator Uptime/Reliability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Staking wallets and validator nodes that are frequently offline or functioning incorrectly can cause you to lose your rewards and staked crypto to network penalties. The risk of experiencing slashing penalties increases if a busy schedule distracts you from attending to validator tasks or you choose a staking service that isn't reliable and online consistently.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_74-0"> <span class="mntl-sc-block-subheading__text"> Distribution Time </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Knowing the exact time your rewards will be distributed allows for better budgeting and financial planning. You can anticipate the influx of funds and allocate them towards specific goals, investments, and expenses. If you receive your earned staking rewards sooner, you can reinvest them into staking or other purposes more quickly for higher returns.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-subheading__text"> Coding Ability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Going it alone or using a pool for staking involves making decisions and troubleshooting technology-related errors. Not having the appropriate technical expertise for a staking platform could put you at a severe disadvantage and potentially lead to financial losses.
</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"> You'll need the skills and knowledge to set up software and hardware, diagnose problems, identify solutions, and build and modify programming <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/11/automated-trading-systems.asp">scripts</a> to better suit your needs or automate certain aspects of staking.
</p>
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<span class="heading-toc" id="toc-staking-independently"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-heading__text"> Staking Independently </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Here is a breakdown of how to set up a validator node if you are staking SOL by yourself. A validator node can be connected to both non-custodial and custodial wallets. Anyone can be a validator on the Solana network.<span class="ql-inline-citation" data-cite="16"></span><span class="ql-inline-citation" data-cite="14"></span>
</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>Set up the validator.</strong> Obtain a server with the required hardware specifications. Aim for a CPU with high core count and clock speed, at least 64GB of RAM, a solid-state drive with high read/write speeds, a reliable and high-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bandwidth.asp">bandwidth</a> Internet connection, and a redundant power supply to handle the demands of an uninterrupted staking operation.</li>
<li><strong>Install software dependencies.</strong> Ensure you have the necessary dependencies like <em>libssl-dev</em>, <em>libffi-dev</em>, and <em>libdb-dev</em> installed to run the Solana validator software.</li>
<li><strong>Set up the software.</strong> Install the Solana command-line interface and the latest version of the Solana validator software on your operating system. Download and follow the installation guides for your operating system if you need more information.</li>
<li><strong>Create keys.</strong> Generate your validator identity keypair and a separate vote account keypair using <em>solana-keygen</em> and other commands.</li>
<li><strong>Configure the validator.</strong> Edit configuration files, such as <em>validator.toml</em>, to specify your keys, stake amount, network settings, and other parameters.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Create a vote account.</strong> A vote account can be spun up by using <em>solana create-vote-account</em> and other commands.</li>
<li><strong>Fund the validator.</strong> Transfer enough SOL to your validator identity keypair to cover your desired stake amount.</li>
<li><strong>Start the validator.</strong> Run the <em>solana-validator</em> command and other arguments to start the validator process.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="13"></span></li>
</ol>
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<span class="heading-toc" id="toc-staking-via-non-custodial-wallets"></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"> Staking Via Non-Custodial Wallets </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> Here is a breakdown of how to stake SOL with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-solana-wallets-6830693">non-custodial wallet</a>. A non-custodial wallet can be connected to a third-party staking service or a personal validator node.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="8"></span>
</p>
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> <li><strong>Download and install a wallet.</strong> Non-custodial wallets let you self-custody and hold onto your SOL tokens and wallet keys.</li><li><strong>Choose a validator.</strong> If you don't want to run your own validator while using a non-custodial wallet, research and select a reputable third-party validator. Consider factors like stake weight, commission rate, uptime, and community reputation. You can find validator information on websites like SolanaBeach.io or StakingRewards.com.</li><li><strong>Delegate your SOL.</strong> Connect your wallet to the Solana ecosystem through a decentralized app (dApp) like Solflare or Phantom. Find the "Stake" or "Delegation" section and follow the instructions in your wallet. Select the chosen validator and enter the amount of SOL you wish to delegate. Confirm the transaction and pay the associated network fees.</li><li><strong>Monitor your stake.</strong> Your wallet will display your staked SOL and accumulated rewards. You can track your validator's performance and network inflation rate to estimate your potential earnings.</li>
</ol>
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<span class="heading-toc" id="toc-staking-via-custodial-wallets"></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"> Staking Via Custodial Wallets </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> Here is a breakdown of how to stake SOL with a custodial wallet, the type of wallet usually associated with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-crypto-exchanges-5071855">third-party</a> staking services that aren't staking pools.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="9"></span>
</p>
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0">
<li><strong>Choose a wallet.</strong> Several reputable custodial wallets offer SOL staking services.</li>
<li><strong>Create an account.</strong> You may need to provide your personal information and verify your identity.</li>
<li><strong>Fund your account.</strong> Transfer SOL to your custodial wallet from an exchange or another wallet. You may need to use the wallet's address or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quick-response-qr-code.asp">QR code</a> to receive the SOL.</li>
<li><strong>Find the staking option.</strong> You should see an option for SOL staking in your account.</li>
<li><strong>Choose your stake amount.</strong> Enter the amount of SOL you want to stake. The minimum stake amount will vary depending on the platform.</li>
<li><strong>Select a staking period.</strong> Some custodial wallets offer the option to choose a staking period that determines how long your SOL will be locked up. A longer staking period may offer higher rewards.</li>
<li><strong>Confirm your stake and monitor your rewards.</strong> Review the details and confirm the transaction. Your SOL will be staked and you will start earning rewards. You can track your accumulated rewards and the estimated annual percentage yield (APY) through the wallet's interface.</li>
</ol>
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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-how-long-does-it-take-to-earn-solana-staking-rewards"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Does It Take to Earn Solana Staking Rewards?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can generally expect to see your first Solana staking rewards within two days of delegating your SOL to a validator, plus an additional buffer time for those relying on third-party services. Solana staking rewards are calculated and distributed once per epoch, a timeframe used for network management and consensus that lasts approximately two days long.<span class="ql-inline-citation" data-cite="5"></span></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_99-0"><span class="heading-toc" id="toc-how-much-can-you-earn-staking-solana"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Can You Earn Staking Solana?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There isn't a guaranteed amount to be earned from Solana staking. If you are staking independently, you can estimate your yield by using the Solana network's formula, which multiplies the network's inflation rate, the validator's uptime, the difference between one and the validator's fee, and the quantity of one divided by the percentage of SOL staked, where the percentage of SOL staked is the total SOL staked in the Solana network divided by the total current supply of SOL.<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_100-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_101-0"><span class="heading-toc" id="toc-what-staking-behavior-does-the-solana-network-penalize"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Staking Behavior Does the Solana Network Penalize?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Staked SOL can be removed from circulation and taken away from validators who experience downtime, vote for conflicting block proposals, double sign the same block, maliciously slash other validators by submitting false reports, and commit other protocol violations. Solana is exploring partial slashing penalties that will still continue to incentivize validators to maintain high uptime, act honestly, and contribute to the network's security and efficiency.<span class="ql-inline-citation" data-cite="17"></span></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_103-0"><span class="heading-toc" id="toc-how-long-do-i-need-to-wait-to-stake-and-unstake-sol-tokens"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Do I Need to Wait to Stake and Unstake SOL Tokens?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Regardless of the staking method, you must wait days to weeks for the staked SOL to become accessible to the validator node during a warm-up period, and you must keep your SOL on the Solana network for a minimum amount of time during a validation period. You can withdraw, or unstake, your SOL and access your tokens at any time to maintain <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/07/liquidity.asp">liquidity</a> and flexibility, but there is a cooldown period of typically two to three days when your SOL will continue to be temporarily locked up.<span class="ql-inline-citation" data-cite="9"></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_105-0"> <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_106-0"> Staking SOL on the Solana blockchain offers passive income through rewards on your SOL holdings. Profitability depends on variousors, particularly wallet and validator selection, the amount of staked cryptocurrency, market and network characteristics, and compliance with staking rules.
</p></div> | ## What Is Staking Solana?
On the Solana blockchain, staking is the process of assigning your tokens to a validator node. Staking Solana (SOL) allows you to "vote" for the validator you trust. The more votes a validator has, the more weight it has in the consensus process. As a reward, you receive a staking yield based on the amount you have staked.
You can stake your Solana tokens from a compatible [cryptocurrency wallet](https://www.investopedia.com/terms/b/bitcoin-wallet.asp) that is connected to a validator node. Staking wallets and validator nodes can be managed independently or by a third-party service, such as a staking pool or [staking-as-a-service](https://www.investopedia.com/terms/s/software-as-a-service-saas.asp).
### Key Takeaways
* Solana's staking mechanism rewards a share of newly minted tokens and transaction fees to users who delegate SOL to validators in charge of processing transactions and securing the network.
* The upsides of staking Solana include earning passive income and contributing to network security, but the downsides include financial penalties, market volatility, and technical issues.
* You need a software wallet and a powerful hardware setup to stake Solana independently, while a third-party service typically requires just an online account and minimal technical knowledge.
## Understanding Solana Staking
Solana was designed as a high-performance solution to combat [scalability](https://www.investopedia.com/terms/s/scalability.asp) issues plaguing other blockchains. Unlike [Ethereum](https://www.investopedia.com/terms/e/ethereum.asp), which struggles with a few dozen transactions per second, Solana claims the ability to process thousands. This network [throughput](https://www.investopedia.com/terms/t/throughput.asp) has catapulted Solana to becoming a favorite for [decentralized application (dApp)](https://www.investopedia.com/terms/d/decentralized-applications-dapps.asp) development, particularly for [decentralized finance (DeFi)](https://www.investopedia.com/decentralized-finance-defi-5113835) services related to lending, trading, and borrowing.
### Proofs
To facilitate faster transaction speeds and lower fees, Solana secures its network with [Proof-of-Stake (PoS)](https://www.investopedia.com/terms/p/proof-stake-pos.asp) and Proof-of-History (PoH) [consensus mechanisms](https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp). This contrasts Bitcoin's [Proof-of-Work (PoW)](https://www.investopedia.com/terms/p/proof-work.asp) consensus mechanism, where miners use computational power to solve cryptographic puzzles.
The PoS and PoH consensus mechanisms allow validators to keep Solana running asynchronously by simply staking SOL [cryptocurrency tokens](https://www.investopedia.com/terms/c/crypto-token.asp) that have been delegated to them by users. The PoH consensus mechanism's cryptographic function generates readily available block timestamps to allow validators to agree on the order of transactions without needing to wait for external time sources and confirmations from others, significantly speeding up transaction times.
### Staking
When the staked SOL is locked up, it cannot be used or traded by the users who delegated the token. Validators control the SOL tokens for a certain period so that they can run groups of specialized computer [nodes](https://www.investopedia.com/terms/m/master-node-cryptocurrency.asp) to process transactions and add them to the blockchain. The greater the amount of delegated SOL, the greater the probability a validator will be chosen to perform assigned network tasks and earn rewards in the form of additional SOL tokens.
### Rewards
The majority of Solana's staking rewards consist of newly [minted](https://www.investopedia.com/terms/m/mint.asp) SOL tokens that are automatically distributed to validators and delegators based on their stake weights and network [inflation](https://www.investopedia.com/terms/i/inflation.asp) rate, which will gradually decrease over time until it reaches a sustainable level. The other fraction of rewards is [transaction fees](https://www.investopedia.com/terms/t/transactioncosts.asp) paid by users when they send transactions on the Solana network. Validators collect these transaction fees and share a portion with their delegators at a rate that depends on their transaction processing volume and the percentage the delegator has staked.
### Independent Staking
Staking independently offers greater control and privacy than third-party staking. When you stake on your own, you aren't subjected to customer screening; you can directly interact with the Solana blockchain, and you can hold onto your tokens yourself, assuming you choose a non-custodial wallet that places [private keys](https://www.investopedia.com/terms/p/private-key.asp) squarely in your possession. However, to pull off solo staking successfully, you will need technical expertise, coding knowledge, financial resources, and dedicated hours of effort.
Carefully shopping around for and setting up the validator node's hardware and wallet are musts in order to avoid going over budgetary constraints and opening yourself up to [cybersecurity](https://www.investopedia.com/terms/c/cybersecurity.asp) risks. Experience with computer programming and electronic goods is required to install and execute commands from a command-line interface, to synchronize the software with the hardware for the validator node, and to physically integrate the hardware parts into a working system.
### Staking Services
Staking your SOL is a relatively simple process, if you decline to run your own validator node and accept that you will give control of your tokens to a third-party staking service. All you need to do to stake cryptocurrency with a staking service is complete a sign-up form, provide personal information to satisfy [Anti-Money Laundering (AML)](https://www.investopedia.com/terms/a/aml.asp) and [Know-Your-Customer (KYC)](https://www.investopedia.com/terms/k/knowyourclient.asp) checks, and let it automatically handle the staking process for you.
A third-party service's staking wallet is almost always included with the service and can be accessed through conventional website and mobile app interfaces without needing to save and enter wallet keys every time you want to log in and monitor your staking performance. The staking service owns the wallet keys and seamlessly authenticates it for you.
A staking pool won't require you to run your own validator node, but it will require more effort than a staking service to set up a wallet. While staking services oversee both the validator and wallet on your behalf, a staking pool asks you to open a wallet and hook it up to one of the pool's many validator nodes by yourself, just as if you were staking independently.
## Benefits and Risks of Solana Staking
Staking SOL provides a recurring, low-effort source of [passive income](https://www.investopedia.com/terms/p/passiveincome.asp) that doesn't need to be actively managed unless you are staking independently. With the rapid growth and development of the Solana's network, the staking rewards could potentially even increase and become a lucrative long-term investment opportunity.
Staking also contributes to the security, stability, and [decentralization](https://www.investopedia.com/terms/d/decentralizedmarket.asp) of the Solana network. Staked SOL incentivizes validators to participate in the network while behaving honestly and upholding the network's rules. More participants means more voices can shape the future of the Solana network and defend it from attacks. Power can become distributed across the Solana community rather than concentrated in the hands of a few large entities when [governance proposals](https://www.investopedia.com/terms/o/onchain-governance.asp) are considered, leading to a more decentralized, resilient, and censorship-resistant network.
Nonetheless, staking cryptocurrency involves certain technical, financial, centralization, and regulatory risks that investors should be aware of before participating. It's important to conduct thorough research and understand these risks before making any investment decisions.
### Technical Aspects
As with any technology, the Solana blockchain and its software are susceptible to bugs and vulnerabilities, and validator nodes rely on hardware components that can fail. Downtime and outages could lead to the loss of staked SOL and interruptions in your staking rewards due to security breaches and missed validation opportunities. When using a custodial wallet, staking pool, or staking service, you are trusting a third party with your SOL and exposing yourself to the risk of [insolvency](https://www.investopedia.com/terms/i/insolvency.asp) or mismanagement.
### Financial Aspects
Staked SOL is locked up for a period of time and inaccessible for trading or other purposes, eliciting an [opportunity cost](https://www.investopedia.com/terms/o/opportunitycost.asp) if other investments you could have alternatively made perform more positively. During that time, the price of SOL can also be [volatile](https://www.investopedia.com/ask/answers/010915/volatility-good-thing-or-bad-thing-investors-point-view-and-why.asp), causing the value of your staked SOL and earned rewards to fluctuate significantly and potentially drop in value. If your chosen validator engages in malicious activity or performs poorly, you could also lose a portion of your staked SOL as a penalty. The Solana network punishes errant behavior and confiscates staked SOL in a process known as slashing.
### Centralization Aspects
Solana tries to stay decentralized, but the network is still under development and relies on a relatively small number of validators, raising [centralization](https://www.investopedia.com/terms/c/centralizedmarket.asp) issues. A small group of validators has an easier chance of rewriting the rules of a blockchain and manipulating the network in their favor through collusion, rent capture, abusive slashing, or network forks, potentially imperiling the value of the SOL cryptocurrency and staking rewards.
[Collusion](https://www.investopedia.com/terms/c/collusion.asp) could involve agreements to exclude certain validators from receiving rewards and artificially inflate the stake weight of specific validators. [Rent capture, also called rent seeking](https://www.investopedia.com/terms/r/rentseeking.asp), could involve capturing a greater share of the network's inflation rewards. This could cause the overall rewards available to individual stakers to become lower. It would increase the minimum stake requirement, introduce new fees for participants, and reduce the network inflation rate.
Abusive slashing mechanisms could involve fabricating evidence of malicious activity or manipulating votes to trigger unwarranted slashing events, unfairly penalize other validators, and gain an advantage in terms of stake weight and rewards. [Soft forks](https://www.investopedia.com/terms/s/soft-fork.asp) and [hard forks](https://www.investopedia.com/terms/h/hard-fork.asp)—splitting into two separate chains—could involve disagreements among validators regarding protocol changes or network governance that affect the value of SOL and the distribution of staking rewards.
### Regulatory Aspects
Depending on your jurisdiction, [taxation](https://www.investopedia.com/terms/t/taxation.asp) and regulatory changes could impact the profitability and legality of staking practices. Staking rewards are considered [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp) in many countries, and tax burdens reduce the overall returns from staking and could potentially be raised by law over time. New [regulations](https://www.investopedia.com/terms/f/functional-regulation.asp) could introduce additional [compliance](https://www.investopedia.com/terms/c/compliance-program.asp) requirements for staking providers and participants. Regulations could impose restrictions on staking activities, increasing administrative complexity and costs and limiting staking accessibility and rewards.
###
The average [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp) on Solana staking is around 7.41%, as of March 2024.
## Factors to Consider When Choosing a Staking Method
Taking into account the quality, costs, and commitment of certain wallets and validators can help ensure the safety and profitability of your staking investment. Here is a discussion of factors to look for when choosing a third-party service that provides a staking wallet and validator node:
### Cybersecurity
A staking platform that protects your private keys and other sensitive information can prevent losses from hacking and thefts. Lean towards wallets and validators with proven track records of independent security [audits](https://www.investopedia.com/terms/a/audit.asp) and little to no vulnerabilities. Look for proactive vulnerability resolution, [cybersecurity management](https://www.investopedia.com/cybersecurity-4427739) and [insurance](https://www.investopedia.com/terms/c/cyber-and-privacy-insurance.asp), and wide selections of available security features, such as private key storage with [multi-signature](https://www.investopedia.com/multi-signature-wallets-definition-5271193) options.
### Staking Fees
Fees from both wallets and validators will directly reduce your staking rewards and a higher [fee structure](https://www.investopedia.com/terms/f/fee-structure.asp) will result in a lower net return on your staked SOL. Every transaction on the Solana blockchain incurs a network fee, and wallet providers and validator nodes charge commission, referral, deposit, or withdrawal fees to cover their operating cost.
### Customer Service
Customer service provides crucial assistance in troubleshooting technical issues, resolving errors, and keeping users informed of updates, notifications, and risks. Certain security concerns that aren't addressed or raised promptly could lead to issues becoming more severe or permanently unresolved down the line.
### Validator Uptime/Reliability
Staking wallets and validator nodes that are frequently offline or functioning incorrectly can cause you to lose your rewards and staked crypto to network penalties. The risk of experiencing slashing penalties increases if a busy schedule distracts you from attending to validator tasks or you choose a staking service that isn't reliable and online consistently.
### Distribution Time
Knowing the exact time your rewards will be distributed allows for better budgeting and financial planning. You can anticipate the influx of funds and allocate them towards specific goals, investments, and expenses. If you receive your earned staking rewards sooner, you can reinvest them into staking or other purposes more quickly for higher returns.
### Coding Ability
Going it alone or using a pool for staking involves making decisions and troubleshooting technology-related errors. Not having the appropriate technical expertise for a staking platform could put you at a severe disadvantage and potentially lead to financial losses.
You'll need the skills and knowledge to set up software and hardware, diagnose problems, identify solutions, and build and modify programming [scripts](https://www.investopedia.com/articles/trading/11/automated-trading-systems.asp) to better suit your needs or automate certain aspects of staking.
## Staking Independently
Here is a breakdown of how to set up a validator node if you are staking SOL by yourself. A validator node can be connected to both non-custodial and custodial wallets. Anyone can be a validator on the Solana network.
1. **Set up the validator.** Obtain a server with the required hardware specifications. Aim for a CPU with high core count and clock speed, at least 64GB of RAM, a solid-state drive with high read/write speeds, a reliable and high-[bandwidth](https://www.investopedia.com/terms/b/bandwidth.asp) Internet connection, and a redundant power supply to handle the demands of an uninterrupted staking operation.
2. **Install software dependencies.** Ensure you have the necessary dependencies like *libssl-dev*, *libffi-dev*, and *libdb-dev* installed to run the Solana validator software.
3. **Set up the software.** Install the Solana command-line interface and the latest version of the Solana validator software on your operating system. Download and follow the installation guides for your operating system if you need more information.
4. **Create keys.** Generate your validator identity keypair and a separate vote account keypair using *solana-keygen* and other commands.
5. **Configure the validator.** Edit configuration files, such as *validator.toml*, to specify your keys, stake amount, network settings, and other parameters.
7. **Create a vote account.** A vote account can be spun up by using *solana create-vote-account* and other commands.
8. **Fund the validator.** Transfer enough SOL to your validator identity keypair to cover your desired stake amount.
9. **Start the validator.** Run the *solana-validator* command and other arguments to start the validator process.
## Staking Via Non-Custodial Wallets
Here is a breakdown of how to stake SOL with a [non-custodial wallet](https://www.investopedia.com/best-solana-wallets-6830693). A non-custodial wallet can be connected to a third-party staking service or a personal validator node.
1. **Download and install a wallet.** Non-custodial wallets let you self-custody and hold onto your SOL tokens and wallet keys.
2. **Choose a validator.** If you don't want to run your own validator while using a non-custodial wallet, research and select a reputable third-party validator. Consider factors like stake weight, commission rate, uptime, and community reputation. You can find validator information on websites like SolanaBeach.io or StakingRewards.com.
3. **Delegate your SOL.** Connect your wallet to the Solana ecosystem through a decentralized app (dApp) like Solflare or Phantom. Find the "Stake" or "Delegation" section and follow the instructions in your wallet. Select the chosen validator and enter the amount of SOL you wish to delegate. Confirm the transaction and pay the associated network fees.
4. **Monitor your stake.** Your wallet will display your staked SOL and accumulated rewards. You can track your validator's performance and network inflation rate to estimate your potential earnings.
## Staking Via Custodial Wallets
Here is a breakdown of how to stake SOL with a custodial wallet, the type of wallet usually associated with [third-party](https://www.investopedia.com/best-crypto-exchanges-5071855) staking services that aren't staking pools.
1. **Choose a wallet.** Several reputable custodial wallets offer SOL staking services.
2. **Create an account.** You may need to provide your personal information and verify your identity.
3. **Fund your account.** Transfer SOL to your custodial wallet from an exchange or another wallet. You may need to use the wallet's address or [QR code](https://www.investopedia.com/terms/q/quick-response-qr-code.asp) to receive the SOL.
4. **Find the staking option.** You should see an option for SOL staking in your account.
5. **Choose your stake amount.** Enter the amount of SOL you want to stake. The minimum stake amount will vary depending on the platform.
6. **Select a staking period.** Some custodial wallets offer the option to choose a staking period that determines how long your SOL will be locked up. A longer staking period may offer higher rewards.
7. **Confirm your stake and monitor your rewards.** Review the details and confirm the transaction. Your SOL will be staked and you will start earning rewards. You can track your accumulated rewards and the estimated annual percentage yield (APY) through the wallet's interface.
## How Long Does It Take to Earn Solana Staking Rewards?
You can generally expect to see your first Solana staking rewards within two days of delegating your SOL to a validator, plus an additional buffer time for those relying on third-party services. Solana staking rewards are calculated and distributed once per epoch, a timeframe used for network management and consensus that lasts approximately two days long.
## How Much Can You Earn Staking Solana?
There isn't a guaranteed amount to be earned from Solana staking. If you are staking independently, you can estimate your yield by using the Solana network's formula, which multiplies the network's inflation rate, the validator's uptime, the difference between one and the validator's fee, and the quantity of one divided by the percentage of SOL staked, where the percentage of SOL staked is the total SOL staked in the Solana network divided by the total current supply of SOL.
## What Staking Behavior Does the Solana Network Penalize?
Staked SOL can be removed from circulation and taken away from validators who experience downtime, vote for conflicting block proposals, double sign the same block, maliciously slash other validators by submitting false reports, and commit other protocol violations. Solana is exploring partial slashing penalties that will still continue to incentivize validators to maintain high uptime, act honestly, and contribute to the network's security and efficiency.
## How Long Do I Need to Wait to Stake and Unstake SOL Tokens?
Regardless of the staking method, you must wait days to weeks for the staked SOL to become accessible to the validator node during a warm-up period, and you must keep your SOL on the Solana network for a minimum amount of time during a validation period. You can withdraw, or unstake, your SOL and access your tokens at any time to maintain [liquidity](https://www.investopedia.com/articles/basics/07/liquidity.asp) and flexibility, but there is a cooldown period of typically two to three days when your SOL will continue to be temporarily locked up.
## The Bottom Line
Staking SOL on the Solana blockchain offers passive income through rewards on your SOL holdings. Profitability depends on variousors, particularly wallet and validator selection, the amount of staked cryptocurrency, market and network characteristics, and compliance with staking rules.
| What Is Staking Solana?
On the Solana blockchain, staking is the process of assigning your tokens to a validator node. Staking Solana (SOL) allows you to "vote" for the validator you trust. The more votes a validator has, the more weight it has in the consensus process. As a reward, you receive a staking yield based on the amount you have staked.
You can stake your Solana tokens from a compatible cryptocurrency wallet that is connected to a validator node. Staking wallets and validator nodes can be managed independently or by a third-party service, such as a staking pool or staking-as-a-service.
Key Takeaways
Solana's staking mechanism rewards a share of newly minted tokens and transaction fees to users who delegate SOL to validators in charge of processing transactions and securing the network.The upsides of staking Solana include earning passive income and contributing to network security, but the downsides include financial penalties, market volatility, and technical issues.You need a software wallet and a powerful hardware setup to stake Solana independently, while a third-party service typically requires just an online account and minimal technical knowledge.
Understanding Solana Staking
Solana was designed as a high-performance solution to combat scalability issues plaguing other blockchains. Unlike Ethereum, which struggles with a few dozen transactions per second, Solana claims the ability to process thousands. This network throughput has catapulted Solana to becoming a favorite for decentralized application (dApp) development, particularly for decentralized finance (DeFi) services related to lending, trading, and borrowing.
Proofs
To facilitate faster transaction speeds and lower fees, Solana secures its network with Proof-of-Stake (PoS) and Proof-of-History (PoH) consensus mechanisms. This contrasts Bitcoin's Proof-of-Work (PoW) consensus mechanism, where miners use computational power to solve cryptographic puzzles.
The PoS and PoH consensus mechanisms allow validators to keep Solana running asynchronously by simply staking SOL cryptocurrency tokens that have been delegated to them by users. The PoH consensus mechanism's cryptographic function generates readily available block timestamps to allow validators to agree on the order of transactions without needing to wait for external time sources and confirmations from others, significantly speeding up transaction times.
Staking
When the staked SOL is locked up, it cannot be used or traded by the users who delegated the token. Validators control the SOL tokens for a certain period so that they can run groups of specialized computer nodes to process transactions and add them to the blockchain. The greater the amount of delegated SOL, the greater the probability a validator will be chosen to perform assigned network tasks and earn rewards in the form of additional SOL tokens.
Rewards
The majority of Solana's staking rewards consist of newly minted SOL tokens that are automatically distributed to validators and delegators based on their stake weights and network inflation rate, which will gradually decrease over time until it reaches a sustainable level. The other fraction of rewards is transaction fees paid by users when they send transactions on the Solana network. Validators collect these transaction fees and share a portion with their delegators at a rate that depends on their transaction processing volume and the percentage the delegator has staked.
Independent Staking
Staking independently offers greater control and privacy than third-party staking. When you stake on your own, you aren't subjected to customer screening; you can directly interact with the Solana blockchain, and you can hold onto your tokens yourself, assuming you choose a non-custodial wallet that places private keys squarely in your possession. However, to pull off solo staking successfully, you will need technical expertise, coding knowledge, financial resources, and dedicated hours of effort.
Carefully shopping around for and setting up the validator node's hardware and wallet are musts in order to avoid going over budgetary constraints and opening yourself up to cybersecurity risks. Experience with computer programming and electronic goods is required to install and execute commands from a command-line interface, to synchronize the software with the hardware for the validator node, and to physically integrate the hardware parts into a working system.
Staking Services
Staking your SOL is a relatively simple process, if you decline to run your own validator node and accept that you will give control of your tokens to a third-party staking service. All you need to do to stake cryptocurrency with a staking service is complete a sign-up form, provide personal information to satisfy Anti-Money Laundering (AML) and Know-Your-Customer (KYC) checks, and let it automatically handle the staking process for you.
A third-party service's staking wallet is almost always included with the service and can be accessed through conventional website and mobile app interfaces without needing to save and enter wallet keys every time you want to log in and monitor your staking performance. The staking service owns the wallet keys and seamlessly authenticates it for you.
A staking pool won't require you to run your own validator node, but it will require more effort than a staking service to set up a wallet. While staking services oversee both the validator and wallet on your behalf, a staking pool asks you to open a wallet and hook it up to one of the pool's many validator nodes by yourself, just as if you were staking independently.
Benefits and Risks of Solana Staking
Staking SOL provides a recurring, low-effort source of passive income that doesn't need to be actively managed unless you are staking independently. With the rapid growth and development of the Solana's network, the staking rewards could potentially even increase and become a lucrative long-term investment opportunity.
Staking also contributes to the security, stability, and decentralization of the Solana network. Staked SOL incentivizes validators to participate in the network while behaving honestly and upholding the network's rules. More participants means more voices can shape the future of the Solana network and defend it from attacks. Power can become distributed across the Solana community rather than concentrated in the hands of a few large entities when governance proposals are considered, leading to a more decentralized, resilient, and censorship-resistant network.
Nonetheless, staking cryptocurrency involves certain technical, financial, centralization, and regulatory risks that investors should be aware of before participating. It's important to conduct thorough research and understand these risks before making any investment decisions.
Technical Aspects
As with any technology, the Solana blockchain and its software are susceptible to bugs and vulnerabilities, and validator nodes rely on hardware components that can fail. Downtime and outages could lead to the loss of staked SOL and interruptions in your staking rewards due to security breaches and missed validation opportunities. When using a custodial wallet, staking pool, or staking service, you are trusting a third party with your SOL and exposing yourself to the risk of insolvency or mismanagement.
Financial Aspects
Staked SOL is locked up for a period of time and inaccessible for trading or other purposes, eliciting an opportunity cost if other investments you could have alternatively made perform more positively. During that time, the price of SOL can also be volatile, causing the value of your staked SOL and earned rewards to fluctuate significantly and potentially drop in value. If your chosen validator engages in malicious activity or performs poorly, you could also lose a portion of your staked SOL as a penalty. The Solana network punishes errant behavior and confiscates staked SOL in a process known as slashing.
Centralization Aspects
Solana tries to stay decentralized, but the network is still under development and relies on a relatively small number of validators, raising centralization issues. A small group of validators has an easier chance of rewriting the rules of a blockchain and manipulating the network in their favor through collusion, rent capture, abusive slashing, or network forks, potentially imperiling the value of the SOL cryptocurrency and staking rewards.
Collusion could involve agreements to exclude certain validators from receiving rewards and artificially inflate the stake weight of specific validators. Rent capture, also called rent seeking, could involve capturing a greater share of the network's inflation rewards. This could cause the overall rewards available to individual stakers to become lower. It would increase the minimum stake requirement, introduce new fees for participants, and reduce the network inflation rate.
Abusive slashing mechanisms could involve fabricating evidence of malicious activity or manipulating votes to trigger unwarranted slashing events, unfairly penalize other validators, and gain an advantage in terms of stake weight and rewards. Soft forks and hard forks—splitting into two separate chains—could involve disagreements among validators regarding protocol changes or network governance that affect the value of SOL and the distribution of staking rewards.
Regulatory Aspects
Depending on your jurisdiction, taxation and regulatory changes could impact the profitability and legality of staking practices. Staking rewards are considered taxable income in many countries, and tax burdens reduce the overall returns from staking and could potentially be raised by law over time. New regulations could introduce additional compliance requirements for staking providers and participants. Regulations could impose restrictions on staking activities, increasing administrative complexity and costs and limiting staking accessibility and rewards.
The average annual percentage yield (APY) on Solana staking is around 7.41%, as of March 2024.
Factors to Consider When Choosing a Staking Method
Taking into account the quality, costs, and commitment of certain wallets and validators can help ensure the safety and profitability of your staking investment. Here is a discussion of factors to look for when choosing a third-party service that provides a staking wallet and validator node:
Cybersecurity
A staking platform that protects your private keys and other sensitive information can prevent losses from hacking and thefts. Lean towards wallets and validators with proven track records of independent security audits and little to no vulnerabilities. Look for proactive vulnerability resolution, cybersecurity management and insurance, and wide selections of available security features, such as private key storage with multi-signature options.
Staking Fees
Fees from both wallets and validators will directly reduce your staking rewards and a higher fee structure will result in a lower net return on your staked SOL. Every transaction on the Solana blockchain incurs a network fee, and wallet providers and validator nodes charge commission, referral, deposit, or withdrawal fees to cover their operating cost.
Customer Service
Customer service provides crucial assistance in troubleshooting technical issues, resolving errors, and keeping users informed of updates, notifications, and risks. Certain security concerns that aren't addressed or raised promptly could lead to issues becoming more severe or permanently unresolved down the line.
Validator Uptime/Reliability
Staking wallets and validator nodes that are frequently offline or functioning incorrectly can cause you to lose your rewards and staked crypto to network penalties. The risk of experiencing slashing penalties increases if a busy schedule distracts you from attending to validator tasks or you choose a staking service that isn't reliable and online consistently.
Distribution Time
Knowing the exact time your rewards will be distributed allows for better budgeting and financial planning. You can anticipate the influx of funds and allocate them towards specific goals, investments, and expenses. If you receive your earned staking rewards sooner, you can reinvest them into staking or other purposes more quickly for higher returns.
Coding Ability
Going it alone or using a pool for staking involves making decisions and troubleshooting technology-related errors. Not having the appropriate technical expertise for a staking platform could put you at a severe disadvantage and potentially lead to financial losses.
You'll need the skills and knowledge to set up software and hardware, diagnose problems, identify solutions, and build and modify programming scripts to better suit your needs or automate certain aspects of staking.
Staking Independently
Here is a breakdown of how to set up a validator node if you are staking SOL by yourself. A validator node can be connected to both non-custodial and custodial wallets. Anyone can be a validator on the Solana network.
Set up the validator. Obtain a server with the required hardware specifications. Aim for a CPU with high core count and clock speed, at least 64GB of RAM, a solid-state drive with high read/write speeds, a reliable and high-bandwidth Internet connection, and a redundant power supply to handle the demands of an uninterrupted staking operation.
Install software dependencies. Ensure you have the necessary dependencies like libssl-dev, libffi-dev, and libdb-dev installed to run the Solana validator software.
Set up the software. Install the Solana command-line interface and the latest version of the Solana validator software on your operating system. Download and follow the installation guides for your operating system if you need more information.
Create keys. Generate your validator identity keypair and a separate vote account keypair using solana-keygen and other commands.
Configure the validator. Edit configuration files, such as validator.toml, to specify your keys, stake amount, network settings, and other parameters.
Create a vote account. A vote account can be spun up by using solana create-vote-account and other commands.
Fund the validator. Transfer enough SOL to your validator identity keypair to cover your desired stake amount.
Start the validator. Run the solana-validator command and other arguments to start the validator process.
Staking Via Non-Custodial Wallets
Here is a breakdown of how to stake SOL with a non-custodial wallet. A non-custodial wallet can be connected to a third-party staking service or a personal validator node.
Download and install a wallet. Non-custodial wallets let you self-custody and hold onto your SOL tokens and wallet keys.Choose a validator. If you don't want to run your own validator while using a non-custodial wallet, research and select a reputable third-party validator. Consider factors like stake weight, commission rate, uptime, and community reputation. You can find validator information on websites like SolanaBeach.io or StakingRewards.com.Delegate your SOL. Connect your wallet to the Solana ecosystem through a decentralized app (dApp) like Solflare or Phantom. Find the "Stake" or "Delegation" section and follow the instructions in your wallet. Select the chosen validator and enter the amount of SOL you wish to delegate. Confirm the transaction and pay the associated network fees.Monitor your stake. Your wallet will display your staked SOL and accumulated rewards. You can track your validator's performance and network inflation rate to estimate your potential earnings.
Staking Via Custodial Wallets
Here is a breakdown of how to stake SOL with a custodial wallet, the type of wallet usually associated with third-party staking services that aren't staking pools.
Choose a wallet. Several reputable custodial wallets offer SOL staking services.
Create an account. You may need to provide your personal information and verify your identity.
Fund your account. Transfer SOL to your custodial wallet from an exchange or another wallet. You may need to use the wallet's address or QR code to receive the SOL.
Find the staking option. You should see an option for SOL staking in your account.
Choose your stake amount. Enter the amount of SOL you want to stake. The minimum stake amount will vary depending on the platform.
Select a staking period. Some custodial wallets offer the option to choose a staking period that determines how long your SOL will be locked up. A longer staking period may offer higher rewards.
Confirm your stake and monitor your rewards. Review the details and confirm the transaction. Your SOL will be staked and you will start earning rewards. You can track your accumulated rewards and the estimated annual percentage yield (APY) through the wallet's interface.
How Long Does It Take to Earn Solana Staking Rewards?
You can generally expect to see your first Solana staking rewards within two days of delegating your SOL to a validator, plus an additional buffer time for those relying on third-party services. Solana staking rewards are calculated and distributed once per epoch, a timeframe used for network management and consensus that lasts approximately two days long.
How Much Can You Earn Staking Solana?
There isn't a guaranteed amount to be earned from Solana staking. If you are staking independently, you can estimate your yield by using the Solana network's formula, which multiplies the network's inflation rate, the validator's uptime, the difference between one and the validator's fee, and the quantity of one divided by the percentage of SOL staked, where the percentage of SOL staked is the total SOL staked in the Solana network divided by the total current supply of SOL.
What Staking Behavior Does the Solana Network Penalize?
Staked SOL can be removed from circulation and taken away from validators who experience downtime, vote for conflicting block proposals, double sign the same block, maliciously slash other validators by submitting false reports, and commit other protocol violations. Solana is exploring partial slashing penalties that will still continue to incentivize validators to maintain high uptime, act honestly, and contribute to the network's security and efficiency.
How Long Do I Need to Wait to Stake and Unstake SOL Tokens?
Regardless of the staking method, you must wait days to weeks for the staked SOL to become accessible to the validator node during a warm-up period, and you must keep your SOL on the Solana network for a minimum amount of time during a validation period. You can withdraw, or unstake, your SOL and access your tokens at any time to maintain liquidity and flexibility, but there is a cooldown period of typically two to three days when your SOL will continue to be temporarily locked up.
The Bottom Line
Staking SOL on the Solana blockchain offers passive income through rewards on your SOL holdings. Profitability depends on variousors, particularly wallet and validator selection, the amount of staked cryptocurrency, market and network characteristics, and compliance with staking rules.
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https://www.investopedia.com/sofi-savings-account-interest-rates-7554966 | SoFi Savings Account Interest Rates: May 2024 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-sofi-savings-account-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> SoFi Savings Account Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> SoFi savings account interest rates are competitive—potentially beating the national average several times over if you set up an eligible direct deposit with the financial institution.<span class="ql-inline-citation" data-cite="1"></span> The nationally chartered bank also offers a bonus of $50 to $300 for eligible new account holders.<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_3-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Additionally, the SoFi Checking and Savings account features no standard bank account fees, including monthly maintenance fees, overdraft fees, or ATM fees.<span class="ql-inline-citation" data-cite="2"></span> Unlike some other banks, you don’t have to jump through hoops to qualify for fee waivers from SoFi.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-subheading__text"> SoFi Savings Account Account Interest Rates Overview </span> </h3>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_7-0"> <div class="mntl-sc-block-table__table-wrapper">
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<thead>
<tr>
<th><b>Account Name</b></th>
<th><b>Requirement for Highest APY</b></th>
<th><b>APY Range</b></th>
<th><b>Monthly Fee</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><b>SoFi Checking and Savings</b></td>
<td>Direct deposit or $5k or more in Qualifying Deposits</td>
<td>0.50%-4.60%</td>
<td>None<span data-cite="5"></span></td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_9-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_10-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>See the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings account rates</a> today before choosing the savings account that is best for you.</p></div></div></div>
<span class="heading-toc" id="toc-sofi-savings-accounts-key-features"></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"> SoFi Savings Accounts: Key Features </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_12-0"> <div class="mntl-sc-block-table__table-wrapper">
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<th class="mntl-sc-block-table__title" colspan="2">SoFi Savings Account Key Features</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<th><b>APY Range</b></th>
<td>0.50%–4.60%</td>
</tr>
<tr>
<th><b>Requirement for Highest APY</b></th>
<td>Direct deposit or $5k or more in Qualifying Deposits</td>
</tr>
<tr>
<th><b>Minimum Deposit</b></th>
<td>$0</td>
</tr>
<tr>
<th><b>Withdrawal Limit</b></th>
<td>None<span data-cite="4"></span></td>
</tr>
<tr>
<th><b>Monthly Service Fee</b></th>
<td>None<span data-cite="5"></span></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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> SoFi’s savings account must be opened along with a SoFi checking account. You can’t have a SoFi savings account on its own or a SoFi checking account on its own. The checking account earns a modest APY as well.
</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 qualify for the highest APY on your SoFi savings account balance, you’ll need to receive direct deposits from an employer, payroll provider, or benefits provider via ACH deposit. Also you can earn the highest APY with monthly qualifying deposits. Unlike many other banks, SoFi has no withdrawal limits on its savings account.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Before you open a savings account, it’s important to consider the features of the account—from the APY a bank offers and beyond. Here are some of the highlights that might help you decide whether a SoFi Checking and Savings account makes sense for you.
</p>
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<li><strong>SoFi savings account rates:</strong> SoFi savings rates beat the national average (which was 0.46% as of Nov. 20, 2023) and are competitive among other financial institutions as well (though not necessarily <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">the best available</a>).<span class="ql-inline-citation" data-cite="1"></span></li>
<li><strong>Fees:</strong> One of the biggest perks of a SoFi Checking and Savings account is that you don’t have to worry about paying traditional bank fees. There are no monthly fees (and no account minimums to meet to qualify for a waiver). The account features no ATM fees (within the Allpoint Network), no overdraft fees, and no bill-pay fees, among others. But SoFi does point out that it has the right to change its fee policy in the future.<span class="ql-inline-citation" data-cite="2"></span> </li>
<li><strong>$50 to $300 bank bonus:</strong> You could earn up to $300 when you set up a direct deposit for the first time on your SoFi Checking and Savings account. This promotion is available to new and existing customers (if they haven’t set up a direct deposit in the past). Eligible direct deposits of $1,000 to $4,999.99 within a 25-calendar-day promotional period may qualify for a cash bonus of up to $50. But you’ll need to receive $5,000 in direct deposits within the promotional period to be eligible for the $300 max bonus.<span class="ql-inline-citation" data-cite="5"></span> </li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Savings Vaults: </strong>One of the bank’s stand-out features is the ability to set and track smaller financial goals. With SoFi Vaults, you can set up <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/030217/best-strategy-shortterm-savings-goals.asp">smaller savings goals</a> within your savings account for an emergency fund, vacation, down payment, holiday, home improvement project, etc.</li>
<li><strong>Roundup debits:</strong> You can opt to automatically round up debit card purchases to the nearest dollar. The extra change goes into the SoFi savings Vault of your choice. </li>
</ul>
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<span class="heading-toc" id="toc-about-sofi-other-savings-options"></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"> About SoFi: Other Savings Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The history of SoFi began in 2011 when four Stanford business school students came together to launch an alumni-funded lending program.<span class="ql-inline-citation" data-cite="6"></span> As SoFi grew, it expanded the financial services it offered consumers. On top of a wide variety of loan products, SoFi customers now have access to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sofi-invest-review-4767412">automated investing services</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sofi-active-investing-review-5199960">active investing</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sofi-credit-card-review-5086169">credit cards</a>, insurance products, and limited banking services.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> However, aside from the hybrid SoFi Checking and Savings account, the financial institution doesn’t offer additional savings options. In fact, SoFi doesn’t offer any other types of deposit accounts.
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<span class="heading-toc" id="toc-compare-savings-account-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> Compare Savings Account Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Before opening a savings account, it’s wise to compare the rates a financial institution offers with both the national average rates and the APYs from multiple competing banks and credit unions.
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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 interest rates for savings accounts from SoFi rank well above the national average. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rates for savings and checking accounts are as follows as of Nov. 20, 2023:
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <li>Savings: 0.46%</li><li>Interest checking: 0.07%<span class="ql-inline-citation" data-cite="1"></span></li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> SoFi’s savings APY outperforms the national average interest rates for other types of deposit accounts during this same period, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-rate-certificate-of-deposit.asp">fixed-rate CDs</a>.<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_36-0"> Nonetheless, it’s important to point out that you can typically find higher interest rates with a little research, including savings accounts, CDs, and money market accounts.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_40-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_41-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_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>Today’s CD rates are higher than we’ve seen in 16 years, pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame inflation. With another increase announced July 27, 2023, the Fed has hiked 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 5.25%-5.50%.<span class="ql-inline-citation" data-cite="11"></span> Since CD rates closely follow the fed funds rate, rates may continue to trend slightly higher. It’s currently unknown if the Fed will implement any further increases this year, but if it does, that could nudge CD rates higher still.</p></div></div></div>
<span class="heading-toc" id="toc-pros-and-cons-of-sofi-savings-accounts"></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 and Cons of SoFi Savings Accounts </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>Excellent rate</p></li>
<li><p>No ongoing fees</p></li>
<li><p>Full-service financial firm</p></li>
<li><p>Automatic savings program</p></li>
<li><p>Access to member benefits program</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>$4.95 fee for depositing cash</p></li>
<li><p>Doesn’t offer in-person branches</p></li>
<li><p>Must sign up for SoFi checking account too</p></li>
<li><p>Rate and benefits depend on deposit activity</p></li>
</ul>
</div>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Pros Explained </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> <li><strong>Excellent rate:</strong> SoFi savings account interest rates aren’t usually the absolute highest on the market today, but they’re not very far off the mark either—as long as you meet the deposit requirements for the higher rate, that is.</li><li><strong>No ongoing fees:</strong> Aside from a cash deposit fee, there aren’t really any other fees you need to worry about with this account—no monthly fees, overdraft fees, etc.</li><li><strong>Full-service financial firm:</strong> SoFi started as a lender, but it offers most financial services you’ll need today, such as banking, investing, insurance, and more.<span class="ql-inline-citation" data-cite="6"></span></li><li><strong>Automatic savings program:</strong> SoFi offers a couple of unique ways to save more money, such as by rounding up your debit card purchases and saving the difference or by automatically tucking a percentage of each paycheck directly into your savings account.<span class="ql-inline-citation" data-cite="5"></span> </li><li><strong>Access to member benefits program:</strong> SoFi offers generous perks such as access to free financial advisors and career coaches, estate planning discounts, and more.<span class="ql-inline-citation" data-cite="14"></span></li>
</ul>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-subheading__text"> Cons Explained </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li><strong>$4.95 fee for depositing cash:</strong> You can deposit cash at many nationwide chain stores, but you’ll have to pay a fee to do so—something you don’t have to worry about with banks that offer convenient branch locations.<span class="ql-inline-citation" data-cite="15"></span></li><li><strong>Doesn’t offer in-person branches:</strong> SoFi Bank offers such high rates by offering online-only services, so it’s not a good option if you prefer to manage your finances in person. </li><li><strong>Must sign up for SoFi checking account too:</strong> You can’t sign up for the SoFi Savings account on its own; it’s a two-part deal with SoFi’s Checking account.<span class="ql-inline-citation" data-cite="16"></span></li><li><strong>Rate and benefits depend on deposit activity:</strong> If you don’t have any direct deposits being funneled into your account each month, you’ll need to deposit at least $5,000 per month into your SoFi Checking account. If not, you won’t earn the checking account benefits, and your SoFi savings account interest rates will be greatly reduced.<span class="ql-inline-citation" data-cite="5"></span></li>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Make sure you can meet SoFi’s deposit requirements to earn the high APY, especially if you’re a freelance worker or contractor who isn’t paid via direct deposits. Otherwise, this account may not be worth the hassle. </p></div></div></div>
<span class="heading-toc" id="toc-alternatives-to-sofi-savings-accounts"></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"> Alternatives to SoFi Savings Accounts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> If SoFi isn’t right for you, consider these other savings options instead:
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<li><strong>Credit unions:</strong> These nonprofit banking institutions require you to become a member before you can open an account, but they may offer higher rates than local banks and can be a better choice if you deal in cash a lot.<span class="ql-inline-citation" data-cite="17"></span> See the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best savings account rates</a> available today, many of which are provided by credit unions.</li>
<li><strong>Online banks:</strong> SoFi now operates as a bank, but that’s relatively new and it still operates more like a fintech company in some ways.<span class="ql-inline-citation" data-cite="18"></span> Other online banks may offer easier-to-meet deposit requirements to earn higher interest rates. Take a look at the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/banks-pay-highest-interest-rates-savings-accounts/">best banks for savings accounts</a> for more information.</li>
<li><strong>Investment brokerages:</strong> You may earn more money by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">investing with a brokerage</a>, but you’ll also have a higher potential for losses as well. </li>
<li><strong>U.S. Treasuries:</strong> You may be able to earn more than savings accounts offer with a treasury bill or bond, but without as much risk as some other investments.</li>
<li><strong>Certificates of deposit (CDs):</strong> If you have a stash of cash you won’t be touching for a while, these timed deposit accounts offered by most banks and credit unions offer a very high potential for return without investing your money. The <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates today</a> are similar to the top savings account rates.</li>
</ul>
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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-does-sofi-have-a-high-interest-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does SoFi Have a High-Interest Savings Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>SoFi has a high-interest savings account with a fairly good rate, which comes with a checking account. But it’s possible to find still higher APYs—browse the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings accounts</a> to find the best rates available today.</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-what-is-the-minimum-account-balance-for-a-sofi-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Minimum Account Balance for a SoFi Savings Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There is no minimum account balance requirement to open a SoFi savings account and checking account.<span class="ql-inline-citation" data-cite="9"></span> Likewise, you don’t need to maintain a minimum balance to qualify for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/bank_fees.asp">bank fee</a> waiver or to qualify for a bank account bonus from SoFi. There are no account fees, and you can earn a bonus by setting up direct deposits.</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_63-0"><span class="heading-toc" id="toc-how-often-does-sofi-pay-interest-on-savings-accounts"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Often Does SoFi Pay Interest on Savings Accounts?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You will <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp">accrue interest</a> on your SoFi Checking and Savings account balance daily. The bank will compound the interest you earn on a monthly basis. SoFi calculates interest on the last business day of each month and posts it to your account by the fifth business day of the following month.<span class="ql-inline-citation" data-cite="7"></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_65-0"><span class="heading-toc" id="toc-can-you-open-a-sofi-savings-account-without-a-sofi-checking-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Open a SoFi Savings Account Without a SoFi Checking Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>SoFi offers a hybrid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/checking-vs-savings-accounts-4783514">checking and savings account</a> option to its customers. You must sign up for both accounts together if you want to open a savings account with the financial institution.<span class="ql-inline-citation" data-cite="8"></span></p></div>
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<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-how-does-sofis-savings-account-work"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does SoFi’s Savings Account Work?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You must open a SoFi savings account with a checking account as a two-part package; they aren’t available separately. You can qualify for higher SoFi savings account interest rates and more benefits (including higher checking account rates) if you receive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directdeposit.asp">direct deposit payments</a> to your checking account or you receive at least $5,000 in deposits each month via other routes.</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_69-0"><span class="heading-toc" id="toc-how-do-you-open-a-sofi-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Open a SoFi Savings Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can open a SoFi savings and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-checking-account-online-4797805">checking account online</a> if you’re at least 18 years old and a U.S. citizen, a permanent resident, or a non-resident with a Social Security number.</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_71-0"><span class="heading-toc" id="toc-does-the-sofi-savings-account-have-fees"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the SoFi Savings Account Have Fees?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Generally, no—SoFi does not charge any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-fees.asp">common bank fees</a> for its checking/savings account package. You may pay a $4.95 fee, however, if you deposit cash into your SoFi account with one of its partner merchant retailers available around the country.</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-is-keeping-money-with-sofi-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Keeping Money With SoFi Safe?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, SoFi is a safe place to keep your savings. SoFi checking and savings accounts are FDIC-insured up to $250,000, as is standard with other banks. SoFi offers good <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/are-online-banks-safe-7642966">online banking security measures</a> as well, such as two-factor authentication.<span class="ql-inline-citation" data-cite="16"></span></p></div>
</div>
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<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-important" 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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Make sure to sign up for two-factor authentication as soon as you create your account. Don’t wait to do it later, when you might forget until it’s too late.</p></div></div></div>
<span class="heading-toc" id="toc-your-guide-to-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-heading__text"> Your Guide to Savings Accounts </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">What Is a Savings Account and How Does It Work?</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">What Is a High-Yield Savings Account?</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631">How to Open a High-Yield Savings Account</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-close-a-savings-account-7500880">How to Close a Savings Account</a></li>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp">Besides a Savings Account, Where Is the Safest Place to Keep My Money?</a></li>
<li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-many-savings-accounts-should-i-have-7775519">How Many Savings Accounts Should I Have?</a></li>
<li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/043015/what-economic-factors-affect-savings-account-rates.asp">How Savings Account Interest Rates Are Determined</a></li>
<li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp">How Interest Works on Savings Accounts</a></li>
<li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/052515/how-savings-account-taxed.asp">How Is a Savings Account Taxed?</a></li>
<li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp">Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?</a></li>
<li><a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cds-vs-savings-accounts-5270287">Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?</a></li>
<li><a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp">4 Savings Accounts for Investors</a></li>
<li><a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">Best High-Yield Savings Accounts</a></li>
<li><a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-free-savings-accounts-5191103">Best Free Savings Accounts</a></li>
<li><a data-component="link" data-ordinal="15" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-accounts-for-kids-5179494">Best Savings Accounts for Kids and Teens</a></li>
</ul></div> | ## SoFi Savings Account Rates
SoFi savings account interest rates are competitive—potentially beating the national average several times over if you set up an eligible direct deposit with the financial institution. The nationally chartered bank also offers a bonus of $50 to $300 for eligible new account holders.
Additionally, the SoFi Checking and Savings account features no standard bank account fees, including monthly maintenance fees, overdraft fees, or ATM fees. Unlike some other banks, you don’t have to jump through hoops to qualify for fee waivers from SoFi.
### SoFi Savings Account Account Interest Rates Overview
| **Account Name** | **Requirement for Highest APY** | **APY Range** | **Monthly Fee** |
| --- | --- | --- | --- |
| **SoFi Checking and Savings** | Direct deposit or $5k or more in Qualifying Deposits | 0.50%-4.60% | None |
###
See the [best high-yield savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) today before choosing the savings account that is best for you.
## SoFi Savings Accounts: Key Features
| SoFi Savings Account Key Features | |
| --- | --- |
| **APY Range** | 0.50%–4.60% |
| **Requirement for Highest APY** | Direct deposit or $5k or more in Qualifying Deposits |
| **Minimum Deposit** | $0 |
| **Withdrawal Limit** | None |
| **Monthly Service Fee** | None |
SoFi’s savings account must be opened along with a SoFi checking account. You can’t have a SoFi savings account on its own or a SoFi checking account on its own. The checking account earns a modest APY as well.
To qualify for the highest APY on your SoFi savings account balance, you’ll need to receive direct deposits from an employer, payroll provider, or benefits provider via ACH deposit. Also you can earn the highest APY with monthly qualifying deposits. Unlike many other banks, SoFi has no withdrawal limits on its savings account.
Before you open a savings account, it’s important to consider the features of the account—from the APY a bank offers and beyond. Here are some of the highlights that might help you decide whether a SoFi Checking and Savings account makes sense for you.
* **SoFi savings account rates:** SoFi savings rates beat the national average (which was 0.46% as of Nov. 20, 2023) and are competitive among other financial institutions as well (though not necessarily [the best available](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)).
* **Fees:** One of the biggest perks of a SoFi Checking and Savings account is that you don’t have to worry about paying traditional bank fees. There are no monthly fees (and no account minimums to meet to qualify for a waiver). The account features no ATM fees (within the Allpoint Network), no overdraft fees, and no bill-pay fees, among others. But SoFi does point out that it has the right to change its fee policy in the future.
* **$50 to $300 bank bonus:** You could earn up to $300 when you set up a direct deposit for the first time on your SoFi Checking and Savings account. This promotion is available to new and existing customers (if they haven’t set up a direct deposit in the past). Eligible direct deposits of $1,000 to $4,999.99 within a 25-calendar-day promotional period may qualify for a cash bonus of up to $50. But you’ll need to receive $5,000 in direct deposits within the promotional period to be eligible for the $300 max bonus.
* **Savings Vaults:** One of the bank’s stand-out features is the ability to set and track smaller financial goals. With SoFi Vaults, you can set up [smaller savings goals](https://www.investopedia.com/articles/investing/030217/best-strategy-shortterm-savings-goals.asp) within your savings account for an emergency fund, vacation, down payment, holiday, home improvement project, etc.
* **Roundup debits:** You can opt to automatically round up debit card purchases to the nearest dollar. The extra change goes into the SoFi savings Vault of your choice.
## About SoFi: Other Savings Options
The history of SoFi began in 2011 when four Stanford business school students came together to launch an alumni-funded lending program. As SoFi grew, it expanded the financial services it offered consumers. On top of a wide variety of loan products, SoFi customers now have access to [automated investing services](https://www.investopedia.com/sofi-invest-review-4767412), [active investing](https://www.investopedia.com/sofi-active-investing-review-5199960), [credit cards](https://www.investopedia.com/sofi-credit-card-review-5086169), insurance products, and limited banking services.
However, aside from the hybrid SoFi Checking and Savings account, the financial institution doesn’t offer additional savings options. In fact, SoFi doesn’t offer any other types of deposit accounts.
## Compare Savings Account Rates
Before opening a savings account, it’s wise to compare the rates a financial institution offers with both the national average rates and the APYs from multiple competing banks and credit unions.
The interest rates for savings accounts from SoFi rank well above the national average. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rates for savings and checking accounts are as follows as of Nov. 20, 2023:
* Savings: 0.46%
* Interest checking: 0.07%
SoFi’s savings APY outperforms the national average interest rates for other types of deposit accounts during this same period, including [fixed-rate CDs](https://www.investopedia.com/terms/f/fixed-rate-certificate-of-deposit.asp).
Nonetheless, it’s important to point out that you can typically find higher interest rates with a little research, including savings accounts, CDs, and money market accounts.
### In the News
Today’s CD rates are higher than we’ve seen in 16 years, pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame inflation. With another increase announced July 27, 2023, the Fed has hiked the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to 5.25%-5.50%. Since CD rates closely follow the fed funds rate, rates may continue to trend slightly higher. It’s currently unknown if the Fed will implement any further increases this year, but if it does, that could nudge CD rates higher still.
## Pros and Cons of SoFi Savings Accounts
Pros
* Excellent rate
* No ongoing fees
* Full-service financial firm
* Automatic savings program
* Access to member benefits program
Cons
* $4.95 fee for depositing cash
* Doesn’t offer in-person branches
* Must sign up for SoFi checking account too
* Rate and benefits depend on deposit activity
### Pros Explained
* **Excellent rate:** SoFi savings account interest rates aren’t usually the absolute highest on the market today, but they’re not very far off the mark either—as long as you meet the deposit requirements for the higher rate, that is.
* **No ongoing fees:** Aside from a cash deposit fee, there aren’t really any other fees you need to worry about with this account—no monthly fees, overdraft fees, etc.
* **Full-service financial firm:** SoFi started as a lender, but it offers most financial services you’ll need today, such as banking, investing, insurance, and more.
* **Automatic savings program:** SoFi offers a couple of unique ways to save more money, such as by rounding up your debit card purchases and saving the difference or by automatically tucking a percentage of each paycheck directly into your savings account.
* **Access to member benefits program:** SoFi offers generous perks such as access to free financial advisors and career coaches, estate planning discounts, and more.
### Cons Explained
* **$4.95 fee for depositing cash:** You can deposit cash at many nationwide chain stores, but you’ll have to pay a fee to do so—something you don’t have to worry about with banks that offer convenient branch locations.
* **Doesn’t offer in-person branches:** SoFi Bank offers such high rates by offering online-only services, so it’s not a good option if you prefer to manage your finances in person.
* **Must sign up for SoFi checking account too:** You can’t sign up for the SoFi Savings account on its own; it’s a two-part deal with SoFi’s Checking account.
* **Rate and benefits depend on deposit activity:** If you don’t have any direct deposits being funneled into your account each month, you’ll need to deposit at least $5,000 per month into your SoFi Checking account. If not, you won’t earn the checking account benefits, and your SoFi savings account interest rates will be greatly reduced.
###
Make sure you can meet SoFi’s deposit requirements to earn the high APY, especially if you’re a freelance worker or contractor who isn’t paid via direct deposits. Otherwise, this account may not be worth the hassle.
## Alternatives to SoFi Savings Accounts
If SoFi isn’t right for you, consider these other savings options instead:
* **Credit unions:** These nonprofit banking institutions require you to become a member before you can open an account, but they may offer higher rates than local banks and can be a better choice if you deal in cash a lot. See the [best savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) available today, many of which are provided by credit unions.
* **Online banks:** SoFi now operates as a bank, but that’s relatively new and it still operates more like a fintech company in some ways. Other online banks may offer easier-to-meet deposit requirements to earn higher interest rates. Take a look at the [best banks for savings accounts](https://www.investopedia.com/personal-finance/banks-pay-highest-interest-rates-savings-accounts/) for more information.
* **Investment brokerages:** You may earn more money by [investing with a brokerage](https://www.investopedia.com/best-online-brokers-4587872), but you’ll also have a higher potential for losses as well.
* **U.S. Treasuries:** You may be able to earn more than savings accounts offer with a treasury bill or bond, but without as much risk as some other investments.
* **Certificates of deposit (CDs):** If you have a stash of cash you won’t be touching for a while, these timed deposit accounts offered by most banks and credit unions offer a very high potential for return without investing your money. The [best CD rates today](https://www.investopedia.com/best-cd-rates-4770214) are similar to the top savings account rates.
## Does SoFi Have a High-Interest Savings Account?
SoFi has a high-interest savings account with a fairly good rate, which comes with a checking account. But it’s possible to find still higher APYs—browse the [best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) to find the best rates available today.
## What Is the Minimum Account Balance for a SoFi Savings Account?
There is no minimum account balance requirement to open a SoFi savings account and checking account. Likewise, you don’t need to maintain a minimum balance to qualify for a [bank fee](https://www.investopedia.com/articles/pf/07/bank_fees.asp) waiver or to qualify for a bank account bonus from SoFi. There are no account fees, and you can earn a bonus by setting up direct deposits.
## How Often Does SoFi Pay Interest on Savings Accounts?
You will [accrue interest](https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp) on your SoFi Checking and Savings account balance daily. The bank will compound the interest you earn on a monthly basis. SoFi calculates interest on the last business day of each month and posts it to your account by the fifth business day of the following month.
## Can You Open a SoFi Savings Account Without a SoFi Checking Account?
SoFi offers a hybrid [checking and savings account](https://www.investopedia.com/checking-vs-savings-accounts-4783514) option to its customers. You must sign up for both accounts together if you want to open a savings account with the financial institution.
## How Does SoFi’s Savings Account Work?
You must open a SoFi savings account with a checking account as a two-part package; they aren’t available separately. You can qualify for higher SoFi savings account interest rates and more benefits (including higher checking account rates) if you receive [direct deposit payments](https://www.investopedia.com/terms/d/directdeposit.asp) to your checking account or you receive at least $5,000 in deposits each month via other routes.
## How Do You Open a SoFi Savings Account?
You can open a SoFi savings and [checking account online](https://www.investopedia.com/how-to-open-a-checking-account-online-4797805) if you’re at least 18 years old and a U.S. citizen, a permanent resident, or a non-resident with a Social Security number.
## Does the SoFi Savings Account Have Fees?
Generally, no—SoFi does not charge any [common bank fees](https://www.investopedia.com/terms/b/bank-fees.asp) for its checking/savings account package. You may pay a $4.95 fee, however, if you deposit cash into your SoFi account with one of its partner merchant retailers available around the country.
## Is Keeping Money With SoFi Safe?
Yes, SoFi is a safe place to keep your savings. SoFi checking and savings accounts are FDIC-insured up to $250,000, as is standard with other banks. SoFi offers good [online banking security measures](https://www.investopedia.com/are-online-banks-safe-7642966) as well, such as two-factor authentication.
###
Make sure to sign up for two-factor authentication as soon as you create your account. Don’t wait to do it later, when you might forget until it’s too late.
## Your Guide to Savings Accounts
* [What Is a Savings Account and How Does It Work?](https://www.investopedia.com/terms/s/savingsaccount.asp)
* [What Is a High-Yield Savings Account?](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp)
* [How to Open a High-Yield Savings Account](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631)
* [How to Close a Savings Account](https://www.investopedia.com/how-to-close-a-savings-account-7500880)
* [Besides a Savings Account, Where Is the Safest Place to Keep My Money?](https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp)
* [How Many Savings Accounts Should I Have?](https://www.investopedia.com/how-many-savings-accounts-should-i-have-7775519)
* [How Savings Account Interest Rates Are Determined](https://www.investopedia.com/ask/answers/043015/what-economic-factors-affect-savings-account-rates.asp)
* [How Interest Works on Savings Accounts](https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp)
* [How Is a Savings Account Taxed?](https://www.investopedia.com/ask/answers/052515/how-savings-account-taxed.asp)
* [Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?](https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp)
* [Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?](https://www.investopedia.com/cds-vs-savings-accounts-5270287)
* [4 Savings Accounts for Investors](https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp)
* [Best High-Yield Savings Accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)
* [Best Free Savings Accounts](https://www.investopedia.com/best-free-savings-accounts-5191103)
* [Best Savings Accounts for Kids and Teens](https://www.investopedia.com/best-savings-accounts-for-kids-5179494)
| SoFi Savings Account Rates
SoFi savings account interest rates are competitive—potentially beating the national average several times over if you set up an eligible direct deposit with the financial institution. The nationally chartered bank also offers a bonus of $50 to $300 for eligible new account holders.
Additionally, the SoFi Checking and Savings account features no standard bank account fees, including monthly maintenance fees, overdraft fees, or ATM fees. Unlike some other banks, you don’t have to jump through hoops to qualify for fee waivers from SoFi.
SoFi Savings Account Account Interest Rates Overview
Account Name
Requirement for Highest APY
APY Range
Monthly Fee
SoFi Checking and Savings
Direct deposit or $5k or more in Qualifying Deposits
0.50%-4.60%
None
See the best high-yield savings account rates today before choosing the savings account that is best for you.
SoFi Savings Accounts: Key Features
SoFi Savings Account Key Features
APY Range
0.50%–4.60%
Requirement for Highest APY
Direct deposit or $5k or more in Qualifying Deposits
Minimum Deposit
$0
Withdrawal Limit
None
Monthly Service Fee
None
SoFi’s savings account must be opened along with a SoFi checking account. You can’t have a SoFi savings account on its own or a SoFi checking account on its own. The checking account earns a modest APY as well.
To qualify for the highest APY on your SoFi savings account balance, you’ll need to receive direct deposits from an employer, payroll provider, or benefits provider via ACH deposit. Also you can earn the highest APY with monthly qualifying deposits. Unlike many other banks, SoFi has no withdrawal limits on its savings account.
Before you open a savings account, it’s important to consider the features of the account—from the APY a bank offers and beyond. Here are some of the highlights that might help you decide whether a SoFi Checking and Savings account makes sense for you.
SoFi savings account rates: SoFi savings rates beat the national average (which was 0.46% as of Nov. 20, 2023) and are competitive among other financial institutions as well (though not necessarily the best available).
Fees: One of the biggest perks of a SoFi Checking and Savings account is that you don’t have to worry about paying traditional bank fees. There are no monthly fees (and no account minimums to meet to qualify for a waiver). The account features no ATM fees (within the Allpoint Network), no overdraft fees, and no bill-pay fees, among others. But SoFi does point out that it has the right to change its fee policy in the future.
$50 to $300 bank bonus: You could earn up to $300 when you set up a direct deposit for the first time on your SoFi Checking and Savings account. This promotion is available to new and existing customers (if they haven’t set up a direct deposit in the past). Eligible direct deposits of $1,000 to $4,999.99 within a 25-calendar-day promotional period may qualify for a cash bonus of up to $50. But you’ll need to receive $5,000 in direct deposits within the promotional period to be eligible for the $300 max bonus.
Savings Vaults: One of the bank’s stand-out features is the ability to set and track smaller financial goals. With SoFi Vaults, you can set up smaller savings goals within your savings account for an emergency fund, vacation, down payment, holiday, home improvement project, etc.
Roundup debits: You can opt to automatically round up debit card purchases to the nearest dollar. The extra change goes into the SoFi savings Vault of your choice.
About SoFi: Other Savings Options
The history of SoFi began in 2011 when four Stanford business school students came together to launch an alumni-funded lending program. As SoFi grew, it expanded the financial services it offered consumers. On top of a wide variety of loan products, SoFi customers now have access to automated investing services, active investing, credit cards, insurance products, and limited banking services.
However, aside from the hybrid SoFi Checking and Savings account, the financial institution doesn’t offer additional savings options. In fact, SoFi doesn’t offer any other types of deposit accounts.
Compare Savings Account Rates
Before opening a savings account, it’s wise to compare the rates a financial institution offers with both the national average rates and the APYs from multiple competing banks and credit unions.
The interest rates for savings accounts from SoFi rank well above the national average. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rates for savings and checking accounts are as follows as of Nov. 20, 2023:
Savings: 0.46%Interest checking: 0.07%
SoFi’s savings APY outperforms the national average interest rates for other types of deposit accounts during this same period, including fixed-rate CDs.
Nonetheless, it’s important to point out that you can typically find higher interest rates with a little research, including savings accounts, CDs, and money market accounts.
In the News
Today’s CD rates are higher than we’ve seen in 16 years, pushed up by the Federal Reserve’s rate-hike campaign that began in March 2022 to tame inflation. With another increase announced July 27, 2023, the Fed has hiked the federal funds rate to 5.25%-5.50%. Since CD rates closely follow the fed funds rate, rates may continue to trend slightly higher. It’s currently unknown if the Fed will implement any further increases this year, but if it does, that could nudge CD rates higher still.
Pros and Cons of SoFi Savings Accounts
Pros
Excellent rate
No ongoing fees
Full-service financial firm
Automatic savings program
Access to member benefits program
Cons
$4.95 fee for depositing cash
Doesn’t offer in-person branches
Must sign up for SoFi checking account too
Rate and benefits depend on deposit activity
Pros Explained
Excellent rate: SoFi savings account interest rates aren’t usually the absolute highest on the market today, but they’re not very far off the mark either—as long as you meet the deposit requirements for the higher rate, that is.No ongoing fees: Aside from a cash deposit fee, there aren’t really any other fees you need to worry about with this account—no monthly fees, overdraft fees, etc.Full-service financial firm: SoFi started as a lender, but it offers most financial services you’ll need today, such as banking, investing, insurance, and more.Automatic savings program: SoFi offers a couple of unique ways to save more money, such as by rounding up your debit card purchases and saving the difference or by automatically tucking a percentage of each paycheck directly into your savings account. Access to member benefits program: SoFi offers generous perks such as access to free financial advisors and career coaches, estate planning discounts, and more.
Cons Explained
$4.95 fee for depositing cash: You can deposit cash at many nationwide chain stores, but you’ll have to pay a fee to do so—something you don’t have to worry about with banks that offer convenient branch locations.Doesn’t offer in-person branches: SoFi Bank offers such high rates by offering online-only services, so it’s not a good option if you prefer to manage your finances in person. Must sign up for SoFi checking account too: You can’t sign up for the SoFi Savings account on its own; it’s a two-part deal with SoFi’s Checking account.Rate and benefits depend on deposit activity: If you don’t have any direct deposits being funneled into your account each month, you’ll need to deposit at least $5,000 per month into your SoFi Checking account. If not, you won’t earn the checking account benefits, and your SoFi savings account interest rates will be greatly reduced.
Make sure you can meet SoFi’s deposit requirements to earn the high APY, especially if you’re a freelance worker or contractor who isn’t paid via direct deposits. Otherwise, this account may not be worth the hassle.
Alternatives to SoFi Savings Accounts
If SoFi isn’t right for you, consider these other savings options instead:
Credit unions: These nonprofit banking institutions require you to become a member before you can open an account, but they may offer higher rates than local banks and can be a better choice if you deal in cash a lot. See the best savings account rates available today, many of which are provided by credit unions.
Online banks: SoFi now operates as a bank, but that’s relatively new and it still operates more like a fintech company in some ways. Other online banks may offer easier-to-meet deposit requirements to earn higher interest rates. Take a look at the best banks for savings accounts for more information.
Investment brokerages: You may earn more money by investing with a brokerage, but you’ll also have a higher potential for losses as well.
U.S. Treasuries: You may be able to earn more than savings accounts offer with a treasury bill or bond, but without as much risk as some other investments.
Certificates of deposit (CDs): If you have a stash of cash you won’t be touching for a while, these timed deposit accounts offered by most banks and credit unions offer a very high potential for return without investing your money. The best CD rates today are similar to the top savings account rates.
Does SoFi Have a High-Interest Savings Account?
SoFi has a high-interest savings account with a fairly good rate, which comes with a checking account. But it’s possible to find still higher APYs—browse the best high-yield savings accounts to find the best rates available today.
What Is the Minimum Account Balance for a SoFi Savings Account?
There is no minimum account balance requirement to open a SoFi savings account and checking account. Likewise, you don’t need to maintain a minimum balance to qualify for a bank fee waiver or to qualify for a bank account bonus from SoFi. There are no account fees, and you can earn a bonus by setting up direct deposits.
How Often Does SoFi Pay Interest on Savings Accounts?
You will accrue interest on your SoFi Checking and Savings account balance daily. The bank will compound the interest you earn on a monthly basis. SoFi calculates interest on the last business day of each month and posts it to your account by the fifth business day of the following month.
Can You Open a SoFi Savings Account Without a SoFi Checking Account?
SoFi offers a hybrid checking and savings account option to its customers. You must sign up for both accounts together if you want to open a savings account with the financial institution.
How Does SoFi’s Savings Account Work?
You must open a SoFi savings account with a checking account as a two-part package; they aren’t available separately. You can qualify for higher SoFi savings account interest rates and more benefits (including higher checking account rates) if you receive direct deposit payments to your checking account or you receive at least $5,000 in deposits each month via other routes.
How Do You Open a SoFi Savings Account?
You can open a SoFi savings and checking account online if you’re at least 18 years old and a U.S. citizen, a permanent resident, or a non-resident with a Social Security number.
Does the SoFi Savings Account Have Fees?
Generally, no—SoFi does not charge any common bank fees for its checking/savings account package. You may pay a $4.95 fee, however, if you deposit cash into your SoFi account with one of its partner merchant retailers available around the country.
Is Keeping Money With SoFi Safe?
Yes, SoFi is a safe place to keep your savings. SoFi checking and savings accounts are FDIC-insured up to $250,000, as is standard with other banks. SoFi offers good online banking security measures as well, such as two-factor authentication.
Make sure to sign up for two-factor authentication as soon as you create your account. Don’t wait to do it later, when you might forget until it’s too late.
Your Guide to Savings Accounts
What Is a Savings Account and How Does It Work?
What Is a High-Yield Savings Account?
How to Open a High-Yield Savings Account
How to Close a Savings Account
Besides a Savings Account, Where Is the Safest Place to Keep My Money?
How Many Savings Accounts Should I Have?
How Savings Account Interest Rates Are Determined
How Interest Works on Savings Accounts
How Is a Savings Account Taxed?
Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?
Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?
4 Savings Accounts for Investors
Best High-Yield Savings Accounts
Best Free Savings Accounts
Best Savings Accounts for Kids and Teens
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https://www.investopedia.com/what-trump-s-taxes-reveal-about-us-tax-law-5080039 | What Former President Trump's Taxes Reveal About US Tax Law | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> On September 27, 2020,<em> The New York Times</em> published a report on former President Donald Trump's taxes, spotlighting serious legal, financial, and political risks, as well as a history of startlingly low tax payments.
</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 report, Trump paid no 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> for 11 of 18 years that reporters examined; he paid $750 in taxes in each of 2016 and 2017. He also reportedly pumped cash into money-losing businesses, and incurred hundreds of millions of dollars in debt through <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-guarantee.asp">personally guaranteed loans</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"> What can we learn about U.S. tax law from the complicated picture of former President Donald Trump's taxes that emerged from the report?
</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>In 2020, <em>The New York Times </em>published an investigation into former President Donald Trump taxes based on more than two decades of return data.</li><li>The report contained notable findings, including that Trump had paid no federal income tax for 11 out of the 18 years that the publication examined.</li><li>He reportedly paid $750 in taxes in each of 2016 and 2017.</li><li>Trump's low tax bills are partly attributable to losses he's claimed for his businesses.</li><li>Meanwhile, debt deadlines and audit questions continue to loom over Trump and have placed him in a potentially precarious financial position.</li></ul></div></div></div>
<span class="heading-toc" id="toc-us-tax-law-and-real-estate-business"></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"> U.S. Tax Law and Real Estate Business </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> How could Donald Trump have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax_avoidance.asp">avoided income taxes</a> while earning more than $427 million from “The Apprentice,” licensing, and endorsements between 2000 and 2018?<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Tax law affords special rules and benefits to real estate professionals, defined as those actively engaged in the real estate business. These advantages—typically unavailable to other individuals—permit developers like Trump to claim losses from real estate to offset income from other sources.<span class="ql-inline-citation" data-cite="5"></span> Employees and taxpayers engaged in other lines of business generally must net their income and losses separately for each source of income.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The revelations cast a light on the special <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/write-off.asp">write-offs</a> available to business owners and other wealthy individuals, particularly real estate professionals, whose <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-planning.asp">tax planning</a> can result in tax liabilities that are lower than those of average-income taxpayers.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> For instance, tax-law rules on depreciation permit the cost of constructing a building to be deducted as a "loss" over 27.5 years for residential realty and 39 years for commercial buildings, even when the building’s fair market value is increasing over time.<span class="ql-inline-citation" data-cite="2"></span> Trump's properties are held in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flow-through.asp">"pass-through" entities</a>. This is a standard industry arrangement for avoiding corporate taxation and enabling an individual to report an entity’s income and <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> on a personal tax return, benefitting in particular from the latter.<span class="ql-inline-citation" data-cite="20"></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_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Additionally, until 2020, tax law permitted taxpayers to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/losscarryback.asp">carry back</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/losscarryforward.asp">carryforward</a> <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netoperatingloss.asp">net operating losses (NOLs)</a>.<span class="ql-inline-citation" data-cite="21"></span><span class="ql-inline-citation" data-cite="7"></span> (For tax years after 2020, NOLs can only be carried forward.) According to the <em>Times</em>, Trump claimed losses of $915.7 million in 1985 that likely offset decades of TV, branding, and investment income estimated at $600 million. Although he paid taxes of $70.1 million from 2005 through 2007, the NOL rules allowed him subsequently to carry back NOLs to these years and receive a refund of the full amount. As discussed below, this refund appears to have been contested retroactively in the former president’s ongoing IRS audit.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<span class="heading-toc" id="toc-questionable-tax-reduction-strategies"></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"> Questionable Tax-Reduction Strategies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The <em>Times</em> report described a number of operational and transactional tax claims that presented substantial audit issues for the former president and his business organizations.
</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"> Casino 'Abandonment' Loss </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The $70.1 million refund obtained for the period from 2005 to 2007 appears attributable to the carryback of approximately $700 million of business losses claimed for 2009. These losses likely were based on a claim of complete “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/abandonment.asp">abandonment</a>” of the Trump Atlantic City casino business.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="11"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Such would be allowable, provided Trump received nothing in return for giving up his interest in the business. However, bankruptcy proceedings records indicate that Trump received 5% of the successor company’s stock, which would have disqualified any abandonment loss and limited his deduction to a $3,000 loss for 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_27-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Consulting Fees vs. Employee Compensation vs. Gifts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Per the <em>Times </em>report, unspecified "consulting fees" point to another strategy that can reduce business income and taxes. Some of these fees were likely paid out to his daughter Ivanka Trump, the publication found, a questionable arrangement given that as an employee of the Trump organization, she should not have been paid as a consultant, also known as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/independent-contractor.asp">independent contractor</a>.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Unlike employee compensation, consultant fees are not subject to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/withholdingtax.asp">withholding taxes</a> from the payor.<span class="ql-inline-citation" data-cite="24"></span><span class="ql-inline-citation" data-cite="22"></span> But to be deductible, the fees must be reasonable, market-value amounts. The <em>Times </em>pointed out that such a payment raises questions about whether some consulting fees were de facto asset transfers, which should have incurred a gift tax.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="23"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Business vs. Personal Expenses </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Although not all of Trump's business expenses are explained, the article identified items that might properly be nondeductible personal expenses. It noted that the IRS might disallow deductions for aircraft used for personal travel and grooming costs for TV appearances on that basis.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> In addition, because deductions for legal fees are reported as a lump sum, the<em> Times</em> also questioned whether the total paid to attorneys includes fees that weren't directly related to business operations, which could run afoul of IRS rules.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="14"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Residence vs. Investment </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The Trump Seven Springs residential estate in Bedford, N.Y., also raises questions. Previously, <em>Forbes</em> reported that the former president's son Eric Trump described the property as a personal residence; in contrast, Donald Trump has characterized it as an investment and deducted property taxes worth $2.2 million as a business expense.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="1"></span> The discrepancy in how the estate has been characterized is important: Deductions for local and state taxes (for both income and property) are subject to a ceiling of $10,000.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<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"> Valuation of Conservation Easement </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> The report also examined a 2015 charitable deduction of $21.1 million for a conservation easement, which gave up the right to develop some of the Seven Springs estate. Such a deduction is meant to reflect the decrease in a property’s fair market value after the donation.<span class="ql-inline-citation" data-cite="25"></span> Tax experts debate whether some conservation easements actually increase real property values, particularly where they protect the natural attractiveness of the donor’s remaining land. In view of the reported questions around inconsistencies in valuations of Trump properties for different purposes, the value claimed for the Seven Springs’ easement drew scrutiny from the New York attorney general.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<span class="heading-toc" id="toc-the-irs-and-the-endless-audit"></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 IRS and the Endless Audit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Trump's tax returns have drawn a years-long audit battle with the IRS. A partial cause of this lengthy fight may be the interplay of loss carrybacks and carryforwards, which require exceptional extensions of the statute of limitations.
</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<em> Times </em>reported that the refund of $70.1 million was eventually referred, as required by law, to the Congressional Joint Committee on Taxation (JCT) for review by the Committee’s nonpartisan, expert professional staff.<span class="ql-inline-citation" data-cite="18"></span> The question of whether JCT staff—the same group that in 1974 reviewed President Nixon’s taxes and found certain deductions improper—may challenge the refund and demand its repayment remains unsettled.<span class="ql-inline-citation" data-cite="16"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-how-did-trump-respond-to-reporting-on-tax-returns"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Did Trump Respond to Reporting on Tax Returns?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Alan Garten, a lawyer for the Trump organization, disputed the accuracy of the <em>Times</em> report on the former president's taxes. According to the publication, he contended that Trump paid “tens of millions of dollars” in personal federal taxes since 2015. The <em>Times</em> suggested that Garten may have been referring to Social Security, Medicare, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nanny-tax.asp">household employee taxes</a>—as well as federal <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alternativeminimumtax.asp">alternative minimum tax (AMT)</a>—rather than income taxes, and it noted that Garten had inaccurately equated the use of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxcredit.asp">tax credits</a> to tax payments.<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_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-donald-trumps-net-worth"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Donald Trump's Net Worth?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Former President Donald Trump's net worth has been the matter of debate for decades. During the 2016, Trump's campaign claimed that his net worth exceeded $10 billion, though the figure has been disputed.<span class="ql-inline-citation" data-cite="27"></span> In March 2024, <em>Forbes</em> published an asset-by-asset analysis of Trump's worth, determining an estimate of around $6.4 billion.<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_52-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_53-0"><span class="heading-toc" id="toc-what-is-joe-bidens-net-worth-in-2024"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Joe Biden's Net Worth in 2024?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>According to another report by <em>Forbes, </em>published in August 2023, President Joe Biden's net worth is approximately $10 million. This estimate is based largely on owned assets such as real estate and property.<span class="ql-inline-citation" data-cite="29"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> According to the <em>Times</em> report, former President Trump did earn hundreds of millions of dollars over the past decades, most from "The Apprentice" and licensing fees. However, at the same time, with a few exceptions, the Trump real estate business produced enormous losses.<span class="ql-inline-citation" data-cite="1"></span> Apparent inconsistencies between his tax return losses and his federal financial reports of annual income in the hundreds of millions raised both reputational and legal issues.
</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"> In a diminished financial position, the former president may face enormous liabilities. He will be personally liable on personally guaranteed loans worth $421 million. In addition, the <em>Times</em> estimated that his <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/history-of-presidents-and-federal-income-tax-what-s-normal-5080237">federal tax liabilities</a> could exceed $100 million.<span class="ql-inline-citation" data-cite="1"></span> The reports of Donald Trump's tax avoidance and looming financial exposures may disturb ordinary voters, and may undercut his self-proclaimed image as a astute billionaire.<span class="ql-inline-citation" data-cite="26"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> The <em>Times</em> report also drew significant attention to opportunities that the tax code offers to wealthy business owners to avoid taxes lawfully—opportunities that are unavailable to average taxpayers—and may generate support for tax reform in the years to come.
</p></div> | On September 27, 2020, *The New York Times* published a report on former President Donald Trump's taxes, spotlighting serious legal, financial, and political risks, as well as a history of startlingly low tax payments.
According to report, Trump paid no federal [income tax](https://www.investopedia.com/terms/i/incometax.asp) for 11 of 18 years that reporters examined; he paid $750 in taxes in each of 2016 and 2017. He also reportedly pumped cash into money-losing businesses, and incurred hundreds of millions of dollars in debt through [personally guaranteed loans](https://www.investopedia.com/terms/p/personal-guarantee.asp).
What can we learn about U.S. tax law from the complicated picture of former President Donald Trump's taxes that emerged from the report?
### Key Takeaways
* In 2020, *The New York Times* published an investigation into former President Donald Trump taxes based on more than two decades of return data.
* The report contained notable findings, including that Trump had paid no federal income tax for 11 out of the 18 years that the publication examined.
* He reportedly paid $750 in taxes in each of 2016 and 2017.
* Trump's low tax bills are partly attributable to losses he's claimed for his businesses.
* Meanwhile, debt deadlines and audit questions continue to loom over Trump and have placed him in a potentially precarious financial position.
## U.S. Tax Law and Real Estate Business
How could Donald Trump have [avoided income taxes](https://www.investopedia.com/terms/t/tax_avoidance.asp) while earning more than $427 million from “The Apprentice,” licensing, and endorsements between 2000 and 2018?
Tax law affords special rules and benefits to real estate professionals, defined as those actively engaged in the real estate business. These advantages—typically unavailable to other individuals—permit developers like Trump to claim losses from real estate to offset income from other sources. Employees and taxpayers engaged in other lines of business generally must net their income and losses separately for each source of income.
The revelations cast a light on the special [write-offs](https://www.investopedia.com/terms/w/write-off.asp) available to business owners and other wealthy individuals, particularly real estate professionals, whose [tax planning](https://www.investopedia.com/terms/t/tax-planning.asp) can result in tax liabilities that are lower than those of average-income taxpayers.
For instance, tax-law rules on depreciation permit the cost of constructing a building to be deducted as a "loss" over 27.5 years for residential realty and 39 years for commercial buildings, even when the building’s fair market value is increasing over time. Trump's properties are held in ["pass-through" entities](https://www.investopedia.com/terms/f/flow-through.asp). This is a standard industry arrangement for avoiding corporate taxation and enabling an individual to report an entity’s income and [deductions](https://www.investopedia.com/terms/t/tax-deduction.asp) on a personal tax return, benefitting in particular from the latter.
Additionally, until 2020, tax law permitted taxpayers to [carry back](https://www.investopedia.com/terms/l/losscarryback.asp) or [carryforward](https://www.investopedia.com/terms/l/losscarryforward.asp) [net operating losses (NOLs)](https://www.investopedia.com/terms/n/netoperatingloss.asp). (For tax years after 2020, NOLs can only be carried forward.) According to the *Times*, Trump claimed losses of $915.7 million in 1985 that likely offset decades of TV, branding, and investment income estimated at $600 million. Although he paid taxes of $70.1 million from 2005 through 2007, the NOL rules allowed him subsequently to carry back NOLs to these years and receive a refund of the full amount. As discussed below, this refund appears to have been contested retroactively in the former president’s ongoing IRS audit.
## Questionable Tax-Reduction Strategies
The *Times* report described a number of operational and transactional tax claims that presented substantial audit issues for the former president and his business organizations.
### Casino 'Abandonment' Loss
The $70.1 million refund obtained for the period from 2005 to 2007 appears attributable to the carryback of approximately $700 million of business losses claimed for 2009. These losses likely were based on a claim of complete “[abandonment](https://www.investopedia.com/terms/a/abandonment.asp)” of the Trump Atlantic City casino business.
Such would be allowable, provided Trump received nothing in return for giving up his interest in the business. However, bankruptcy proceedings records indicate that Trump received 5% of the successor company’s stock, which would have disqualified any abandonment loss and limited his deduction to a $3,000 loss for the year.
### Consulting Fees vs. Employee Compensation vs. Gifts
Per the *Times* report, unspecified "consulting fees" point to another strategy that can reduce business income and taxes. Some of these fees were likely paid out to his daughter Ivanka Trump, the publication found, a questionable arrangement given that as an employee of the Trump organization, she should not have been paid as a consultant, also known as an [independent contractor](https://www.investopedia.com/terms/i/independent-contractor.asp).
Unlike employee compensation, consultant fees are not subject to [withholding taxes](https://www.investopedia.com/terms/w/withholdingtax.asp) from the payor. But to be deductible, the fees must be reasonable, market-value amounts. The *Times* pointed out that such a payment raises questions about whether some consulting fees were de facto asset transfers, which should have incurred a gift tax.
### Business vs. Personal Expenses
Although not all of Trump's business expenses are explained, the article identified items that might properly be nondeductible personal expenses. It noted that the IRS might disallow deductions for aircraft used for personal travel and grooming costs for TV appearances on that basis.
In addition, because deductions for legal fees are reported as a lump sum, the *Times* also questioned whether the total paid to attorneys includes fees that weren't directly related to business operations, which could run afoul of IRS rules.
### Residence vs. Investment
The Trump Seven Springs residential estate in Bedford, N.Y., also raises questions. Previously, *Forbes* reported that the former president's son Eric Trump described the property as a personal residence; in contrast, Donald Trump has characterized it as an investment and deducted property taxes worth $2.2 million as a business expense. The discrepancy in how the estate has been characterized is important: Deductions for local and state taxes (for both income and property) are subject to a ceiling of $10,000.
### Valuation of Conservation Easement
The report also examined a 2015 charitable deduction of $21.1 million for a conservation easement, which gave up the right to develop some of the Seven Springs estate. Such a deduction is meant to reflect the decrease in a property’s fair market value after the donation. Tax experts debate whether some conservation easements actually increase real property values, particularly where they protect the natural attractiveness of the donor’s remaining land. In view of the reported questions around inconsistencies in valuations of Trump properties for different purposes, the value claimed for the Seven Springs’ easement drew scrutiny from the New York attorney general.
## The IRS and the Endless Audit
Trump's tax returns have drawn a years-long audit battle with the IRS. A partial cause of this lengthy fight may be the interplay of loss carrybacks and carryforwards, which require exceptional extensions of the statute of limitations.
The *Times* reported that the refund of $70.1 million was eventually referred, as required by law, to the Congressional Joint Committee on Taxation (JCT) for review by the Committee’s nonpartisan, expert professional staff. The question of whether JCT staff—the same group that in 1974 reviewed President Nixon’s taxes and found certain deductions improper—may challenge the refund and demand its repayment remains unsettled.
## How Did Trump Respond to Reporting on Tax Returns?
Alan Garten, a lawyer for the Trump organization, disputed the accuracy of the *Times* report on the former president's taxes. According to the publication, he contended that Trump paid “tens of millions of dollars” in personal federal taxes since 2015. The *Times* suggested that Garten may have been referring to Social Security, Medicare, and [household employee taxes](https://www.investopedia.com/terms/n/nanny-tax.asp)—as well as federal [alternative minimum tax (AMT)](https://www.investopedia.com/terms/a/alternativeminimumtax.asp)—rather than income taxes, and it noted that Garten had inaccurately equated the use of [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp) to tax payments.
## What Is Donald Trump's Net Worth?
Former President Donald Trump's net worth has been the matter of debate for decades. During the 2016, Trump's campaign claimed that his net worth exceeded $10 billion, though the figure has been disputed. In March 2024, *Forbes* published an asset-by-asset analysis of Trump's worth, determining an estimate of around $6.4 billion.
## What Is Joe Biden's Net Worth in 2024?
According to another report by *Forbes,* published in August 2023, President Joe Biden's net worth is approximately $10 million. This estimate is based largely on owned assets such as real estate and property.
## The Bottom Line
According to the *Times* report, former President Trump did earn hundreds of millions of dollars over the past decades, most from "The Apprentice" and licensing fees. However, at the same time, with a few exceptions, the Trump real estate business produced enormous losses. Apparent inconsistencies between his tax return losses and his federal financial reports of annual income in the hundreds of millions raised both reputational and legal issues.
In a diminished financial position, the former president may face enormous liabilities. He will be personally liable on personally guaranteed loans worth $421 million. In addition, the *Times* estimated that his [federal tax liabilities](https://www.investopedia.com/history-of-presidents-and-federal-income-tax-what-s-normal-5080237) could exceed $100 million. The reports of Donald Trump's tax avoidance and looming financial exposures may disturb ordinary voters, and may undercut his self-proclaimed image as a astute billionaire.
The *Times* report also drew significant attention to opportunities that the tax code offers to wealthy business owners to avoid taxes lawfully—opportunities that are unavailable to average taxpayers—and may generate support for tax reform in the years to come.
| On September 27, 2020, The New York Times published a report on former President Donald Trump's taxes, spotlighting serious legal, financial, and political risks, as well as a history of startlingly low tax payments.
According to report, Trump paid no federal income tax for 11 of 18 years that reporters examined; he paid $750 in taxes in each of 2016 and 2017. He also reportedly pumped cash into money-losing businesses, and incurred hundreds of millions of dollars in debt through personally guaranteed loans.
What can we learn about U.S. tax law from the complicated picture of former President Donald Trump's taxes that emerged from the report?
Key Takeaways
In 2020, The New York Times published an investigation into former President Donald Trump taxes based on more than two decades of return data.The report contained notable findings, including that Trump had paid no federal income tax for 11 out of the 18 years that the publication examined.He reportedly paid $750 in taxes in each of 2016 and 2017.Trump's low tax bills are partly attributable to losses he's claimed for his businesses.Meanwhile, debt deadlines and audit questions continue to loom over Trump and have placed him in a potentially precarious financial position.
U.S. Tax Law and Real Estate Business
How could Donald Trump have avoided income taxes while earning more than $427 million from “The Apprentice,” licensing, and endorsements between 2000 and 2018?
Tax law affords special rules and benefits to real estate professionals, defined as those actively engaged in the real estate business. These advantages—typically unavailable to other individuals—permit developers like Trump to claim losses from real estate to offset income from other sources. Employees and taxpayers engaged in other lines of business generally must net their income and losses separately for each source of income.
The revelations cast a light on the special write-offs available to business owners and other wealthy individuals, particularly real estate professionals, whose tax planning can result in tax liabilities that are lower than those of average-income taxpayers.
For instance, tax-law rules on depreciation permit the cost of constructing a building to be deducted as a "loss" over 27.5 years for residential realty and 39 years for commercial buildings, even when the building’s fair market value is increasing over time. Trump's properties are held in "pass-through" entities. This is a standard industry arrangement for avoiding corporate taxation and enabling an individual to report an entity’s income and deductions on a personal tax return, benefitting in particular from the latter.
Additionally, until 2020, tax law permitted taxpayers to carry back or carryforward net operating losses (NOLs). (For tax years after 2020, NOLs can only be carried forward.) According to the Times, Trump claimed losses of $915.7 million in 1985 that likely offset decades of TV, branding, and investment income estimated at $600 million. Although he paid taxes of $70.1 million from 2005 through 2007, the NOL rules allowed him subsequently to carry back NOLs to these years and receive a refund of the full amount. As discussed below, this refund appears to have been contested retroactively in the former president’s ongoing IRS audit.
Questionable Tax-Reduction Strategies
The Times report described a number of operational and transactional tax claims that presented substantial audit issues for the former president and his business organizations.
Casino 'Abandonment' Loss
The $70.1 million refund obtained for the period from 2005 to 2007 appears attributable to the carryback of approximately $700 million of business losses claimed for 2009. These losses likely were based on a claim of complete “abandonment” of the Trump Atlantic City casino business.
Such would be allowable, provided Trump received nothing in return for giving up his interest in the business. However, bankruptcy proceedings records indicate that Trump received 5% of the successor company’s stock, which would have disqualified any abandonment loss and limited his deduction to a $3,000 loss for the year.
Consulting Fees vs. Employee Compensation vs. Gifts
Per the Times report, unspecified "consulting fees" point to another strategy that can reduce business income and taxes. Some of these fees were likely paid out to his daughter Ivanka Trump, the publication found, a questionable arrangement given that as an employee of the Trump organization, she should not have been paid as a consultant, also known as an independent contractor.
Unlike employee compensation, consultant fees are not subject to withholding taxes from the payor. But to be deductible, the fees must be reasonable, market-value amounts. The Times pointed out that such a payment raises questions about whether some consulting fees were de facto asset transfers, which should have incurred a gift tax.
Business vs. Personal Expenses
Although not all of Trump's business expenses are explained, the article identified items that might properly be nondeductible personal expenses. It noted that the IRS might disallow deductions for aircraft used for personal travel and grooming costs for TV appearances on that basis.
In addition, because deductions for legal fees are reported as a lump sum, the Times also questioned whether the total paid to attorneys includes fees that weren't directly related to business operations, which could run afoul of IRS rules.
Residence vs. Investment
The Trump Seven Springs residential estate in Bedford, N.Y., also raises questions. Previously, Forbes reported that the former president's son Eric Trump described the property as a personal residence; in contrast, Donald Trump has characterized it as an investment and deducted property taxes worth $2.2 million as a business expense. The discrepancy in how the estate has been characterized is important: Deductions for local and state taxes (for both income and property) are subject to a ceiling of $10,000.
Valuation of Conservation Easement
The report also examined a 2015 charitable deduction of $21.1 million for a conservation easement, which gave up the right to develop some of the Seven Springs estate. Such a deduction is meant to reflect the decrease in a property’s fair market value after the donation. Tax experts debate whether some conservation easements actually increase real property values, particularly where they protect the natural attractiveness of the donor’s remaining land. In view of the reported questions around inconsistencies in valuations of Trump properties for different purposes, the value claimed for the Seven Springs’ easement drew scrutiny from the New York attorney general.
The IRS and the Endless Audit
Trump's tax returns have drawn a years-long audit battle with the IRS. A partial cause of this lengthy fight may be the interplay of loss carrybacks and carryforwards, which require exceptional extensions of the statute of limitations.
The Times reported that the refund of $70.1 million was eventually referred, as required by law, to the Congressional Joint Committee on Taxation (JCT) for review by the Committee’s nonpartisan, expert professional staff. The question of whether JCT staff—the same group that in 1974 reviewed President Nixon’s taxes and found certain deductions improper—may challenge the refund and demand its repayment remains unsettled.
How Did Trump Respond to Reporting on Tax Returns?
Alan Garten, a lawyer for the Trump organization, disputed the accuracy of the Times report on the former president's taxes. According to the publication, he contended that Trump paid “tens of millions of dollars” in personal federal taxes since 2015. The Times suggested that Garten may have been referring to Social Security, Medicare, and household employee taxes—as well as federal alternative minimum tax (AMT)—rather than income taxes, and it noted that Garten had inaccurately equated the use of tax credits to tax payments.
What Is Donald Trump's Net Worth?
Former President Donald Trump's net worth has been the matter of debate for decades. During the 2016, Trump's campaign claimed that his net worth exceeded $10 billion, though the figure has been disputed. In March 2024, Forbes published an asset-by-asset analysis of Trump's worth, determining an estimate of around $6.4 billion.
What Is Joe Biden's Net Worth in 2024?
According to another report by Forbes, published in August 2023, President Joe Biden's net worth is approximately $10 million. This estimate is based largely on owned assets such as real estate and property.
The Bottom Line
According to the Times report, former President Trump did earn hundreds of millions of dollars over the past decades, most from "The Apprentice" and licensing fees. However, at the same time, with a few exceptions, the Trump real estate business produced enormous losses. Apparent inconsistencies between his tax return losses and his federal financial reports of annual income in the hundreds of millions raised both reputational and legal issues.
In a diminished financial position, the former president may face enormous liabilities. He will be personally liable on personally guaranteed loans worth $421 million. In addition, the Times estimated that his federal tax liabilities could exceed $100 million. The reports of Donald Trump's tax avoidance and looming financial exposures may disturb ordinary voters, and may undercut his self-proclaimed image as a astute billionaire.
The Times report also drew significant attention to opportunities that the tax code offers to wealthy business owners to avoid taxes lawfully—opportunities that are unavailable to average taxpayers—and may generate support for tax reform in the years to come.
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https://www.investopedia.com/what-is-fednow-7963716 | FedNow: What It Is and How It Works | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> FedNow is a new instant payment service launched by 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> in July 2023. Using the FedNow Service, financial institutions can give customers real-time payment capabilities, executing transactions in a matter of seconds even outside of normal banking hours.
</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 other words, if your bank or credit union participates in the FedNow program, you can send and receive money instantaneously and 24/7—even on holidays, weekends, and off-hours. FedNow’s seamlessness and around-the-clock availability represent an improvement over the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ach.asp">Automated Clearing House (ACH)</a> network, the current standard for transferring funds electronically that takes up to three business days to complete a transaction.
</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>FedNow, launched by the Federal Reserve in July 2023, is an instant payment platform that can process financial transactions in real time and around the clock.</li><li>Individuals and businesses cannot enroll directly in FedNow, but can benefit from the service’s streamlined funds transfers through a participating bank or credit union.</li><li>The platform could help you receive your paycheck more quickly and simplify the process for making on-time bill payments.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-fednow"></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 FedNow? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The FedNow Service is an instant payment infrastructure inaugurated by the Federal Reserve in July 2023. Using the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp">central bank</a>’s new platform, participating financial institutions can give their customers the ability to send and receive money within seconds.<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_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In addition to reducing the time it takes to transfer funds, the new platform makes it possible to process transactions anytime, including after hours or on weekends and holidays.<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"> The idea of sending and receiving payments in real time may not seem all that novel to you, particularly if you’ve used services like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/010715/venmo-its-business-model-and-competition.asp">Venmo</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/company-insights/090916/how-square-cash-works-and-makes-money-sq.asp">Cash App</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-zelle-7097991">Zelle</a>. These payment-processing apps are unlikely to go anywhere, but if your bank participates in FedNow, you will have an additional option for completing nearly instantaneous financial transactions.
</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"> FedNow’s integrated clearing functionality allows it to process transactions much more quickly than the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120">Automated Clearing House (ACH)</a> system—the current platform in the United States that allows consumers, businesses, and government entities to send and receive funds electronically. ACH transactions typically take one to three business days to complete, and although Same Day ACH became available in 2016, even that option is far from instantaneous.<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_16-0"> Given this time frame, the Fed classifies Same Day ACH as a “faster payment” solution, so FedNow earns the title of an “instant payment” platform.<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>
<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 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>In the near term, ACH appears unlikely to disappear and probably will still be used for many types of transactions. However, we could see financial institutions increasingly shift toward more instant options like FedNow. The Fed eventually may seek to make the FedNow platform operate in tandem with ACH payments.</p></div></div></div>
<span class="heading-toc" id="toc-how-fednow-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> How FedNow Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The anatomy of a FedNow transaction is much like the process for other instant payment platforms. You initiate a payment using an interface set up by your financial institution. Your bank verifies that you have enough funds to make the payment and then initiates the transaction through the FedNow platform.
</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"> Once the payee’s financial institution approves the transaction, FedNow withdraws the funds from your account and deposits them in the destination account.<span class="ql-inline-citation" data-cite="4"></span> The service also includes a request for payment (RFP) feature with the potential to help businesses streamline their electronic invoicing.<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_25-0"> While the process seems straightforward enough, the FedNow system must carry out two key functions to facilitate the transfer of funds:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearing.asp">Clearing</a> involves the communications about a payment between the sending and receiving financial institutions, which may include checking for fraudulent activity.</li>
<li>Settlement describes the actual process of debiting the funds from the payer’s account and crediting them to the payee’s account.</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The FedNow system executes both of these steps in a matter of seconds.<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_31-0"> FedNow uses <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/international-organization-for-standardization-iso.asp">International Organization for Standardization (ISO)</a> 20022 standards—an international norm for sending and receiving electronic messages that helps make financial transactions more secure and facilitates interoperability with other payment systems.<span class="ql-inline-citation" data-cite="6"></span>
</p>
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<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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The FedNow Service allows for transactions up to a limit of $500,000. However, the Fed sets a default limit of $100,000 per transaction, allowing participating financial institutions to adjust this cap as needed to meet their customers’ needs. The Fed plans to assess the overall cap on FedNow transactions on an ongoing basis, adjusting the limit as needed.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div>
<span class="heading-toc" id="toc-benefits-and-drawbacks-of-fednow"></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"> Benefits and Drawbacks of FedNow </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Access to FedNow’s instant payment capabilities provides plenty of advantages. First and foremost, the platform makes sending and receiving money quicker and easier, giving people more options to manage payments more effectively.
</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"> This flexibility could prove particularly beneficial to people on a tight budget. For instance, receiving a paycheck or other payments immediately rather than having to wait a few days could eliminate the need to resort to expensive <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>.
</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"> What’s more, streamlining the process of paying bills could help people avoid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/late-fee.asp">late fees</a>, and because the FedNow System verifies that there are sufficient funds in the payer’s account before processing a transaction, it offers built-in protection against <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a> fees.
</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"> Beyond facilitating on-time bill payments, the ability to transfer funds instantly from account to account could make it easier to manage your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashflow.asp">cash flow</a> and your overall finances. Similar benefits apply to businesses, which can control and forecast cash flows more effectively, and financial institutions themselves may enjoy a reduction in processing costs while helping their customers.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> However, a drawback of the FedNow Service is that in order to benefit from the system, all institutions that are a party to the transaction must be using the service. If, for instance, you are making multiple payments, but some of the institutions on the other end of the transactions are not using the FedNow system, then you could end up with an overdraft because the transactions from the institutions that do not use FedNow will be processed via ACH—possibly triggering an overdraft.<span class="ql-inline-citation" data-cite="11"></span>
</p>
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<span class="heading-toc" id="toc-the-future-of-fednow-and-what-it-means-for-you"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> The Future of FedNow and What It Means for You </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> From a consumer’s perspective, FedNow means that you may receive quicker access to your paycheck or other incoming payments, while you will have a streamlined tool to pay your bills and manage your accounts more effectively.
</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"> Your ability to harness the power of FedNow’s instant payment system depends on your financial institution’s participation in the program. The Fed makes the service available to all U.S. banks and credit unions, but financial institutions must opt in to begin offering FedNow-driven transfers to their customers.<span class="ql-inline-citation" data-cite="1"></span>
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_51-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_52-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" 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>There is no FedNow app for consumers and businesses to use directly. Instead, your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">bank</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-join-a-credit-union-7495339">credit union</a> will enable this instant payment functionality through its own website or mobile app. You may not see the name “FedNow” associated with the funds transfer capabilities offered by your bank, but FedNow is the “highway” that sends instant payment to their destination.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> While you can’t enroll in FedNow as an individual, you could ask your bank or credit union if it provides you with access to these instant payment services.
</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"> Looking to the future, it remains to be seen how financial institutions will adopt FedNow’s capabilities and the full extent of ways for consumers and businesses to reap the benefits of instant payments. The Fed anticipates that, as more banks and credit unions join the FedNow platform, instant payments will solidify their role as “a routine part of everyday commerce.”<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_56-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_57-0"><span class="heading-toc" id="toc-what-is-the-difference-between-fednow-and-real-time-payments"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between FedNow and Real-Time Payments?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The Federal Reserve—the central bank of the U.S.—operates the FedNow Service, launched in July 2023. In contrast, the real time payments (RTP) network is an instant payment platform operated by a consortium of large U.S. banks. Both platforms can fulfill similar purposes, facilitating instant financial transactions between businesses and consumers.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="10"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-how-much-does-it-cost-to-conduct-a-fednow-transaction"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does It Cost to Conduct a FedNow Transaction?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The Fed charges financial institutions a monthly fee to participate in the FedNow Service, along with a small fee per transaction. It remains to be seen how much of these costs banks and credit unions will pass on to their customers.<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_60-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-how-much-does-fednow-charge"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does FedNow Charge?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>FedNow charges a $25 monthly participation fee for each <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 transit number (RTN)</a> that enrolls in the service. In addition, it charges fees of 4.5 cents per transaction to the sender’s financial institution. Filing a request for payment (RFP) message via the FedNow platform comes with a fee of 1 cent for the requester.<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_62-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_63-0"><span class="heading-toc" id="toc-can-fednow-freeze-your-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can FedNow Freeze Your Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. Although your financial institution must verify that you have sufficient funds to cover any payments through FedNow, neither the Federal Reserve nor the FedNow Service has access to individual bank accounts.<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_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-how-is-fednow-different-from-fedwire"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is FedNow Different from Fedwire?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fedwire.asp">Fedwire Funds Service</a> is a system facilitating real-time financial transactions between participating financial institutions that have an account with the Federal Reserve. Unlike FedNow, which has a transaction limit of $500,000, Fedwire transactions have no such cap, making the service useful for large-value transfers. However, the Fedwire service is available only during business hours, meaning it can’t match FedNow’s 24/7 coverage.<span class="ql-inline-citation" data-cite="8"></span></p></div>
</div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> The Federal Reserve’s FedNow Service allows banks and credit unions to offer instant payment capabilities to their customers, even outside of normal banking hours. From reducing the time it takes to receive your paycheck to facilitating instantaneous bill payments, FedNow has the potential to add flexibility and swiftness to help businesses and individuals manage cash flows and better control their financial lives.<br/>
</p></div> | FedNow is a new instant payment service launched by the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) in July 2023. Using the FedNow Service, financial institutions can give customers real-time payment capabilities, executing transactions in a matter of seconds even outside of normal banking hours.
In other words, if your bank or credit union participates in the FedNow program, you can send and receive money instantaneously and 24/7—even on holidays, weekends, and off-hours. FedNow’s seamlessness and around-the-clock availability represent an improvement over the [Automated Clearing House (ACH)](https://www.investopedia.com/terms/a/ach.asp) network, the current standard for transferring funds electronically that takes up to three business days to complete a transaction.
### Key Takeaways
* FedNow, launched by the Federal Reserve in July 2023, is an instant payment platform that can process financial transactions in real time and around the clock.
* Individuals and businesses cannot enroll directly in FedNow, but can benefit from the service’s streamlined funds transfers through a participating bank or credit union.
* The platform could help you receive your paycheck more quickly and simplify the process for making on-time bill payments.
## What Is FedNow?
The FedNow Service is an instant payment infrastructure inaugurated by the Federal Reserve in July 2023. Using the [central bank](https://www.investopedia.com/terms/c/centralbank.asp)’s new platform, participating financial institutions can give their customers the ability to send and receive money within seconds.
In addition to reducing the time it takes to transfer funds, the new platform makes it possible to process transactions anytime, including after hours or on weekends and holidays.
The idea of sending and receiving payments in real time may not seem all that novel to you, particularly if you’ve used services like [Venmo](https://www.investopedia.com/articles/personal-finance/010715/venmo-its-business-model-and-competition.asp), [Cash App](https://www.investopedia.com/articles/company-insights/090916/how-square-cash-works-and-makes-money-sq.asp), and [Zelle](https://www.investopedia.com/what-is-zelle-7097991). These payment-processing apps are unlikely to go anywhere, but if your bank participates in FedNow, you will have an additional option for completing nearly instantaneous financial transactions.
FedNow’s integrated clearing functionality allows it to process transactions much more quickly than the [Automated Clearing House (ACH)](https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120) system—the current platform in the United States that allows consumers, businesses, and government entities to send and receive funds electronically. ACH transactions typically take one to three business days to complete, and although Same Day ACH became available in 2016, even that option is far from instantaneous.
Given this time frame, the Fed classifies Same Day ACH as a “faster payment” solution, so FedNow earns the title of an “instant payment” platform.
### Note
In the near term, ACH appears unlikely to disappear and probably will still be used for many types of transactions. However, we could see financial institutions increasingly shift toward more instant options like FedNow. The Fed eventually may seek to make the FedNow platform operate in tandem with ACH payments.
## How FedNow Works
The anatomy of a FedNow transaction is much like the process for other instant payment platforms. You initiate a payment using an interface set up by your financial institution. Your bank verifies that you have enough funds to make the payment and then initiates the transaction through the FedNow platform.
Once the payee’s financial institution approves the transaction, FedNow withdraws the funds from your account and deposits them in the destination account. The service also includes a request for payment (RFP) feature with the potential to help businesses streamline their electronic invoicing.
While the process seems straightforward enough, the FedNow system must carry out two key functions to facilitate the transfer of funds:
* [Clearing](https://www.investopedia.com/terms/c/clearing.asp) involves the communications about a payment between the sending and receiving financial institutions, which may include checking for fraudulent activity.
* Settlement describes the actual process of debiting the funds from the payer’s account and crediting them to the payee’s account.
The FedNow system executes both of these steps in a matter of seconds.
FedNow uses [International Organization for Standardization (ISO)](https://www.investopedia.com/terms/i/international-organization-for-standardization-iso.asp) 20022 standards—an international norm for sending and receiving electronic messages that helps make financial transactions more secure and facilitates interoperability with other payment systems.
###
The FedNow Service allows for transactions up to a limit of $500,000. However, the Fed sets a default limit of $100,000 per transaction, allowing participating financial institutions to adjust this cap as needed to meet their customers’ needs. The Fed plans to assess the overall cap on FedNow transactions on an ongoing basis, adjusting the limit as needed.
## Benefits and Drawbacks of FedNow
Access to FedNow’s instant payment capabilities provides plenty of advantages. First and foremost, the platform makes sending and receiving money quicker and easier, giving people more options to manage payments more effectively.
This flexibility could prove particularly beneficial to people on a tight budget. For instance, receiving a paycheck or other payments immediately rather than having to wait a few days could eliminate the need to resort to expensive [payday loans](https://www.investopedia.com/terms/p/payday-loans.asp).
What’s more, streamlining the process of paying bills could help people avoid [late fees](https://www.investopedia.com/terms/l/late-fee.asp), and because the FedNow System verifies that there are sufficient funds in the payer’s account before processing a transaction, it offers built-in protection against [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fees.
Beyond facilitating on-time bill payments, the ability to transfer funds instantly from account to account could make it easier to manage your [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) and your overall finances. Similar benefits apply to businesses, which can control and forecast cash flows more effectively, and financial institutions themselves may enjoy a reduction in processing costs while helping their customers.
However, a drawback of the FedNow Service is that in order to benefit from the system, all institutions that are a party to the transaction must be using the service. If, for instance, you are making multiple payments, but some of the institutions on the other end of the transactions are not using the FedNow system, then you could end up with an overdraft because the transactions from the institutions that do not use FedNow will be processed via ACH—possibly triggering an overdraft.
## The Future of FedNow and What It Means for You
From a consumer’s perspective, FedNow means that you may receive quicker access to your paycheck or other incoming payments, while you will have a streamlined tool to pay your bills and manage your accounts more effectively.
Your ability to harness the power of FedNow’s instant payment system depends on your financial institution’s participation in the program. The Fed makes the service available to all U.S. banks and credit unions, but financial institutions must opt in to begin offering FedNow-driven transfers to their customers.
###
There is no FedNow app for consumers and businesses to use directly. Instead, your [bank](https://www.investopedia.com/terms/b/bank.asp) or [credit union](https://www.investopedia.com/how-to-join-a-credit-union-7495339) will enable this instant payment functionality through its own website or mobile app. You may not see the name “FedNow” associated with the funds transfer capabilities offered by your bank, but FedNow is the “highway” that sends instant payment to their destination.
While you can’t enroll in FedNow as an individual, you could ask your bank or credit union if it provides you with access to these instant payment services.
Looking to the future, it remains to be seen how financial institutions will adopt FedNow’s capabilities and the full extent of ways for consumers and businesses to reap the benefits of instant payments. The Fed anticipates that, as more banks and credit unions join the FedNow platform, instant payments will solidify their role as “a routine part of everyday commerce.”
## What Is the Difference Between FedNow and Real-Time Payments?
The Federal Reserve—the central bank of the U.S.—operates the FedNow Service, launched in July 2023. In contrast, the real time payments (RTP) network is an instant payment platform operated by a consortium of large U.S. banks. Both platforms can fulfill similar purposes, facilitating instant financial transactions between businesses and consumers.
## How Much Does It Cost to Conduct a FedNow Transaction?
The Fed charges financial institutions a monthly fee to participate in the FedNow Service, along with a small fee per transaction. It remains to be seen how much of these costs banks and credit unions will pass on to their customers.
## How Much Does FedNow Charge?
FedNow charges a $25 monthly participation fee for each [routing transit number (RTN)](https://www.investopedia.com/terms/r/routing_transit_number.asp) that enrolls in the service. In addition, it charges fees of 4.5 cents per transaction to the sender’s financial institution. Filing a request for payment (RFP) message via the FedNow platform comes with a fee of 1 cent for the requester.
## Can FedNow Freeze Your Account?
No. Although your financial institution must verify that you have sufficient funds to cover any payments through FedNow, neither the Federal Reserve nor the FedNow Service has access to individual bank accounts.
## How Is FedNow Different from Fedwire?
The [Fedwire Funds Service](https://www.investopedia.com/terms/f/fedwire.asp) is a system facilitating real-time financial transactions between participating financial institutions that have an account with the Federal Reserve. Unlike FedNow, which has a transaction limit of $500,000, Fedwire transactions have no such cap, making the service useful for large-value transfers. However, the Fedwire service is available only during business hours, meaning it can’t match FedNow’s 24/7 coverage.
## The Bottom Line
The Federal Reserve’s FedNow Service allows banks and credit unions to offer instant payment capabilities to their customers, even outside of normal banking hours. From reducing the time it takes to receive your paycheck to facilitating instantaneous bill payments, FedNow has the potential to add flexibility and swiftness to help businesses and individuals manage cash flows and better control their financial lives.
| FedNow is a new instant payment service launched by the Federal Reserve in July 2023. Using the FedNow Service, financial institutions can give customers real-time payment capabilities, executing transactions in a matter of seconds even outside of normal banking hours.
In other words, if your bank or credit union participates in the FedNow program, you can send and receive money instantaneously and 24/7—even on holidays, weekends, and off-hours. FedNow’s seamlessness and around-the-clock availability represent an improvement over the Automated Clearing House (ACH) network, the current standard for transferring funds electronically that takes up to three business days to complete a transaction.
Key Takeaways
FedNow, launched by the Federal Reserve in July 2023, is an instant payment platform that can process financial transactions in real time and around the clock.Individuals and businesses cannot enroll directly in FedNow, but can benefit from the service’s streamlined funds transfers through a participating bank or credit union.The platform could help you receive your paycheck more quickly and simplify the process for making on-time bill payments.
What Is FedNow?
The FedNow Service is an instant payment infrastructure inaugurated by the Federal Reserve in July 2023. Using the central bank’s new platform, participating financial institutions can give their customers the ability to send and receive money within seconds.
In addition to reducing the time it takes to transfer funds, the new platform makes it possible to process transactions anytime, including after hours or on weekends and holidays.
The idea of sending and receiving payments in real time may not seem all that novel to you, particularly if you’ve used services like Venmo, Cash App, and Zelle. These payment-processing apps are unlikely to go anywhere, but if your bank participates in FedNow, you will have an additional option for completing nearly instantaneous financial transactions.
FedNow’s integrated clearing functionality allows it to process transactions much more quickly than the Automated Clearing House (ACH) system—the current platform in the United States that allows consumers, businesses, and government entities to send and receive funds electronically. ACH transactions typically take one to three business days to complete, and although Same Day ACH became available in 2016, even that option is far from instantaneous.
Given this time frame, the Fed classifies Same Day ACH as a “faster payment” solution, so FedNow earns the title of an “instant payment” platform.
Note
In the near term, ACH appears unlikely to disappear and probably will still be used for many types of transactions. However, we could see financial institutions increasingly shift toward more instant options like FedNow. The Fed eventually may seek to make the FedNow platform operate in tandem with ACH payments.
How FedNow Works
The anatomy of a FedNow transaction is much like the process for other instant payment platforms. You initiate a payment using an interface set up by your financial institution. Your bank verifies that you have enough funds to make the payment and then initiates the transaction through the FedNow platform.
Once the payee’s financial institution approves the transaction, FedNow withdraws the funds from your account and deposits them in the destination account. The service also includes a request for payment (RFP) feature with the potential to help businesses streamline their electronic invoicing.
While the process seems straightforward enough, the FedNow system must carry out two key functions to facilitate the transfer of funds:
Clearing involves the communications about a payment between the sending and receiving financial institutions, which may include checking for fraudulent activity.
Settlement describes the actual process of debiting the funds from the payer’s account and crediting them to the payee’s account.
The FedNow system executes both of these steps in a matter of seconds.
FedNow uses International Organization for Standardization (ISO) 20022 standards—an international norm for sending and receiving electronic messages that helps make financial transactions more secure and facilitates interoperability with other payment systems.
The FedNow Service allows for transactions up to a limit of $500,000. However, the Fed sets a default limit of $100,000 per transaction, allowing participating financial institutions to adjust this cap as needed to meet their customers’ needs. The Fed plans to assess the overall cap on FedNow transactions on an ongoing basis, adjusting the limit as needed.
Benefits and Drawbacks of FedNow
Access to FedNow’s instant payment capabilities provides plenty of advantages. First and foremost, the platform makes sending and receiving money quicker and easier, giving people more options to manage payments more effectively.
This flexibility could prove particularly beneficial to people on a tight budget. For instance, receiving a paycheck or other payments immediately rather than having to wait a few days could eliminate the need to resort to expensive payday loans.
What’s more, streamlining the process of paying bills could help people avoid late fees, and because the FedNow System verifies that there are sufficient funds in the payer’s account before processing a transaction, it offers built-in protection against overdraft fees.
Beyond facilitating on-time bill payments, the ability to transfer funds instantly from account to account could make it easier to manage your cash flow and your overall finances. Similar benefits apply to businesses, which can control and forecast cash flows more effectively, and financial institutions themselves may enjoy a reduction in processing costs while helping their customers.
However, a drawback of the FedNow Service is that in order to benefit from the system, all institutions that are a party to the transaction must be using the service. If, for instance, you are making multiple payments, but some of the institutions on the other end of the transactions are not using the FedNow system, then you could end up with an overdraft because the transactions from the institutions that do not use FedNow will be processed via ACH—possibly triggering an overdraft.
The Future of FedNow and What It Means for You
From a consumer’s perspective, FedNow means that you may receive quicker access to your paycheck or other incoming payments, while you will have a streamlined tool to pay your bills and manage your accounts more effectively.
Your ability to harness the power of FedNow’s instant payment system depends on your financial institution’s participation in the program. The Fed makes the service available to all U.S. banks and credit unions, but financial institutions must opt in to begin offering FedNow-driven transfers to their customers.
There is no FedNow app for consumers and businesses to use directly. Instead, your bank or credit union will enable this instant payment functionality through its own website or mobile app. You may not see the name “FedNow” associated with the funds transfer capabilities offered by your bank, but FedNow is the “highway” that sends instant payment to their destination.
While you can’t enroll in FedNow as an individual, you could ask your bank or credit union if it provides you with access to these instant payment services.
Looking to the future, it remains to be seen how financial institutions will adopt FedNow’s capabilities and the full extent of ways for consumers and businesses to reap the benefits of instant payments. The Fed anticipates that, as more banks and credit unions join the FedNow platform, instant payments will solidify their role as “a routine part of everyday commerce.”
What Is the Difference Between FedNow and Real-Time Payments?
The Federal Reserve—the central bank of the U.S.—operates the FedNow Service, launched in July 2023. In contrast, the real time payments (RTP) network is an instant payment platform operated by a consortium of large U.S. banks. Both platforms can fulfill similar purposes, facilitating instant financial transactions between businesses and consumers.
How Much Does It Cost to Conduct a FedNow Transaction?
The Fed charges financial institutions a monthly fee to participate in the FedNow Service, along with a small fee per transaction. It remains to be seen how much of these costs banks and credit unions will pass on to their customers.
How Much Does FedNow Charge?
FedNow charges a $25 monthly participation fee for each routing transit number (RTN) that enrolls in the service. In addition, it charges fees of 4.5 cents per transaction to the sender’s financial institution. Filing a request for payment (RFP) message via the FedNow platform comes with a fee of 1 cent for the requester.
Can FedNow Freeze Your Account?
No. Although your financial institution must verify that you have sufficient funds to cover any payments through FedNow, neither the Federal Reserve nor the FedNow Service has access to individual bank accounts.
How Is FedNow Different from Fedwire?
The Fedwire Funds Service is a system facilitating real-time financial transactions between participating financial institutions that have an account with the Federal Reserve. Unlike FedNow, which has a transaction limit of $500,000, Fedwire transactions have no such cap, making the service useful for large-value transfers. However, the Fedwire service is available only during business hours, meaning it can’t match FedNow’s 24/7 coverage.
The Bottom Line
The Federal Reserve’s FedNow Service allows banks and credit unions to offer instant payment capabilities to their customers, even outside of normal banking hours. From reducing the time it takes to receive your paycheck to facilitating instantaneous bill payments, FedNow has the potential to add flexibility and swiftness to help businesses and individuals manage cash flows and better control their financial lives.
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https://www.investopedia.com/ask/answers/012815/how-does-government-regulation-impact-railroads-sector.asp | How Does Government Regulation Impact the Railroads Sector? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Since its beginning in February 1827 with the Baltimore & Ohio Railroad, the U.S. rail <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/industry.asp">industry</a> has had a seemingly symbiotic relationship with the prevailing governments.<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"> During the late 19th and early 20th centuries, railways were a major contributor to the country’s economic growth, both from their own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit.asp">profits</a> and share price <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciation</a> as well as through the utility they provided other industries and the general public. They radically improved access to raw materials and provided the first reliable cross-country transportation. Much of the history of the United States is deeply intertwined with the history of the railroad <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sector</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>During the 19th century, the railroad companies comprised one of the largest and most influential industries in the United States.</li><li>Railroad expansion to the West and into major cities was helped in great part due to incentives and support from the federal government.</li><li>With the creation of Amtrak in 1971, America’s interstate passenger rail service was essentially federalized.</li><li>The 2021 infrastructure bill grants a record $66 billion to Amtrak to improve infrastructure and modernize its service.</li></ul></div></div></div>
<span class="heading-toc" id="toc-government-regulation-that-impacted-railroads"></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"> Government Regulation That Impacted Railroads </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Two early examples of government regulation that impacted railroads are the Pacific Railroad Acts of 1862 and 1864. These provided financial aid to companies in the form of land allowances and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage_bond.asp">mortgage bonds</a> based on the amount of westward track laid.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The bonds were valued at $16,000, $32,000, and $48,000 at the time, with the price increasing for track laid progressively further west.<span class="ql-inline-citation" data-cite="2"></span> In 2022, these amounts amount to around $415,000, $830,000, and $1,250,000, respectively, when adjusted for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Another example of government regulation impacting the railroad sector was the Department of Transportation Act of 1966, which created the Federal Railroad Administration (FRA). The newly formed administration was primarily charged with ensuring the safety of both commercial and passenger trains.<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>
<span class="heading-toc" id="toc-blue-sky-laws"></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"> Blue Sky Laws </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> In the early 1900s, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blueskylaws.asp">blue sky laws</a> were put into effect by individual states to protect investors from fraud by requiring securities issuers and brokerages to register and abide by certain reporting requirements. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uniformsecuritiesact.asp">Uniform Securities Act</a>, first promulgated in 1930 and revised in 1956, provided a model for states wishing to enact laws to prohibit securities fraud on investments that are not regulated at the federal level and do not fall under the jurisdiction of the Securities and Exchange Commission (SEC).<span class="ql-inline-citation" data-cite="7"></span> However, certain securities issuers, including railroads, are exempt from these state laws.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<span class="heading-toc" id="toc-government-support-of-railroads"></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"> Government Support of Railroads </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/072115/how-amtrak-works-makes-money.asp">Amtrak</a> has received subsidies ranging from hundreds of millions to billions of dollars since the early 1970s under the Rail Passenger Service Act.<span class="ql-inline-citation" data-cite="10"></span> In the 1960s, after the introduction of the FRA, it became evident that passenger railway service was unprofitable. However, the utility it provided as a public service was deemed imperative to the well-being of the country by both Congress and then-President Richard Nixon.<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_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/a/american-recovery-and-reinvestment-act.asp">American Recovery and Reinvestment Act</a> of 2009 allocated $8 billion toward the development of a network of high-speed rail lines connecting major American cities. Then-President Barack Obama was a strong advocate of the initiative and signed it into law.<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_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Because the consequences of railway mishaps are substantial, the FRA has a significant budget devoted to safety and operations, approximately $222 million in fiscal year 2019.<span class="ql-inline-citation" data-cite="12"></span> Railway accidents can be caused by both malfunctioning equipment and human error. The FRA is charged with investigating accidents and implementing measures to ensure steps are taken to prevent avoidable accidents from recurring and negatively impacting the railroad sector.<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_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> America’s railways received another boost of $66 billion in federal spending resulting from the 2021 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/infrastructure-investment-jobs-act-5209581">Infrastructure Investment and Jobs Act</a> signed into law by President Joe Biden. This amounts to the largest investment in passenger rail since the creation of Amtrak in 1971, handing the agency billions of dollars to address its repair backlog, modernize its fleet, and reduce trip times.<span class="ql-inline-citation" data-cite="14"></span> It can also help with rail line expansion into new cities and routes across the U.S.
</p></div> | Since its beginning in February 1827 with the Baltimore & Ohio Railroad, the U.S. rail [industry](https://www.investopedia.com/terms/i/industry.asp) has had a seemingly symbiotic relationship with the prevailing governments.
During the late 19th and early 20th centuries, railways were a major contributor to the country’s economic growth, both from their own [profits](https://www.investopedia.com/terms/p/profit.asp) and share price [appreciation](https://www.investopedia.com/terms/a/appreciation.asp) as well as through the utility they provided other industries and the general public. They radically improved access to raw materials and provided the first reliable cross-country transportation. Much of the history of the United States is deeply intertwined with the history of the railroad [sector](https://www.investopedia.com/terms/s/sector.asp).
### Key Takeaways
* During the 19th century, the railroad companies comprised one of the largest and most influential industries in the United States.
* Railroad expansion to the West and into major cities was helped in great part due to incentives and support from the federal government.
* With the creation of Amtrak in 1971, America’s interstate passenger rail service was essentially federalized.
* The 2021 infrastructure bill grants a record $66 billion to Amtrak to improve infrastructure and modernize its service.
## Government Regulation That Impacted Railroads
Two early examples of government regulation that impacted railroads are the Pacific Railroad Acts of 1862 and 1864. These provided financial aid to companies in the form of land allowances and [mortgage bonds](https://www.investopedia.com/terms/m/mortgage_bond.asp) based on the amount of westward track laid.
The bonds were valued at $16,000, $32,000, and $48,000 at the time, with the price increasing for track laid progressively further west. In 2022, these amounts amount to around $415,000, $830,000, and $1,250,000, respectively, when adjusted for [inflation](https://www.investopedia.com/terms/i/inflation.asp).
Another example of government regulation impacting the railroad sector was the Department of Transportation Act of 1966, which created the Federal Railroad Administration (FRA). The newly formed administration was primarily charged with ensuring the safety of both commercial and passenger trains.
## Blue Sky Laws
In the early 1900s, [blue sky laws](https://www.investopedia.com/terms/b/blueskylaws.asp) were put into effect by individual states to protect investors from fraud by requiring securities issuers and brokerages to register and abide by certain reporting requirements. The [Uniform Securities Act](https://www.investopedia.com/terms/u/uniformsecuritiesact.asp), first promulgated in 1930 and revised in 1956, provided a model for states wishing to enact laws to prohibit securities fraud on investments that are not regulated at the federal level and do not fall under the jurisdiction of the Securities and Exchange Commission (SEC). However, certain securities issuers, including railroads, are exempt from these state laws.
## Government Support of Railroads
[Amtrak](https://www.investopedia.com/articles/investing/072115/how-amtrak-works-makes-money.asp) has received subsidies ranging from hundreds of millions to billions of dollars since the early 1970s under the Rail Passenger Service Act. In the 1960s, after the introduction of the FRA, it became evident that passenger railway service was unprofitable. However, the utility it provided as a public service was deemed imperative to the well-being of the country by both Congress and then-President Richard Nixon.
The [American Recovery and Reinvestment Act](https://www.investopedia.com/terms/a/american-recovery-and-reinvestment-act.asp) of 2009 allocated $8 billion toward the development of a network of high-speed rail lines connecting major American cities. Then-President Barack Obama was a strong advocate of the initiative and signed it into law.
Because the consequences of railway mishaps are substantial, the FRA has a significant budget devoted to safety and operations, approximately $222 million in fiscal year 2019. Railway accidents can be caused by both malfunctioning equipment and human error. The FRA is charged with investigating accidents and implementing measures to ensure steps are taken to prevent avoidable accidents from recurring and negatively impacting the railroad sector.
America’s railways received another boost of $66 billion in federal spending resulting from the 2021 [Infrastructure Investment and Jobs Act](https://www.investopedia.com/infrastructure-investment-jobs-act-5209581) signed into law by President Joe Biden. This amounts to the largest investment in passenger rail since the creation of Amtrak in 1971, handing the agency billions of dollars to address its repair backlog, modernize its fleet, and reduce trip times. It can also help with rail line expansion into new cities and routes across the U.S.
| Since its beginning in February 1827 with the Baltimore & Ohio Railroad, the U.S. rail industry has had a seemingly symbiotic relationship with the prevailing governments.
During the late 19th and early 20th centuries, railways were a major contributor to the country’s economic growth, both from their own profits and share price appreciation as well as through the utility they provided other industries and the general public. They radically improved access to raw materials and provided the first reliable cross-country transportation. Much of the history of the United States is deeply intertwined with the history of the railroad sector.
Key Takeaways
During the 19th century, the railroad companies comprised one of the largest and most influential industries in the United States.Railroad expansion to the West and into major cities was helped in great part due to incentives and support from the federal government.With the creation of Amtrak in 1971, America’s interstate passenger rail service was essentially federalized.The 2021 infrastructure bill grants a record $66 billion to Amtrak to improve infrastructure and modernize its service.
Government Regulation That Impacted Railroads
Two early examples of government regulation that impacted railroads are the Pacific Railroad Acts of 1862 and 1864. These provided financial aid to companies in the form of land allowances and mortgage bonds based on the amount of westward track laid.
The bonds were valued at $16,000, $32,000, and $48,000 at the time, with the price increasing for track laid progressively further west. In 2022, these amounts amount to around $415,000, $830,000, and $1,250,000, respectively, when adjusted for inflation.
Another example of government regulation impacting the railroad sector was the Department of Transportation Act of 1966, which created the Federal Railroad Administration (FRA). The newly formed administration was primarily charged with ensuring the safety of both commercial and passenger trains.
Blue Sky Laws
In the early 1900s, blue sky laws were put into effect by individual states to protect investors from fraud by requiring securities issuers and brokerages to register and abide by certain reporting requirements. The Uniform Securities Act, first promulgated in 1930 and revised in 1956, provided a model for states wishing to enact laws to prohibit securities fraud on investments that are not regulated at the federal level and do not fall under the jurisdiction of the Securities and Exchange Commission (SEC). However, certain securities issuers, including railroads, are exempt from these state laws.
Government Support of Railroads
Amtrak has received subsidies ranging from hundreds of millions to billions of dollars since the early 1970s under the Rail Passenger Service Act. In the 1960s, after the introduction of the FRA, it became evident that passenger railway service was unprofitable. However, the utility it provided as a public service was deemed imperative to the well-being of the country by both Congress and then-President Richard Nixon.
The American Recovery and Reinvestment Act of 2009 allocated $8 billion toward the development of a network of high-speed rail lines connecting major American cities. Then-President Barack Obama was a strong advocate of the initiative and signed it into law.
Because the consequences of railway mishaps are substantial, the FRA has a significant budget devoted to safety and operations, approximately $222 million in fiscal year 2019. Railway accidents can be caused by both malfunctioning equipment and human error. The FRA is charged with investigating accidents and implementing measures to ensure steps are taken to prevent avoidable accidents from recurring and negatively impacting the railroad sector.
America’s railways received another boost of $66 billion in federal spending resulting from the 2021 Infrastructure Investment and Jobs Act signed into law by President Joe Biden. This amounts to the largest investment in passenger rail since the creation of Amtrak in 1971, handing the agency billions of dollars to address its repair backlog, modernize its fleet, and reduce trip times. It can also help with rail line expansion into new cities and routes across the U.S.
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https://www.investopedia.com/investing/how-renew-and-adjust-your-portfolio/ | How To Adjust and Renew Your Portfolio | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Portfolio rebalancing is nothing more than regular maintenance for your investments, like going to the doctor for a checkup or getting your car’s oil changed. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rebalancing.asp">Rebalancing</a> means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp">asset allocation</a> matches the level of returns you’re trying to achieve and the amount of risk you’re comfortable taking.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> And while rebalancing does involve buying and selling, it's still part of a long-term, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive investing</a> strategy—the type that tends to do the best in the long run. In this article, we’ll talk more about what rebalancing is, as well as why, how often, and how to do it.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Rebalancing means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s asset allocation matches your risk tolerance and desired level of returns.</li><li>There is no optimal frequency or threshold when selecting a rebalancing strategy.</li><li>When rebalancing, primarily, you want to sell overweighted assets.</li><li>The discipline of rebalancing can prevent panicked moves and increase your long-term returns.</li></ul></div></div></div>
<span class="heading-toc" id="toc-why-rebalance-your-portfolio"></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 Rebalance Your Portfolio? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Rebalancing your portfolio is the only way to stay on track with your target asset allocation—the percentage of your portfolio that’s held in different investments, such as 80% <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stocks</a> and 20% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>. Your target asset allocation is the percentage you want to hold in each investment so that you’re comfortable with how much risk you’re taking and are on track to earn the investment returns you need to meet your goals, such as being able to retire by age 65.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The more stocks you hold, the more risk you’re taking on since your portfolio will be more volatile and its value will change with swings in the market. But <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/08/stocks-bonds-performance.asp">stocks tend to outperform bonds</a> significantly over the long run, which is why so many investors rely more on stocks than on bonds to meet their goals.<span class="ql-inline-citation" data-cite="20"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The percentage of your portfolio’s dollar value represented by stocks will increase, as the value of your stock holdings goes up when the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockmarket.asp">stock market</a> does well. If you start with an 80% allocation to stocks, for example, it might increase to 85%, making your portfolio riskier than you intended it to be. The solution? Sell 5% of your stock holdings and buy bonds with the money. That’s an example of rebalancing.
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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 the market is doing well, you might have a hard time, psychologically speaking, with rebalancing. Who wants to sell investments that are doing well? They might go higher and you might miss out! Consider these three reasons:
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0">
<li>They might go lower and then you’ll suffer greater losses than you’re comfortable with.</li>
<li>When you sell an investment that’s been performing well, you’re locking in those gains. They’re real; they don’t just exist on a screen in your brokerage account. And when you buy an investment that’s not performing as well, you’re getting a bargain. Overall, you’re selling <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/081415/look-buy-low-sell-high-strategy.asp">high and buying low</a>, which is exactly what all investors hope for.</li>
<li>Rebalancing usually involves selling only 5% to 10% of your portfolio. So if you are bothered by the idea of selling winners and buying losers (in the short term), at least you’re only doing it with a small amount of your money.<br/></li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> You don’t have to rebalance, of course. The more heavily your portfolio becomes weighted toward stocks, the higher your long-term returns will probably be. But they won’t be that much higher than if you had a more balanced asset allocation and the additional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> might cause you to make financially harmful decisions, like selling stocks at a loss.<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_20-0"> For a completely rational investor (which no one really is), it might make sense to hold 100% stocks. But for anyone who has an emotional reaction to seeing their retirement account balance decline when the stock market suffers, holding some bonds and rebalancing regularly is the best way to stay on track with your plan and achieve the best <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskadjustedreturn.asp">risk-adjusted returns</a> over time.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> One of the times when investors found themselves rebalancing out of bonds and into stocks was during the 2008 financial crisis.<span class="ql-inline-citation" data-cite="22"></span> At the time, it might have seemed scary to buy stocks that were plunging. But those stocks were essentially purchased at a huge discount, and the long <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp">bull market</a> that followed the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great-recession.asp">Great Recession</a> rewarded those investors handsomely.<span class="ql-inline-citation" data-cite="23"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Today, those same investors should still be rebalancing. If not, they will have become strongly overweighted in stocks and they’ll suffer more than they need to the next time the market declines. Since markets are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cyclical-risk.asp">cyclical</a>, it’s only a matter of time until their fortunes, whether good or bad, reverse.
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<span class="heading-toc" id="toc-how-often-should-you-rebalance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> How Often Should You Rebalance? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> There are three frequencies with which you might choose to rebalance your portfolio:
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> <li>According to a set timeframe, like once a year at tax time.</li><li>Whenever your target asset allocation strays by a certain percentage, such as 5% or 10%.</li><li>According to a set timeframe, but only if your target asset allocation has strayed by a certain percentage (a combination of both options).</li>
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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 downside of the first option is that you might waste time and money (in the form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transactioncosts.asp">transaction costs</a>) rebalancing needlessly. There’s really no point in rebalancing if your portfolio is a mere 1% out of alignment with your plan.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> You’ll need to decide how much drift you’re OK with—how far you’re comfortable letting your asset allocation deviate from your target—to determine how often to rebalance. In other words, if your target allocation is 60% stocks and 40% bonds, do you want to rebalance when your portfolio has drifted to 65% stocks and 35% bonds, or are you comfortable waiting until it’s reached 70% stocks and 30% bonds?
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> As it turns out, you may not even need to worry much about when or how often to rebalance. A Vanguard study looking back over the years 1926 to<strong> </strong>2018 concluded that “no specific rebalancing frequency and/or threshold is optimal for all investors." According to Vanguard's findings, someone who rebalanced monthly would have over 1,000 rebalancing events, while someone who rebalanced quarterly would have 372, and someone who rebalanced annually would have just 93. Yet the average annualized return and volatility were nearly identical among the three groups.<span class="ql-inline-citation" data-cite="24"></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>Vanguard recommends checking your portfolio every six months and rebalancing at a 5% threshold to strike the best balance between <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskmanagement.asp">risk management</a> and minimizing costs.<span class="ql-inline-citation" data-cite="17"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <br>Taking it a step further, the Vanguard study actually found that it would be fine to never rebalance your portfolio. On average, someone who started with a 60% allocation to stocks would have ended up with an 85% allocation to stocks.<span class="ql-inline-citation" data-cite="25"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> This person would have spent zero time or money rebalancing. Their portfolio’s volatility was about 2.5 percentage points higher than that of an investor who did rebalance. And their average annualized returns were 8.74%, compared with 8.20%, 8.26%, and 8.19% for the hypothetical investors who rebalanced monthly, quarterly, and annually, respectively.<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_43-0"> Another time you might want to consider rebalancing is when your life situation changes in a way that affects 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>, such as follows:
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<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"> Married a Multimillionaire? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> You can safely shift to more conservative asset allocation. Assuming both you and your spouse manage your existing assets wisely, you may already be set for life.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-subheading__text"> Became Disabled or Seriously Ill? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Again, you might want to rebalance into something more conservative since you want to be able to spend the money you have during the time you have left. You’ll also need money for medical bills sooner rather than later.
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<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"> Divorcing and Not Responsible for Child Support or Alimony? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> With no one to provide for but yourself, you might decide to rebalance into a higher percentage of stocks since your risk-taking won’t affect your family.
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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"> Planning To Buy a House in the Next Few Years? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> You’d be wise to rebalance into more bonds and fewer stocks so that you’ll have plenty of cash to pull out—even if there’s a market downturn—when you’re ready to withdraw your down payment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Now that we’ve covered what rebalancing is and why you should (probably, maybe) do it, let’s talk about how to do it.
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<span class="heading-toc" id="toc-look-at-your-overall-portfolio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-heading__text"> Look at Your Overall Portfolio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> To get an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/coordinate-401-k-investments-with-your-whole-portfolio-5545845">accurate picture of your investments</a>, you need to look at all your accounts combined, not just individual accounts. If you have both 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 <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRA</a>, you want to know how they're working together. What does your combined portfolio look like? Obviously, you can skip this step if you only have one investment account.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Use one of these three methods to create a combined picture of all your investment accounts.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_64-0"> <span class="mntl-sc-block-subheading__text"> 1. Spreadsheet </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> On a single sheet, input each of your accounts, each of the investments within those accounts, and how much money you have in each investment. Note whether each investment is a stock, bond, or cash holding, and then calculate the percentage of your total holdings allocated to each category. This isn’t the easiest or fastest method, but it might be fun if you’re a personal finance geek who likes making spreadsheets.
</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"> Next, compare the allocation of your holdings in each category to your target allocation. If any of your holdings are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/target-date_fund.asp">target-date funds</a> or balanced funds, which will include both stocks and bonds, consult the website of the company that offers those funds (e.g., Fidelity, Vanguard, Schwab) or a research site such as Morningstar, which is what we used to create the spreadsheet below, to see how they’re allocated.
</p>
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<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_69-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<tbody data-check="-1">
<tr>
<td> <b>Account</b></td>
<td> <b>Ticker</b></td>
<td> <b>Fund name</b></td>
<td> <b>Stocks</b></td>
<td> <b>Bonds</b></td>
<td> <b>Cash</b></td>
<td> <b>Total</b></td>
</tr>
<tr>
<td> 401(k)</td>
<td> VTSMX</td>
<td> Vanguard Total Stock Market Index Fund</td>
<td> $9,998</td>
<td> –</td>
<td> $2</td>
<td> $10,000</td>
</tr>
<tr>
<td> </td>
<td> VBMFX</td>
<td> Vanguard Total Bond Market Index Fund</td>
<td> –</td>
<td> $9,895</td>
<td> $15</td>
<td> $10,000*</td>
</tr>
<tr>
<td> Roth IRA</td>
<td> IVV</td>
<td> iShares Core S&P 500 Index ETF</td>
<td> $5,984</td>
<td> –</td>
<td> $16</td>
<td> $6,000</td>
</tr>
<tr>
<td> </td>
<td> GOVT</td>
<td> iShares U.S. Treasury Bond ETF</td>
<td> –</td>
<td> $1,989</td>
<td> $11</td>
<td> $2,000</td>
</tr>
<tr>
<td> <b>Total</b></td>
<td> <b> </b></td>
<td> <b> </b></td>
<td> <b>$15,982</b></td>
<td> <b>$11,884</b></td>
<td> <b>$44</b></td>
<td> <b>$28,000*</b></td>
</tr>
<tr>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr>
<td> Current Allocation</td>
<td> </td>
<td> </td>
<td> 57.1%</td>
<td> 42.4%</td>
<td> 0.2%</td>
<td> 100%*</td>
</tr>
<tr>
<td> Target Allocation</td>
<td> </td>
<td> </td>
<td> 60.0% </td>
<td> 40.0%</td>
<td> 0.0%</td>
<td> 100%</td>
</tr>
<tr>
<td> <b>Difference</b></td>
<td> <b> </b></td>
<td> <b> </b></td>
<td> <b>-2.9%</b></td>
<td> <b>2.4%</b></td>
<td> <b>0.2%</b></td>
<td> <b> </b></td>
</tr>
</tbody>
</table>
</div></figure>
<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"> <em>*0.89% of VBMFX's asset allocation is listed as "not classified."<br/>Thanks to MoneyUnder30.com for the basic format of this spreadsheet.</em><br/>
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_73-0"><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_74-0"><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 break down the stock and bond categories further for a more detailed picture. What percentage of your stocks, for example, are small-cap or large-cap? What percentage are domestic or international? What percentage of your bonds are corporate and what percentage are government-issued securities?</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> You’ll notice when you look up your funds’ asset allocations that funds supposedly 100% dedicated to a specific asset class often have a tiny percentage of their holdings, perhaps 0.5% to 2%, in cash. Don’t sweat this small detail when rebalancing your portfolio.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Also, in the example above, you’ll note that our investor hasn’t strayed far from their target asset allocation. They might decide not to bother rebalancing until the difference is 5% or even 10%.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_79-0"> <span class="mntl-sc-block-subheading__text"> 2. Brokerage Software </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Some <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp">brokerage firms</a> allow their customers to view all their investments in one place, not just the investments they hold with that brokerage. Examples include the Merrill Edge Asset Allocator and Fidelity’s Full View.
</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"> You’ll need to provide your login information for each account whose details you want to view. If you’re using Fidelity’s Full View, for example, and you have a self-employed 401(k) with Fidelity and a Roth IRA with Vanguard, you’ll need to give Fidelity your Vanguard login details so you can see your two accounts’ combined asset allocation.
</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"> 3. Apps </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Apps such as Empower Personal Dashboard, SigFig’s Portfolio Tracker, FutureAdvisor, and Wealthica (for Canadian investors) can sync with your existing accounts to provide a regularly-updated and complete picture of your investments.
</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"> You can use these apps for free; their providers are hoping you’ll sign up for one of the company’s paid services, such as portfolio management. Again, you’ll have to provide these sites with the login details of your brokerage accounts to see your combined asset allocation.
</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"> If you think finding a way to examine your overall portfolio is too much work or if you don’t want to share your login details across sites, here’s another strategy: Strive to maintain your target asset allocation in each of your accounts. Make sure your 401(k) is allocated the right percentage to stocks and to bonds, and do the same for your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account (IRA)</a>. Then rebalance within each account as needed.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div>
<span class="heading-toc" id="toc-analyze-your-portfolio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_91-0"> <span class="mntl-sc-block-heading__text"> Analyze Your Portfolio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Once you have a complete view of your portfolio holdings, examine these four things:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_94-0"> <span class="mntl-sc-block-subheading__text"> 1. Overall Asset Allocation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> What percentage of your investments are in stocks, bonds, and cash, and how does this allocation compare to your target allocation?<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_97-0"><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_98-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>If you own shares of Berkshire Hathaway, pay careful attention. While it’s technically a stock, it has large cash and bond holdings.<span class="ql-inline-citation" data-cite="27"></span><span class="ql-inline-citation" data-cite="26"></span> You might have to do some manual asset allocation calculations if the software you’re using isn’t smart enough to recognize this.</p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_99-0"> <span class="mntl-sc-block-subheading__text"> 2. Overall Risk </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> If you find that you have 70% stocks and 30% bonds, is that too risky for you? If you find that you have 20% cash, 30% bonds, and 50% stocks, are you not taking enough risk to meet your investment goals?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div>
<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"> 3. Overall Fees </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> Ideally, you want your investment fees to be as close to zero as possible, and thanks to increased innovation and competition in the investment marketplace you might be able to achieve this goal. Fidelity Total Market Index Fund (FSKAX), for example, has an annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratio</a> of 0.015%.<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_104-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> The higher your investment fees, the lower your returns, all else being equal. Other fees to watch out for include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/load.asp">loads</a> for buying and selling mutual funds and commissions for buying and selling stocks 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>. For long-term buy-and-hold investors, loads and commissions may cost less over time than annual expense ratios.<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_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"> 4. Returns </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> Are your portfolio’s returns meeting your goals? If they aren’t, that’s not necessarily a problem: What you really care about are the long-term average annual returns. That’s why you want to look at how your portfolio’s investments are performing compared to similar investments.
</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"> Is your stock market fund tracking the index it’s supposed to track? You can look this up on Morningstar, which has determined appropriate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a> for different funds and has created color-coded graphs to show you how your fund has performed against its benchmark.
</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"> Another possibility is that your portfolio’s asset allocation can’t possibly meet your goals. If your goal is to earn an 8% average annual return and your portfolio consists of 80% bonds and 20% stocks, there’s almost no chance you’re going to meet your goal unless you flip your asset allocation to 80% stocks and 20% bonds.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_114-0"><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_115-0"><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 at this stage, you find that you have an unwieldy number of accounts—perhaps you have several 401(k) plans with several former employers—consider consolidating them. You can roll over old 401(k) balances to an individual retirement account (IRA).</p><p><br/></p><p>The old plans can be traditional or Roth, depending on which kind of 401(k) you have or whether you're willing to pay taxes to switch to a Roth. The IRA switch will give you maximum control over your fees and investments. Or, if you like your current employer’s 401(k) and your current employer allows it, you can roll your old 401(k) balances into your current 401(k).<span class="ql-inline-citation" data-cite="29"></span> Note that 401(k) balances have more protection against creditors.<span class="ql-inline-citation" data-cite="30"></span></p></div></div></div>
<span class="heading-toc" id="toc-learn-whats-new"></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"> Learn What’s New </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> Investment innovation might mean that what you currently hold isn’t the best option for meeting your goals. As an example, you might have an index <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 charges an expense ratio of 0.5% when you could be holding a nearly identical index ETF with an expense ratio of 0.05%.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> Does this sound too good to be true? How could you get a nearly identical investment for so much less? Unlike some mutual funds, ETFs rarely charge sales loads or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/12b-1fees.asp">12b-1 (marketing) fees</a>. Also, ETFs are usually passively managed (they follow a given <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">index</a> by investing in all the stocks in that index), not actively managed by human fund managers picking winners and losers. Passive management is not only less expensive but tends to yield better returns—partly due to the lower fees.<span class="ql-inline-citation" data-cite="31"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_121-0"> Another possibility is to move your assets to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp">robo-advisor</a>, which can help lower your fees and eliminate the task of managing your own investments. We talk more about robo-advisors a bit later in this article.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_122-0"></div>
<span class="heading-toc" id="toc-what-should-you-sell-vs-buy"></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"> What Should You Sell vs. Buy? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> Next, it’s time to figure out which investments to unload from your portfolio. Primarily, you want to sell overweighted assets. If stocks have been outperforming bonds, then your desired asset allocation will have gotten out of whack in favor of stocks. You might be holding 75% stocks and 25% bonds when your goal is to hold 70% stocks and 30% bonds. In that case, you’ll need to sell 5% of your stock holdings.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_125-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> Which stocks, including stock mutual funds and stock ETFs, should you sell? Start with these:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_127-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_128-0">
<li>Stock funds with fees that are too high</li>
<li>Stock funds you don’t understand</li>
<li>Stocks of companies whose <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/businessmodel.asp">business model</a> you don’t understand</li>
<li>Stocks and funds that are too risky or not risky enough for your tolerance</li>
<li>Stocks and funds that haven’t performed as well as their benchmarks or as well as you expected them to</li>
<li>Individual stocks that are overvalued or underperforming their peers or that no longer have a positive outlook</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_129-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_130-0"> If it's bonds you’re looking to sell, consider these criteria:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_131-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_132-0">
<li>Bonds whose <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrating.asp">credit rating</a> has dropped (these bonds are now riskier than they were when you purchased them)</li>
<li>Bonds that are underperforming their benchmarks</li>
<li>Bonds with returns that aren’t keeping pace with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a><span class="ql-inline-citation" data-cite="32"></span></li>
<li>Bond funds with fees that are higher than they need to be (that is, you could get a nearly identical bond fund for less)</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_133-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_134-0"> If none of these traits apply to your holdings, sell the investment with the lowest trading fee, such as shares of a no-transaction-fee mutual fund or ETF.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_135-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_136-0"> Before you can purchase new investments, you’ll have to wait for your sales to settle. Settlement times, the time it takes for your sale to finalize and your cash proceeds to appear in your account, vary depending on the type of investment bought or sold.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_137-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_138-0"> Most traditional security transactions settle in two business days, which in industry jargon is described as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-do-t1-t2-and-t3-mean/">T+2</a>—T is the date you place the trade and the 2 represents two business days. Keep in mind that if you place a trade after the market closes, it won’t be executed until the following business day.<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_139-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_140-0"> While your sales are settling, decide what you want to buy. The easiest approach is to buy more of what you already have that you’re <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underweight.asp">underweight</a> in. Reexamine that investment and ask yourself, “Would I buy it today?” If not, seek out a new investment that aligns with your goals.
</p>
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<span class="heading-toc" id="toc-portfolio-rebalancing-by-agegoals"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_142-0"> <span class="mntl-sc-block-heading__text"> Portfolio Rebalancing by Age/Goals </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_143-0"> Portfolio rebalancing in and of itself isn’t really a function of how old you are or what you’re trying to achieve with your portfolio. But since choosing an asset allocation is the precursor to portfolio rebalancing, let’s talk about how you might allocate your portfolio at different key times in your life.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_145-0"> <span class="mntl-sc-block-subheading__text"> Age 25 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_146-0"> You’ve probably read that young investors should place a high percentage of their money in stocks since they have a long time horizon and stocks tend to perform the best in the long run. But your ideal asset allocation depends not just on your age but also on your risk tolerance. If a 10% drop in the stock market would cause you to panic and start selling stocks, you have a lower risk tolerance than someone who would see that same market drop as a buying opportunity.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_148-0"> This short <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://personal.vanguard.com/us/FundsInvQuestionnaire" rel="sponsored nofollow">Vanguard risk tolerance quiz</a> can help you evaluate your risk tolerance and get an idea of how to allocate your portfolio. A simplistic formula like 100 minus your age to get the percentage of your portfolio to allocate to stocks (75% for a 25-year-old) might be a useful starting point, but you’ll need to tweak that percentage to suit your investing personality. You can invest 100% in stocks if you have a very high risk tolerance and a long time horizon, for example.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_150-0"> That Vanguard study we were talking about earlier found that with a hypothetical portfolio invested from 1926 through 2018, average annualized returns would be as low as 5.4% for someone invested 100% in bonds and as high as 9.5% for someone invested 100% in stocks.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_152-0"> But the difference between investing 100% in stocks versus 80% in stocks and 20% in bonds was just a percentage point, with the latter earning average annualized returns of 8.7%. Meanwhile, someone who invested 70% in stocks and 30% in bonds would have earned 8.2%, while a 60/40 investor would have earned 7.8%.<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_153-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_154-0"> What we can take away from these findings is the importance of investing in something tried and true; maybe don’t invest 100% or even 20% of your portfolio in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a>, which is still considered highly speculative.<span class="ql-inline-citation" data-cite="33"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_155-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_156-0"> Since most people are more upset when they lose money in the stock market than they are happy when they make money in the stock market, a strategy that makes you comfortable with the amount of risk you’re taking and helps you stay the course during market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/correction.asp">corrections</a> is the best strategy for you. So, if you’re 25 years old and keep hearing that you should be invested 80% in stocks, you don’t necessarily need to follow that advice. If you’re only comfortable with 50% in stocks and want to keep the other 50% in bonds, that’s fine.
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_158-0"> <span class="mntl-sc-block-subheading__text"> Age 45 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_159-0"> At this point in your life, you might have received an inheritance from a parent or grandparent and be wondering what to do with the money and how the windfall should affect your investment strategy. Another scenario many people face around age 45 is needing money to send a child to college—tens of thousands or maybe even hundreds of thousands of dollars, if you have multiple children or a private school-bound child who didn’t receive any financial aid.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_160-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_161-0"> If you inherit assets, such as stocks, you have to decide how they fit into your overall portfolio and rebalance accordingly. Having more money might mean you’d prefer a more conservative allocation since you don’t need to take on as much risk to achieve the growth you need.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_162-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_163-0"> Inheriting lots of stocks might throw your target allocation way out of whack; you might need to sell off a lot of them and buy bonds. Or you might have inherited lots of bonds and want to own more stocks. You’ll also want to think about whether the particular assets you’ve inherited are things you would buy if you were picking out investments with your own money. And if you inherit cash, well, you can just use the money to purchase the stocks and bonds you want to create your ideal asset allocation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_164-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_165-0"> As far as paying for college, let’s say you have 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>, a tax-advantaged account that helps families save money for education expenses. When your child is 10 or more years away from college, you can use an aggressive asset allocation with a high percentage of stocks. As your child gets closer to college age, you need to rebalance in a way that makes your asset allocation more conservative. Use account contributions to buy bonds instead of stocks.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_166-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_167-0"> The account’s value needs to become less volatile and more stable over time, so you’ll be able to withdraw money for your child’s education when you need it without having to sell investments at a loss. Some 529 plans even have age-based options that act like target-date retirement funds but with a shorter time horizon associated with raising kids and sending them to college.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_168-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_169-0"> Also at age 45, if you’ve been highly successful and watched your spending carefully, you might be on track to retire early. If that’s the case, you might need to start rebalancing toward a more conservative asset allocation. Then again, you might not want to—it depends on your philosophy about stock ownership during retirement, which again has to do with your risk tolerance.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_170-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_171-0"> When you’re zero to 10 years away from retirement, your portfolio is considered to be in the transition stage. Most experts say you should be moving toward an asset allocation that’s weighted more heavily toward bonds than toward stocks—but not too heavily, because you still need continued growth so you won’t outlive your portfolio.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_172-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_173-0"> Instead of moving toward the 40% bond and 60% stock asset allocation that might be recommended for someone planning to retire at age 65, you might move toward a 50/50 allocation. When rebalancing, you’ll be selling stocks and buying bonds.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_174-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_175-0"> <span class="mntl-sc-block-subheading__text"> Age 65 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_176-0"> Age 65 represents the early years of retirement, at least for those people able to afford to stop working. The full Social Security retirement age for those born between 1943 and 1954 is 66; Medicare starts at 65. In any case, at this juncture in life, give or take a few years, you'll be thinking about withdrawing retirement account assets for income.<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_177-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_178-0"> Rebalancing your portfolio at this age could mean selling stocks to gradually move your portfolio toward a heavier bond weighting as you get older. The only catch is that you won’t want to sell stocks at a loss; which investments you’ll sell for income will depend on what you can sell for a profit.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_179-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_180-0"> Being <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversified</a> within each major asset class (for example, holding both large-cap and small-cap stock funds, both international and domestic stock funds, and both government and corporate bonds) gives you a better chance of always having assets to sell at a profit.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_181-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_182-0"> You should also have a retirement drawdown strategy in place. Perhaps you’re going to withdraw 4% of your portfolio balance in year one and adjust that dollar amount by the inflation rate in each following year. Portfolio rebalancing will require a different approach because you’re now accounting for regular withdrawals, whereas before retirement you were accounting only (or mostly) for contributions.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_183-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_184-0"> You might also be making withdrawals from multiple accounts, which might mean rebalancing multiple accounts. Once you reach age 73 if you were born between 1951 and 1959 or 75 if you were born in 1960 or after, you will have to start taking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/requiredminimumdistribution.asp">required minimum distributions (RMDs)</a> from 401(k)s and traditional IRAs to avoid tax penalties.<span class="ql-inline-citation" data-cite="19"></span><span class="ql-inline-citation" data-cite="9"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_185-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_186-0"> When you take RMDs, you can rebalance your portfolio by selling an overweight asset class. Keep in mind that you’ll be paying taxes on withdrawals of earnings and pre-tax contributions unless it’s a Roth account.<span class="ql-inline-citation" data-cite="34"></span> People with significant assets outside of retirement accounts can rebalance in a low-cost, tax-efficient way by gifting appreciated investments to charity or gifting low-basis shares (stock shares with huge <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp">capital gains</a> on their original value) to friends or family.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_188-0"> Now that you understand how the rebalancing process works, the next question is whether to do it yourself, use a robo-advisor, or use a real, live <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentadvisor.asp">investment advisor</a> to help you. Consider the pros and cons of each in terms of skill, time, and cost.
</p>
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<span class="heading-toc" id="toc-diy-portfolio-rebalancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_190-0"> <span class="mntl-sc-block-heading__text"> DIY Portfolio Rebalancing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_191-0"> Rebalancing your portfolio on your own, without the help of a robo-advisor or investment advisor, doesn’t require you to spend any money. What it does cost you is time; how much time depends on the complexity of your investments and your grasp of how to rebalance. If you have one IRA with one stock ETF and one bond ETF, rebalancing will be quick and easy. The more accounts and the more funds you have, the more complicated the task becomes.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_192-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_193-0"> The most common rebalancing advice is to sell the investments you’re overweight in (which will almost always be stocks, since they grow faster than bonds, as we mentioned earlier) and use that money to buy the investments you’re underweight in, which will almost always be bonds. But a simpler method that may have lower transaction costs is to use any new contributions to your account to purchase the investments you need more of.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_194-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_195-0"> If you receive a year-end bonus, a tax refund, or a large gift, use that money. If you make a lump-sum contribution to your IRA, divvy that money up between stocks and bonds in a way that rebalances your portfolio.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_196-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_197-0"> You might not end up <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/08/retirement-assets-cash-saftey.asp">perfectly reallocating your investments</a> back to your target ratio, but you might get close enough to avoid incurring any <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transactioncosts.asp">transaction costs</a> from selling. That being said, many brokerage firms offer no-transaction-fee mutual funds and ETFs, in which case it won’t cost you anything to buy and sell exactly what you need.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_198-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_199-0"> The biggest risks to DIY portfolio rebalancing are not doing it at all and, if you’re working with a taxable account, incurring taxes—especially short-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital_gains_tax.asp">capital gains taxes</a>, which have a higher rate than long-term capital gains taxes.<span class="ql-inline-citation" data-cite="10"></span> Any time you pay investment taxes, you’re hurting your net returns.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_201-0"> To sum up, here’s an example of how this whole process plays out.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_203-0"> Allocation before rebalancing:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_204-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_205-0"> <li>Stock mutual fund value: $7,500 (75% of your portfolio)</li><li>Bond mutual fund value: $2,500 (25% of your portfolio)</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_206-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_207-0"> To rebalance:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_208-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_209-0"> <li>Sell: $500 of the stock mutual fund</li><li>Buy: $500 of the bond mutual fund</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_210-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_211-0"> Allocation after rebalancing:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_212-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_213-0"> <li>Stock mutual fund value: $7,000 (70% of your portfolio)</li><li>Bond mutual fund value: $3,000 (30% of your portfolio)</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_214-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_215-0"> One thing that might complicate this process is if the bond mutual fund you want to purchase additional shares of has a minimum investment that’s higher than $500. If that happens, you could purchase shares of a nearly identical bond ETF that doesn’t have any investment minimum.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_216-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_217-0"> Also, if you have to pay any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commission.asp">commissions</a> to buy or sell, your total ending portfolio value will dip below $10,000.
</p>
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<span class="heading-toc" id="toc-automatic-portfolio-rebalancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_219-0"> <span class="mntl-sc-block-heading__text"> Automatic Portfolio Rebalancing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_220-0"> The easiest way to rebalance your DIY portfolio is to choose funds whose managers do the rebalancing for you. Target-date funds, which are mutual funds that hold a basket of investments and have an asset allocation that’s based on your projected (target) retirement date, are an example of a type of fund that is rebalanced automatically. You don’t have to do anything.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_222-0"> A fund for investors with a target retirement date of 2040, for example, might have a starting target asset allocation of 90% stocks and 10% bonds. The fund’s managers will rebalance the fund as often as needed to maintain that target allocation. In addition, they will shift the fund’s asset allocation over time, making it more conservative through 2040. These funds typically have low expense ratios; the industry average was 0.32% in 2022, according to Morningstar.<span class="ql-inline-citation" data-cite="11"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_224-0"> What about <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancedfund.asp">balanced mutual funds</a>? Also called hybrid funds or asset allocation funds, these are similar to target-date funds in that they hold both stocks and bonds and aim to maintain a specific allocation, such as 60% stocks and 40% bonds. However, that allocation doesn’t change over time; balanced funds are for investors of any age.
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<span class="heading-toc" id="toc-robo-advisor-rebalancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_226-0"> <span class="mntl-sc-block-heading__text"> Robo-Advisor Rebalancing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_227-0"> Working with a robo-advisor requires virtually no time or skill on your part: The robo-advisor does all the work automatically. All you have to do is open an account, put money in it, and choose your target asset allocation or answer the software’s questions to help it set a target asset allocation for you.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_229-0"> Costs are low, too. Robo-advisors such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/betterment-review-4587887">Betterment</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wealthfront-review-4587933">Wealthfront</a>, and SigFig use strategies to make rebalancing less expensive by avoiding or minimizing short- and long-term capital gains taxes. A common strategy is to avoid selling any investments when rebalancing your portfolio. Instead, when you deposit cash or receive a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a>, the robo-advisor uses that money to purchase more of the investment you’re underweight in.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_231-0"> If, for example, your portfolio has drifted from 60% stocks, 40% bonds to 65% stocks, 35% bonds, the next time you add money to your account, the robo-advisor will use your deposit to buy more bonds. By not selling any investments, you don’t face any tax consequences. This strategy is called cash flow rebalancing.<span class="ql-inline-citation" data-cite="35"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_233-0"> You can use this strategy on your own to save money, too, but it’s only helpful within taxable accounts, not within retirement accounts such as IRAs and 401(k)s. There are no tax consequences when you buy or sell investments within a retirement account.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_235-0"> Another strategy robo-advisors use to keep transaction costs low is to sell whichever asset class you’re overweight in any time you decide to withdraw money from your portfolio.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_237-0"> Further, when your robo-advisor rebalances your portfolio, you won’t incur the commissions, transactions, or trading fees that you might encounter when rebalancing on your own or through an investment advisor. Robo-advisors don’t charge these fees. Instead, they charge an annual fee based on the dollar amount of assets they manage for you.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_239-0"> Betterment, for example, charges an annual fee of 0.25% of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management (AUM)</a> and there’s no minimum account balance. And because robo-advisors are automated, they may rebalance your portfolio as often as daily, so it’s usually in near-perfect balance.<span class="ql-inline-citation" data-cite="12"></span>
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<span class="heading-toc" id="toc-hiring-an-investment-advisor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_241-0"> <span class="mntl-sc-block-heading__text"> Hiring an Investment Advisor </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_242-0"> If you hire someone to manage your investments, portfolio rebalancing is one of the tasks they’ll do for you, along with creating an investment plan based on your goals and risk tolerance and recommending investments to help you meet those goals.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_244-0"> It’s certainly possible to manage your investments and rebalance your portfolio yourself. But some people don’t have the time, aren’t confident in their ability to learn what they need to know and perform the right tasks, or just don’t want to deal with it. Other people know how to manage their own investments but find themselves making emotional decisions that hurt their returns. If you fall into one of these categories, hiring an investment advisor could pay off.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_246-0"> <span class="mntl-sc-block-subheading__text"> Hire a Fee-Only Fiduciary </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_247-0"> This type of professional has no conflicts of interest that prevent them from acting outside your best interests. They are paid for the time they spend helping you, not for the specific investments they sell you or the number of trades they make on your behalf.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_249-0"> When choosing a fee-only fiduciary, check their background using the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://brokercheck.finra.org/">Financial Industry Regulatory Authority’s (FINRA) BrokerCheck</a> website and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://adviserinfo.sec.gov/">Securities and Exchange Commission’s Investment Adviser Public Disclosure</a> website. Depending on the type of advisor, you may be able to check their background at one, both, or neither of these websites.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_251-0"> If they do show up in one of these databases, you can see their work history, exams passed, credentials earned, and any disciplinary actions or customer complaints against them. You can also sometimes check an advisor’s credentials with the credentialing organization. You can verify, for example, an individual’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfp.asp">certified financial planner</a> certification and background on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.cfp.net/verify-a-cfp-professional">CFP Board’s</a> website.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_253-0"> <span class="mntl-sc-block-subheading__text"> Cost Is the Biggest Drawback </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_254-0"> The industry average cost is about 1.0% of assets managed per year.<span class="ql-inline-citation" data-cite="36"></span> So, if your portfolio totals $50,000, you’ll pay your advisor roughly $500 per year. In addition, you’ll pay any commissions and fees associated with the investments in your portfolio. Paying any fees, including an investment advisor’s fees, will reduce your overall returns.<span class="ql-inline-citation" data-cite="28"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_256-0"> Some advisory services try to beat the industry average. Vanguard claims that on a $250,000 investment using the company’s Personal Advisor Services, which only costs 0.35% of assets under management per year, you would spend $218.75 in quarterly fees compared to an industry average of $625.<span class="ql-inline-citation" data-cite="14"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_258-0"> <span class="mntl-sc-block-subheading__text"> An Advisor’s Fee Can Pay For Itself </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_259-0"> Investors tend to earn lower returns than the funds they invest in because of their tendency to sell low and buy high. A financial advisor’s behavioral coaching can overcome this problem. Working with an advisor can help you stay the course, especially in bull or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearmarket.asp">bear markets</a> when your emotions might tempt you to stray from your long-term investment strategy.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_261-0"> A study by Vanguard published in June 2020 found that through financial planning, discipline, and guidance—not through trying to outperform the market—advisors can increase their clients’ average annual returns by 3%.<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_263-0"> Another reason to hire an investment advisor is if it’s going to mean the difference between actually having an investment plan or doing nothing. The latter is toxic to your long-term financial health.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_265-0"> You don’t have to hire someone on an ongoing basis; you can hire someone to help you on a per-project or hourly basis. Not all advisors work this way, but many offer the option. And you can hire someone anywhere in the country and speak with them online, by Skype, or by phone.<br/>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_267-0"><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_268-0"><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 seemingly free advice offered by some bank and brokerage employees and services may be compensated with commissions on the investments you purchase, which creates a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conflict-of-interest.asp">conflict of interest</a> that may dissuade them from recommending your best options.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_269-0"> Of course, there are also downsides to hiring an advisor, including the fact that many of them have investment minimums. You might not have enough assets for certain advisors to take you on as a client. Some services require that you have at least $500,000 to invest.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_271-0"> The funny thing about hiring an advisor to rebalance your portfolio is that they’re probably going to use an automatic asset rebalancing tool (in other words, software). This software accounts for the investor’s risk tolerance, tax goals (such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxgainlossharvesting.asp">tax-loss harvesting</a> and avoiding capital gains and wash sales) in the case of a taxable portfolio, and asset location (whether to hold certain investments in a nontaxable account such as a 401(k) or in a taxable brokerage account).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_273-0"> It’s expensive, sophisticated software that you wouldn’t buy on your own, yes. But robo-advisors also use the software. Why not, then, just hire a robo-advisor?
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_275-0"> A Vanguard study published in May 2013, analyzing 58,168 self-directed Vanguard IRA investors over the five years ended Dec. 31, 2012, found that investors who made trades for any reason other than rebalancing—such as reacting to market shake-ups—fared worse than those who stayed the course.<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_277-0"> If robo-advising won’t prevent you from buying high and selling low, then paying an individual investment advisor to make sure you stay disciplined with your investing strategy can pay off.
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_279-0"><span class="heading-toc" id="toc-how-do-i-rebalance-my-portfolio"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Rebalance My Portfolio?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The purpose of rebalancing is to ensure your investment portfolio is correctly weighted to suit your risk tolerance and financial goals. If you feel that your portfolio has become too risky or too conservative, you can take action to return it to your original asset allocation target by selling something you’re overweight in and replacing it with whatever is lacking.<br/></p><p>Alternatively, if you don’t want to sell, consider depositing extra funds or using dividend payments to purchase more of the investments you’re underweight in until your portfolio meets your objectives again.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_281-0"><span class="heading-toc" id="toc-when-should-i-adjust-my-portfolio"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Should I Adjust My Portfolio?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Generally, it’s advisable to check your portfolio every six months or so and only intervene if your asset allocation has deviated significantly from where it should be and basically left you with an unacceptable risk/return profile. It’s up to you to choose an exact threshold that shouldn’t be crossed. Vanguard reckons investors should act when their preferred asset allocation strays by 5%, believing that this level strikes the best balance between risk management and minimizing costs.<span class="ql-inline-citation" data-cite="17"></span><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_283-0"><span class="heading-toc" id="toc-can-you-rebalance-too-often"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Rebalance Too Often?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Rebalancing your portfolio frequently is not necessary and often counterproductive. Endlessly buying and selling results in higher costs that eat into your returns. Watching your portfolio like a hawk can also encourage panic transactions and a hefty short-term capital gains tax bill.</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_285-0"> <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_286-0"> The first time you rebalance your portfolio might be the hardest because everything is new. It’s a good skill to learn and a good habit to get into, though. While it isn’t designed to increase your long-term returns directly, it is designed to increase your risk-adjusted returns.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_288-0"> For most people, taking a little less risk through rebalancing is a good thing because it keeps them from panicking when the market sours and helps them stick with their long-term investment plan. And that means the discipline of rebalancing can increase your long-term returns.
</p></div> | Portfolio rebalancing is nothing more than regular maintenance for your investments, like going to the doctor for a checkup or getting your car’s oil changed. [Rebalancing](https://www.investopedia.com/terms/r/rebalancing.asp) means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp) matches the level of returns you’re trying to achieve and the amount of risk you’re comfortable taking.
And while rebalancing does involve buying and selling, it's still part of a long-term, [passive investing](https://www.investopedia.com/terms/p/passiveinvesting.asp) strategy—the type that tends to do the best in the long run. In this article, we’ll talk more about what rebalancing is, as well as why, how often, and how to do it.
### Key Takeaways
* Rebalancing means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s asset allocation matches your risk tolerance and desired level of returns.
* There is no optimal frequency or threshold when selecting a rebalancing strategy.
* When rebalancing, primarily, you want to sell overweighted assets.
* The discipline of rebalancing can prevent panicked moves and increase your long-term returns.
## Why Rebalance Your Portfolio?
Rebalancing your portfolio is the only way to stay on track with your target asset allocation—the percentage of your portfolio that’s held in different investments, such as 80% [stocks](https://www.investopedia.com/terms/s/stock.asp) and 20% [bonds](https://www.investopedia.com/terms/b/bond.asp). Your target asset allocation is the percentage you want to hold in each investment so that you’re comfortable with how much risk you’re taking and are on track to earn the investment returns you need to meet your goals, such as being able to retire by age 65.
The more stocks you hold, the more risk you’re taking on since your portfolio will be more volatile and its value will change with swings in the market. But [stocks tend to outperform bonds](https://www.investopedia.com/articles/basics/08/stocks-bonds-performance.asp) significantly over the long run, which is why so many investors rely more on stocks than on bonds to meet their goals.
The percentage of your portfolio’s dollar value represented by stocks will increase, as the value of your stock holdings goes up when the [stock market](https://www.investopedia.com/terms/s/stockmarket.asp) does well. If you start with an 80% allocation to stocks, for example, it might increase to 85%, making your portfolio riskier than you intended it to be. The solution? Sell 5% of your stock holdings and buy bonds with the money. That’s an example of rebalancing.
When the market is doing well, you might have a hard time, psychologically speaking, with rebalancing. Who wants to sell investments that are doing well? They might go higher and you might miss out! Consider these three reasons:
1. They might go lower and then you’ll suffer greater losses than you’re comfortable with.
2. When you sell an investment that’s been performing well, you’re locking in those gains. They’re real; they don’t just exist on a screen in your brokerage account. And when you buy an investment that’s not performing as well, you’re getting a bargain. Overall, you’re selling [high and buying low](https://www.investopedia.com/articles/investing/081415/look-buy-low-sell-high-strategy.asp), which is exactly what all investors hope for.
3. Rebalancing usually involves selling only 5% to 10% of your portfolio. So if you are bothered by the idea of selling winners and buying losers (in the short term), at least you’re only doing it with a small amount of your money.
You don’t have to rebalance, of course. The more heavily your portfolio becomes weighted toward stocks, the higher your long-term returns will probably be. But they won’t be that much higher than if you had a more balanced asset allocation and the additional [volatility](https://www.investopedia.com/terms/v/volatility.asp) might cause you to make financially harmful decisions, like selling stocks at a loss.
For a completely rational investor (which no one really is), it might make sense to hold 100% stocks. But for anyone who has an emotional reaction to seeing their retirement account balance decline when the stock market suffers, holding some bonds and rebalancing regularly is the best way to stay on track with your plan and achieve the best [risk-adjusted returns](https://www.investopedia.com/terms/r/riskadjustedreturn.asp) over time.
One of the times when investors found themselves rebalancing out of bonds and into stocks was during the 2008 financial crisis. At the time, it might have seemed scary to buy stocks that were plunging. But those stocks were essentially purchased at a huge discount, and the long [bull market](https://www.investopedia.com/terms/b/bullmarket.asp) that followed the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp) rewarded those investors handsomely.
Today, those same investors should still be rebalancing. If not, they will have become strongly overweighted in stocks and they’ll suffer more than they need to the next time the market declines. Since markets are [cyclical](https://www.investopedia.com/terms/c/cyclical-risk.asp), it’s only a matter of time until their fortunes, whether good or bad, reverse.
## How Often Should You Rebalance?
There are three frequencies with which you might choose to rebalance your portfolio:
1. According to a set timeframe, like once a year at tax time.
2. Whenever your target asset allocation strays by a certain percentage, such as 5% or 10%.
3. According to a set timeframe, but only if your target asset allocation has strayed by a certain percentage (a combination of both options).
The downside of the first option is that you might waste time and money (in the form of [transaction costs](https://www.investopedia.com/terms/t/transactioncosts.asp)) rebalancing needlessly. There’s really no point in rebalancing if your portfolio is a mere 1% out of alignment with your plan.
You’ll need to decide how much drift you’re OK with—how far you’re comfortable letting your asset allocation deviate from your target—to determine how often to rebalance. In other words, if your target allocation is 60% stocks and 40% bonds, do you want to rebalance when your portfolio has drifted to 65% stocks and 35% bonds, or are you comfortable waiting until it’s reached 70% stocks and 30% bonds?
As it turns out, you may not even need to worry much about when or how often to rebalance. A Vanguard study looking back over the years 1926 to2018 concluded that “no specific rebalancing frequency and/or threshold is optimal for all investors." According to Vanguard's findings, someone who rebalanced monthly would have over 1,000 rebalancing events, while someone who rebalanced quarterly would have 372, and someone who rebalanced annually would have just 93. Yet the average annualized return and volatility were nearly identical among the three groups.
###
Vanguard recommends checking your portfolio every six months and rebalancing at a 5% threshold to strike the best balance between [risk management](https://www.investopedia.com/terms/r/riskmanagement.asp) and minimizing costs.
Taking it a step further, the Vanguard study actually found that it would be fine to never rebalance your portfolio. On average, someone who started with a 60% allocation to stocks would have ended up with an 85% allocation to stocks.
This person would have spent zero time or money rebalancing. Their portfolio’s volatility was about 2.5 percentage points higher than that of an investor who did rebalance. And their average annualized returns were 8.74%, compared with 8.20%, 8.26%, and 8.19% for the hypothetical investors who rebalanced monthly, quarterly, and annually, respectively.
Another time you might want to consider rebalancing is when your life situation changes in a way that affects your [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), such as follows:
### Married a Multimillionaire?
You can safely shift to more conservative asset allocation. Assuming both you and your spouse manage your existing assets wisely, you may already be set for life.
### Became Disabled or Seriously Ill?
Again, you might want to rebalance into something more conservative since you want to be able to spend the money you have during the time you have left. You’ll also need money for medical bills sooner rather than later.
### Divorcing and Not Responsible for Child Support or Alimony?
With no one to provide for but yourself, you might decide to rebalance into a higher percentage of stocks since your risk-taking won’t affect your family.
### Planning To Buy a House in the Next Few Years?
You’d be wise to rebalance into more bonds and fewer stocks so that you’ll have plenty of cash to pull out—even if there’s a market downturn—when you’re ready to withdraw your down payment.
Now that we’ve covered what rebalancing is and why you should (probably, maybe) do it, let’s talk about how to do it.
## Look at Your Overall Portfolio
To get an [accurate picture of your investments](https://www.investopedia.com/coordinate-401-k-investments-with-your-whole-portfolio-5545845), you need to look at all your accounts combined, not just individual accounts. If you have both a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) and a [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp), you want to know how they're working together. What does your combined portfolio look like? Obviously, you can skip this step if you only have one investment account.
Use one of these three methods to create a combined picture of all your investment accounts.
### 1. Spreadsheet
On a single sheet, input each of your accounts, each of the investments within those accounts, and how much money you have in each investment. Note whether each investment is a stock, bond, or cash holding, and then calculate the percentage of your total holdings allocated to each category. This isn’t the easiest or fastest method, but it might be fun if you’re a personal finance geek who likes making spreadsheets.
Next, compare the allocation of your holdings in each category to your target allocation. If any of your holdings are [target-date funds](https://www.investopedia.com/terms/t/target-date_fund.asp) or balanced funds, which will include both stocks and bonds, consult the website of the company that offers those funds (e.g., Fidelity, Vanguard, Schwab) or a research site such as Morningstar, which is what we used to create the spreadsheet below, to see how they’re allocated.
| **Account** | **Ticker** | **Fund name** | **Stocks** | **Bonds** | **Cash** | **Total** |
| --- | --- | --- | --- | --- | --- | --- |
| 401(k) | VTSMX | Vanguard Total Stock Market Index Fund | $9,998 | – | $2 | $10,000 |
| | VBMFX | Vanguard Total Bond Market Index Fund | – | $9,895 | $15 | $10,000\* |
| Roth IRA | IVV | iShares Core S&P 500 Index ETF | $5,984 | – | $16 | $6,000 |
| | GOVT | iShares U.S. Treasury Bond ETF | – | $1,989 | $11 | $2,000 |
| **Total** | | | **$15,982** | **$11,884** | **$44** | **$28,000\*** |
| | | | | | | |
| Current Allocation | | | 57.1% | 42.4% | 0.2% | 100%\* |
| Target Allocation | | | 60.0% | 40.0% | 0.0% | 100% |
| **Difference** | | | **-2.9%** | **2.4%** | **0.2%** | |
*\*0.89% of VBMFX's asset allocation is listed as "not classified."
Thanks to MoneyUnder30.com for the basic format of this spreadsheet.*
###
You can break down the stock and bond categories further for a more detailed picture. What percentage of your stocks, for example, are small-cap or large-cap? What percentage are domestic or international? What percentage of your bonds are corporate and what percentage are government-issued securities?
You’ll notice when you look up your funds’ asset allocations that funds supposedly 100% dedicated to a specific asset class often have a tiny percentage of their holdings, perhaps 0.5% to 2%, in cash. Don’t sweat this small detail when rebalancing your portfolio.
Also, in the example above, you’ll note that our investor hasn’t strayed far from their target asset allocation. They might decide not to bother rebalancing until the difference is 5% or even 10%.
### 2. Brokerage Software
Some [brokerage firms](https://www.investopedia.com/terms/b/brokerage-company.asp) allow their customers to view all their investments in one place, not just the investments they hold with that brokerage. Examples include the Merrill Edge Asset Allocator and Fidelity’s Full View.
You’ll need to provide your login information for each account whose details you want to view. If you’re using Fidelity’s Full View, for example, and you have a self-employed 401(k) with Fidelity and a Roth IRA with Vanguard, you’ll need to give Fidelity your Vanguard login details so you can see your two accounts’ combined asset allocation.
### 3. Apps
Apps such as Empower Personal Dashboard, SigFig’s Portfolio Tracker, FutureAdvisor, and Wealthica (for Canadian investors) can sync with your existing accounts to provide a regularly-updated and complete picture of your investments.
You can use these apps for free; their providers are hoping you’ll sign up for one of the company’s paid services, such as portfolio management. Again, you’ll have to provide these sites with the login details of your brokerage accounts to see your combined asset allocation.
If you think finding a way to examine your overall portfolio is too much work or if you don’t want to share your login details across sites, here’s another strategy: Strive to maintain your target asset allocation in each of your accounts. Make sure your 401(k) is allocated the right percentage to stocks and to bonds, and do the same for your [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp). Then rebalance within each account as needed.
## Analyze Your Portfolio
Once you have a complete view of your portfolio holdings, examine these four things:
### 1. Overall Asset Allocation
What percentage of your investments are in stocks, bonds, and cash, and how does this allocation compare to your target allocation?
###
If you own shares of Berkshire Hathaway, pay careful attention. While it’s technically a stock, it has large cash and bond holdings. You might have to do some manual asset allocation calculations if the software you’re using isn’t smart enough to recognize this.
### 2. Overall Risk
If you find that you have 70% stocks and 30% bonds, is that too risky for you? If you find that you have 20% cash, 30% bonds, and 50% stocks, are you not taking enough risk to meet your investment goals?
### 3. Overall Fees
Ideally, you want your investment fees to be as close to zero as possible, and thanks to increased innovation and competition in the investment marketplace you might be able to achieve this goal. Fidelity Total Market Index Fund (FSKAX), for example, has an annual [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) of 0.015%.
The higher your investment fees, the lower your returns, all else being equal. Other fees to watch out for include [loads](https://www.investopedia.com/terms/l/load.asp) for buying and selling mutual funds and commissions for buying and selling stocks and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). For long-term buy-and-hold investors, loads and commissions may cost less over time than annual expense ratios.
### 4. Returns
Are your portfolio’s returns meeting your goals? If they aren’t, that’s not necessarily a problem: What you really care about are the long-term average annual returns. That’s why you want to look at how your portfolio’s investments are performing compared to similar investments.
Is your stock market fund tracking the index it’s supposed to track? You can look this up on Morningstar, which has determined appropriate [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp) for different funds and has created color-coded graphs to show you how your fund has performed against its benchmark.
Another possibility is that your portfolio’s asset allocation can’t possibly meet your goals. If your goal is to earn an 8% average annual return and your portfolio consists of 80% bonds and 20% stocks, there’s almost no chance you’re going to meet your goal unless you flip your asset allocation to 80% stocks and 20% bonds.
###
If at this stage, you find that you have an unwieldy number of accounts—perhaps you have several 401(k) plans with several former employers—consider consolidating them. You can roll over old 401(k) balances to an individual retirement account (IRA).
The old plans can be traditional or Roth, depending on which kind of 401(k) you have or whether you're willing to pay taxes to switch to a Roth. The IRA switch will give you maximum control over your fees and investments. Or, if you like your current employer’s 401(k) and your current employer allows it, you can roll your old 401(k) balances into your current 401(k). Note that 401(k) balances have more protection against creditors.
## Learn What’s New
Investment innovation might mean that what you currently hold isn’t the best option for meeting your goals. As an example, you might have an index [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) that charges an expense ratio of 0.5% when you could be holding a nearly identical index ETF with an expense ratio of 0.05%.
Does this sound too good to be true? How could you get a nearly identical investment for so much less? Unlike some mutual funds, ETFs rarely charge sales loads or [12b-1 (marketing) fees](https://www.investopedia.com/terms/1/12b-1fees.asp). Also, ETFs are usually passively managed (they follow a given [index](https://www.investopedia.com/terms/i/index.asp) by investing in all the stocks in that index), not actively managed by human fund managers picking winners and losers. Passive management is not only less expensive but tends to yield better returns—partly due to the lower fees.
Another possibility is to move your assets to a [robo-advisor](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp), which can help lower your fees and eliminate the task of managing your own investments. We talk more about robo-advisors a bit later in this article.
## What Should You Sell vs. Buy?
Next, it’s time to figure out which investments to unload from your portfolio. Primarily, you want to sell overweighted assets. If stocks have been outperforming bonds, then your desired asset allocation will have gotten out of whack in favor of stocks. You might be holding 75% stocks and 25% bonds when your goal is to hold 70% stocks and 30% bonds. In that case, you’ll need to sell 5% of your stock holdings.
Which stocks, including stock mutual funds and stock ETFs, should you sell? Start with these:
* Stock funds with fees that are too high
* Stock funds you don’t understand
* Stocks of companies whose [business model](https://www.investopedia.com/terms/b/businessmodel.asp) you don’t understand
* Stocks and funds that are too risky or not risky enough for your tolerance
* Stocks and funds that haven’t performed as well as their benchmarks or as well as you expected them to
* Individual stocks that are overvalued or underperforming their peers or that no longer have a positive outlook
If it's bonds you’re looking to sell, consider these criteria:
* Bonds whose [credit rating](https://www.investopedia.com/terms/c/creditrating.asp) has dropped (these bonds are now riskier than they were when you purchased them)
* Bonds that are underperforming their benchmarks
* Bonds with returns that aren’t keeping pace with [inflation](https://www.investopedia.com/terms/i/inflation.asp)
* Bond funds with fees that are higher than they need to be (that is, you could get a nearly identical bond fund for less)
If none of these traits apply to your holdings, sell the investment with the lowest trading fee, such as shares of a no-transaction-fee mutual fund or ETF.
Before you can purchase new investments, you’ll have to wait for your sales to settle. Settlement times, the time it takes for your sale to finalize and your cash proceeds to appear in your account, vary depending on the type of investment bought or sold.
Most traditional security transactions settle in two business days, which in industry jargon is described as [T+2](https://www.investopedia.com/ask/answers/what-do-t1-t2-and-t3-mean/)—T is the date you place the trade and the 2 represents two business days. Keep in mind that if you place a trade after the market closes, it won’t be executed until the following business day.
While your sales are settling, decide what you want to buy. The easiest approach is to buy more of what you already have that you’re [underweight](https://www.investopedia.com/terms/u/underweight.asp) in. Reexamine that investment and ask yourself, “Would I buy it today?” If not, seek out a new investment that aligns with your goals.
## Portfolio Rebalancing by Age/Goals
Portfolio rebalancing in and of itself isn’t really a function of how old you are or what you’re trying to achieve with your portfolio. But since choosing an asset allocation is the precursor to portfolio rebalancing, let’s talk about how you might allocate your portfolio at different key times in your life.
### Age 25
You’ve probably read that young investors should place a high percentage of their money in stocks since they have a long time horizon and stocks tend to perform the best in the long run. But your ideal asset allocation depends not just on your age but also on your risk tolerance. If a 10% drop in the stock market would cause you to panic and start selling stocks, you have a lower risk tolerance than someone who would see that same market drop as a buying opportunity.
This short [Vanguard risk tolerance quiz](https://personal.vanguard.com/us/FundsInvQuestionnaire) can help you evaluate your risk tolerance and get an idea of how to allocate your portfolio. A simplistic formula like 100 minus your age to get the percentage of your portfolio to allocate to stocks (75% for a 25-year-old) might be a useful starting point, but you’ll need to tweak that percentage to suit your investing personality. You can invest 100% in stocks if you have a very high risk tolerance and a long time horizon, for example.
That Vanguard study we were talking about earlier found that with a hypothetical portfolio invested from 1926 through 2018, average annualized returns would be as low as 5.4% for someone invested 100% in bonds and as high as 9.5% for someone invested 100% in stocks.
But the difference between investing 100% in stocks versus 80% in stocks and 20% in bonds was just a percentage point, with the latter earning average annualized returns of 8.7%. Meanwhile, someone who invested 70% in stocks and 30% in bonds would have earned 8.2%, while a 60/40 investor would have earned 7.8%.
What we can take away from these findings is the importance of investing in something tried and true; maybe don’t invest 100% or even 20% of your portfolio in [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp), which is still considered highly speculative.
Since most people are more upset when they lose money in the stock market than they are happy when they make money in the stock market, a strategy that makes you comfortable with the amount of risk you’re taking and helps you stay the course during market [corrections](https://www.investopedia.com/terms/c/correction.asp) is the best strategy for you. So, if you’re 25 years old and keep hearing that you should be invested 80% in stocks, you don’t necessarily need to follow that advice. If you’re only comfortable with 50% in stocks and want to keep the other 50% in bonds, that’s fine.
### Age 45
At this point in your life, you might have received an inheritance from a parent or grandparent and be wondering what to do with the money and how the windfall should affect your investment strategy. Another scenario many people face around age 45 is needing money to send a child to college—tens of thousands or maybe even hundreds of thousands of dollars, if you have multiple children or a private school-bound child who didn’t receive any financial aid.
If you inherit assets, such as stocks, you have to decide how they fit into your overall portfolio and rebalance accordingly. Having more money might mean you’d prefer a more conservative allocation since you don’t need to take on as much risk to achieve the growth you need.
Inheriting lots of stocks might throw your target allocation way out of whack; you might need to sell off a lot of them and buy bonds. Or you might have inherited lots of bonds and want to own more stocks. You’ll also want to think about whether the particular assets you’ve inherited are things you would buy if you were picking out investments with your own money. And if you inherit cash, well, you can just use the money to purchase the stocks and bonds you want to create your ideal asset allocation.
As far as paying for college, let’s say you have a [529 plan](https://www.investopedia.com/terms/1/529plan.asp), a tax-advantaged account that helps families save money for education expenses. When your child is 10 or more years away from college, you can use an aggressive asset allocation with a high percentage of stocks. As your child gets closer to college age, you need to rebalance in a way that makes your asset allocation more conservative. Use account contributions to buy bonds instead of stocks.
The account’s value needs to become less volatile and more stable over time, so you’ll be able to withdraw money for your child’s education when you need it without having to sell investments at a loss. Some 529 plans even have age-based options that act like target-date retirement funds but with a shorter time horizon associated with raising kids and sending them to college.
Also at age 45, if you’ve been highly successful and watched your spending carefully, you might be on track to retire early. If that’s the case, you might need to start rebalancing toward a more conservative asset allocation. Then again, you might not want to—it depends on your philosophy about stock ownership during retirement, which again has to do with your risk tolerance.
When you’re zero to 10 years away from retirement, your portfolio is considered to be in the transition stage. Most experts say you should be moving toward an asset allocation that’s weighted more heavily toward bonds than toward stocks—but not too heavily, because you still need continued growth so you won’t outlive your portfolio.
Instead of moving toward the 40% bond and 60% stock asset allocation that might be recommended for someone planning to retire at age 65, you might move toward a 50/50 allocation. When rebalancing, you’ll be selling stocks and buying bonds.
### Age 65
Age 65 represents the early years of retirement, at least for those people able to afford to stop working. The full Social Security retirement age for those born between 1943 and 1954 is 66; Medicare starts at 65. In any case, at this juncture in life, give or take a few years, you'll be thinking about withdrawing retirement account assets for income.
Rebalancing your portfolio at this age could mean selling stocks to gradually move your portfolio toward a heavier bond weighting as you get older. The only catch is that you won’t want to sell stocks at a loss; which investments you’ll sell for income will depend on what you can sell for a profit.
Being [diversified](https://www.investopedia.com/terms/d/diversification.asp) within each major asset class (for example, holding both large-cap and small-cap stock funds, both international and domestic stock funds, and both government and corporate bonds) gives you a better chance of always having assets to sell at a profit.
You should also have a retirement drawdown strategy in place. Perhaps you’re going to withdraw 4% of your portfolio balance in year one and adjust that dollar amount by the inflation rate in each following year. Portfolio rebalancing will require a different approach because you’re now accounting for regular withdrawals, whereas before retirement you were accounting only (or mostly) for contributions.
You might also be making withdrawals from multiple accounts, which might mean rebalancing multiple accounts. Once you reach age 73 if you were born between 1951 and 1959 or 75 if you were born in 1960 or after, you will have to start taking [required minimum distributions (RMDs)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) from 401(k)s and traditional IRAs to avoid tax penalties.
When you take RMDs, you can rebalance your portfolio by selling an overweight asset class. Keep in mind that you’ll be paying taxes on withdrawals of earnings and pre-tax contributions unless it’s a Roth account. People with significant assets outside of retirement accounts can rebalance in a low-cost, tax-efficient way by gifting appreciated investments to charity or gifting low-basis shares (stock shares with huge [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) on their original value) to friends or family.
Now that you understand how the rebalancing process works, the next question is whether to do it yourself, use a robo-advisor, or use a real, live [investment advisor](https://www.investopedia.com/terms/i/investmentadvisor.asp) to help you. Consider the pros and cons of each in terms of skill, time, and cost.
## DIY Portfolio Rebalancing
Rebalancing your portfolio on your own, without the help of a robo-advisor or investment advisor, doesn’t require you to spend any money. What it does cost you is time; how much time depends on the complexity of your investments and your grasp of how to rebalance. If you have one IRA with one stock ETF and one bond ETF, rebalancing will be quick and easy. The more accounts and the more funds you have, the more complicated the task becomes.
The most common rebalancing advice is to sell the investments you’re overweight in (which will almost always be stocks, since they grow faster than bonds, as we mentioned earlier) and use that money to buy the investments you’re underweight in, which will almost always be bonds. But a simpler method that may have lower transaction costs is to use any new contributions to your account to purchase the investments you need more of.
If you receive a year-end bonus, a tax refund, or a large gift, use that money. If you make a lump-sum contribution to your IRA, divvy that money up between stocks and bonds in a way that rebalances your portfolio.
You might not end up [perfectly reallocating your investments](https://www.investopedia.com/ask/answers/08/retirement-assets-cash-saftey.asp) back to your target ratio, but you might get close enough to avoid incurring any [transaction costs](https://www.investopedia.com/terms/t/transactioncosts.asp) from selling. That being said, many brokerage firms offer no-transaction-fee mutual funds and ETFs, in which case it won’t cost you anything to buy and sell exactly what you need.
The biggest risks to DIY portfolio rebalancing are not doing it at all and, if you’re working with a taxable account, incurring taxes—especially short-term [capital gains taxes](https://www.investopedia.com/terms/c/capital_gains_tax.asp), which have a higher rate than long-term capital gains taxes. Any time you pay investment taxes, you’re hurting your net returns.
To sum up, here’s an example of how this whole process plays out.
Allocation before rebalancing:
* Stock mutual fund value: $7,500 (75% of your portfolio)
* Bond mutual fund value: $2,500 (25% of your portfolio)
To rebalance:
* Sell: $500 of the stock mutual fund
* Buy: $500 of the bond mutual fund
Allocation after rebalancing:
* Stock mutual fund value: $7,000 (70% of your portfolio)
* Bond mutual fund value: $3,000 (30% of your portfolio)
One thing that might complicate this process is if the bond mutual fund you want to purchase additional shares of has a minimum investment that’s higher than $500. If that happens, you could purchase shares of a nearly identical bond ETF that doesn’t have any investment minimum.
Also, if you have to pay any [commissions](https://www.investopedia.com/terms/c/commission.asp) to buy or sell, your total ending portfolio value will dip below $10,000.
## Automatic Portfolio Rebalancing
The easiest way to rebalance your DIY portfolio is to choose funds whose managers do the rebalancing for you. Target-date funds, which are mutual funds that hold a basket of investments and have an asset allocation that’s based on your projected (target) retirement date, are an example of a type of fund that is rebalanced automatically. You don’t have to do anything.
A fund for investors with a target retirement date of 2040, for example, might have a starting target asset allocation of 90% stocks and 10% bonds. The fund’s managers will rebalance the fund as often as needed to maintain that target allocation. In addition, they will shift the fund’s asset allocation over time, making it more conservative through 2040. These funds typically have low expense ratios; the industry average was 0.32% in 2022, according to Morningstar.
What about [balanced mutual funds](https://www.investopedia.com/terms/b/balancedfund.asp)? Also called hybrid funds or asset allocation funds, these are similar to target-date funds in that they hold both stocks and bonds and aim to maintain a specific allocation, such as 60% stocks and 40% bonds. However, that allocation doesn’t change over time; balanced funds are for investors of any age.
## Robo-Advisor Rebalancing
Working with a robo-advisor requires virtually no time or skill on your part: The robo-advisor does all the work automatically. All you have to do is open an account, put money in it, and choose your target asset allocation or answer the software’s questions to help it set a target asset allocation for you.
Costs are low, too. Robo-advisors such as [Betterment](https://www.investopedia.com/betterment-review-4587887), [Wealthfront](https://www.investopedia.com/wealthfront-review-4587933), and SigFig use strategies to make rebalancing less expensive by avoiding or minimizing short- and long-term capital gains taxes. A common strategy is to avoid selling any investments when rebalancing your portfolio. Instead, when you deposit cash or receive a [dividend](https://www.investopedia.com/terms/d/dividend.asp), the robo-advisor uses that money to purchase more of the investment you’re underweight in.
If, for example, your portfolio has drifted from 60% stocks, 40% bonds to 65% stocks, 35% bonds, the next time you add money to your account, the robo-advisor will use your deposit to buy more bonds. By not selling any investments, you don’t face any tax consequences. This strategy is called cash flow rebalancing.
You can use this strategy on your own to save money, too, but it’s only helpful within taxable accounts, not within retirement accounts such as IRAs and 401(k)s. There are no tax consequences when you buy or sell investments within a retirement account.
Another strategy robo-advisors use to keep transaction costs low is to sell whichever asset class you’re overweight in any time you decide to withdraw money from your portfolio.
Further, when your robo-advisor rebalances your portfolio, you won’t incur the commissions, transactions, or trading fees that you might encounter when rebalancing on your own or through an investment advisor. Robo-advisors don’t charge these fees. Instead, they charge an annual fee based on the dollar amount of assets they manage for you.
Betterment, for example, charges an annual fee of 0.25% of [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp) and there’s no minimum account balance. And because robo-advisors are automated, they may rebalance your portfolio as often as daily, so it’s usually in near-perfect balance.
## Hiring an Investment Advisor
If you hire someone to manage your investments, portfolio rebalancing is one of the tasks they’ll do for you, along with creating an investment plan based on your goals and risk tolerance and recommending investments to help you meet those goals.
It’s certainly possible to manage your investments and rebalance your portfolio yourself. But some people don’t have the time, aren’t confident in their ability to learn what they need to know and perform the right tasks, or just don’t want to deal with it. Other people know how to manage their own investments but find themselves making emotional decisions that hurt their returns. If you fall into one of these categories, hiring an investment advisor could pay off.
### Hire a Fee-Only Fiduciary
This type of professional has no conflicts of interest that prevent them from acting outside your best interests. They are paid for the time they spend helping you, not for the specific investments they sell you or the number of trades they make on your behalf.
When choosing a fee-only fiduciary, check their background using the [Financial Industry Regulatory Authority’s (FINRA) BrokerCheck](https://brokercheck.finra.org/) website and the [Securities and Exchange Commission’s Investment Adviser Public Disclosure](https://adviserinfo.sec.gov/) website. Depending on the type of advisor, you may be able to check their background at one, both, or neither of these websites.
If they do show up in one of these databases, you can see their work history, exams passed, credentials earned, and any disciplinary actions or customer complaints against them. You can also sometimes check an advisor’s credentials with the credentialing organization. You can verify, for example, an individual’s [certified financial planner](https://www.investopedia.com/terms/c/cfp.asp) certification and background on the [CFP Board’s](https://www.cfp.net/verify-a-cfp-professional) website.
### Cost Is the Biggest Drawback
The industry average cost is about 1.0% of assets managed per year. So, if your portfolio totals $50,000, you’ll pay your advisor roughly $500 per year. In addition, you’ll pay any commissions and fees associated with the investments in your portfolio. Paying any fees, including an investment advisor’s fees, will reduce your overall returns.
Some advisory services try to beat the industry average. Vanguard claims that on a $250,000 investment using the company’s Personal Advisor Services, which only costs 0.35% of assets under management per year, you would spend $218.75 in quarterly fees compared to an industry average of $625.
### An Advisor’s Fee Can Pay For Itself
Investors tend to earn lower returns than the funds they invest in because of their tendency to sell low and buy high. A financial advisor’s behavioral coaching can overcome this problem. Working with an advisor can help you stay the course, especially in bull or [bear markets](https://www.investopedia.com/terms/b/bearmarket.asp) when your emotions might tempt you to stray from your long-term investment strategy.
A study by Vanguard published in June 2020 found that through financial planning, discipline, and guidance—not through trying to outperform the market—advisors can increase their clients’ average annual returns by 3%.
Another reason to hire an investment advisor is if it’s going to mean the difference between actually having an investment plan or doing nothing. The latter is toxic to your long-term financial health.
You don’t have to hire someone on an ongoing basis; you can hire someone to help you on a per-project or hourly basis. Not all advisors work this way, but many offer the option. And you can hire someone anywhere in the country and speak with them online, by Skype, or by phone.
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The seemingly free advice offered by some bank and brokerage employees and services may be compensated with commissions on the investments you purchase, which creates a [conflict of interest](https://www.investopedia.com/terms/c/conflict-of-interest.asp) that may dissuade them from recommending your best options.
Of course, there are also downsides to hiring an advisor, including the fact that many of them have investment minimums. You might not have enough assets for certain advisors to take you on as a client. Some services require that you have at least $500,000 to invest.
The funny thing about hiring an advisor to rebalance your portfolio is that they’re probably going to use an automatic asset rebalancing tool (in other words, software). This software accounts for the investor’s risk tolerance, tax goals (such as [tax-loss harvesting](https://www.investopedia.com/terms/t/taxgainlossharvesting.asp) and avoiding capital gains and wash sales) in the case of a taxable portfolio, and asset location (whether to hold certain investments in a nontaxable account such as a 401(k) or in a taxable brokerage account).
It’s expensive, sophisticated software that you wouldn’t buy on your own, yes. But robo-advisors also use the software. Why not, then, just hire a robo-advisor?
A Vanguard study published in May 2013, analyzing 58,168 self-directed Vanguard IRA investors over the five years ended Dec. 31, 2012, found that investors who made trades for any reason other than rebalancing—such as reacting to market shake-ups—fared worse than those who stayed the course.
If robo-advising won’t prevent you from buying high and selling low, then paying an individual investment advisor to make sure you stay disciplined with your investing strategy can pay off.
## How Do I Rebalance My Portfolio?
The purpose of rebalancing is to ensure your investment portfolio is correctly weighted to suit your risk tolerance and financial goals. If you feel that your portfolio has become too risky or too conservative, you can take action to return it to your original asset allocation target by selling something you’re overweight in and replacing it with whatever is lacking.
Alternatively, if you don’t want to sell, consider depositing extra funds or using dividend payments to purchase more of the investments you’re underweight in until your portfolio meets your objectives again.
## When Should I Adjust My Portfolio?
Generally, it’s advisable to check your portfolio every six months or so and only intervene if your asset allocation has deviated significantly from where it should be and basically left you with an unacceptable risk/return profile. It’s up to you to choose an exact threshold that shouldn’t be crossed. Vanguard reckons investors should act when their preferred asset allocation strays by 5%, believing that this level strikes the best balance between risk management and minimizing costs.
## Can You Rebalance Too Often?
Rebalancing your portfolio frequently is not necessary and often counterproductive. Endlessly buying and selling results in higher costs that eat into your returns. Watching your portfolio like a hawk can also encourage panic transactions and a hefty short-term capital gains tax bill.
## The Bottom Line
The first time you rebalance your portfolio might be the hardest because everything is new. It’s a good skill to learn and a good habit to get into, though. While it isn’t designed to increase your long-term returns directly, it is designed to increase your risk-adjusted returns.
For most people, taking a little less risk through rebalancing is a good thing because it keeps them from panicking when the market sours and helps them stick with their long-term investment plan. And that means the discipline of rebalancing can increase your long-term returns.
| Portfolio rebalancing is nothing more than regular maintenance for your investments, like going to the doctor for a checkup or getting your car’s oil changed. Rebalancing means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s asset allocation matches the level of returns you’re trying to achieve and the amount of risk you’re comfortable taking.
And while rebalancing does involve buying and selling, it's still part of a long-term, passive investing strategy—the type that tends to do the best in the long run. In this article, we’ll talk more about what rebalancing is, as well as why, how often, and how to do it.
Key Takeaways
Rebalancing means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s asset allocation matches your risk tolerance and desired level of returns.There is no optimal frequency or threshold when selecting a rebalancing strategy.When rebalancing, primarily, you want to sell overweighted assets.The discipline of rebalancing can prevent panicked moves and increase your long-term returns.
Why Rebalance Your Portfolio?
Rebalancing your portfolio is the only way to stay on track with your target asset allocation—the percentage of your portfolio that’s held in different investments, such as 80% stocks and 20% bonds. Your target asset allocation is the percentage you want to hold in each investment so that you’re comfortable with how much risk you’re taking and are on track to earn the investment returns you need to meet your goals, such as being able to retire by age 65.
The more stocks you hold, the more risk you’re taking on since your portfolio will be more volatile and its value will change with swings in the market. But stocks tend to outperform bonds significantly over the long run, which is why so many investors rely more on stocks than on bonds to meet their goals.
The percentage of your portfolio’s dollar value represented by stocks will increase, as the value of your stock holdings goes up when the stock market does well. If you start with an 80% allocation to stocks, for example, it might increase to 85%, making your portfolio riskier than you intended it to be. The solution? Sell 5% of your stock holdings and buy bonds with the money. That’s an example of rebalancing.
When the market is doing well, you might have a hard time, psychologically speaking, with rebalancing. Who wants to sell investments that are doing well? They might go higher and you might miss out! Consider these three reasons:
They might go lower and then you’ll suffer greater losses than you’re comfortable with.
When you sell an investment that’s been performing well, you’re locking in those gains. They’re real; they don’t just exist on a screen in your brokerage account. And when you buy an investment that’s not performing as well, you’re getting a bargain. Overall, you’re selling high and buying low, which is exactly what all investors hope for.
Rebalancing usually involves selling only 5% to 10% of your portfolio. So if you are bothered by the idea of selling winners and buying losers (in the short term), at least you’re only doing it with a small amount of your money.
You don’t have to rebalance, of course. The more heavily your portfolio becomes weighted toward stocks, the higher your long-term returns will probably be. But they won’t be that much higher than if you had a more balanced asset allocation and the additional volatility might cause you to make financially harmful decisions, like selling stocks at a loss.
For a completely rational investor (which no one really is), it might make sense to hold 100% stocks. But for anyone who has an emotional reaction to seeing their retirement account balance decline when the stock market suffers, holding some bonds and rebalancing regularly is the best way to stay on track with your plan and achieve the best risk-adjusted returns over time.
One of the times when investors found themselves rebalancing out of bonds and into stocks was during the 2008 financial crisis. At the time, it might have seemed scary to buy stocks that were plunging. But those stocks were essentially purchased at a huge discount, and the long bull market that followed the Great Recession rewarded those investors handsomely.
Today, those same investors should still be rebalancing. If not, they will have become strongly overweighted in stocks and they’ll suffer more than they need to the next time the market declines. Since markets are cyclical, it’s only a matter of time until their fortunes, whether good or bad, reverse.
How Often Should You Rebalance?
There are three frequencies with which you might choose to rebalance your portfolio:
According to a set timeframe, like once a year at tax time.Whenever your target asset allocation strays by a certain percentage, such as 5% or 10%.According to a set timeframe, but only if your target asset allocation has strayed by a certain percentage (a combination of both options).
The downside of the first option is that you might waste time and money (in the form of transaction costs) rebalancing needlessly. There’s really no point in rebalancing if your portfolio is a mere 1% out of alignment with your plan.
You’ll need to decide how much drift you’re OK with—how far you’re comfortable letting your asset allocation deviate from your target—to determine how often to rebalance. In other words, if your target allocation is 60% stocks and 40% bonds, do you want to rebalance when your portfolio has drifted to 65% stocks and 35% bonds, or are you comfortable waiting until it’s reached 70% stocks and 30% bonds?
As it turns out, you may not even need to worry much about when or how often to rebalance. A Vanguard study looking back over the years 1926 to 2018 concluded that “no specific rebalancing frequency and/or threshold is optimal for all investors." According to Vanguard's findings, someone who rebalanced monthly would have over 1,000 rebalancing events, while someone who rebalanced quarterly would have 372, and someone who rebalanced annually would have just 93. Yet the average annualized return and volatility were nearly identical among the three groups.
Vanguard recommends checking your portfolio every six months and rebalancing at a 5% threshold to strike the best balance between risk management and minimizing costs.
Taking it a step further, the Vanguard study actually found that it would be fine to never rebalance your portfolio. On average, someone who started with a 60% allocation to stocks would have ended up with an 85% allocation to stocks.
This person would have spent zero time or money rebalancing. Their portfolio’s volatility was about 2.5 percentage points higher than that of an investor who did rebalance. And their average annualized returns were 8.74%, compared with 8.20%, 8.26%, and 8.19% for the hypothetical investors who rebalanced monthly, quarterly, and annually, respectively.
Another time you might want to consider rebalancing is when your life situation changes in a way that affects your risk tolerance, such as follows:
Married a Multimillionaire?
You can safely shift to more conservative asset allocation. Assuming both you and your spouse manage your existing assets wisely, you may already be set for life.
Became Disabled or Seriously Ill?
Again, you might want to rebalance into something more conservative since you want to be able to spend the money you have during the time you have left. You’ll also need money for medical bills sooner rather than later.
Divorcing and Not Responsible for Child Support or Alimony?
With no one to provide for but yourself, you might decide to rebalance into a higher percentage of stocks since your risk-taking won’t affect your family.
Planning To Buy a House in the Next Few Years?
You’d be wise to rebalance into more bonds and fewer stocks so that you’ll have plenty of cash to pull out—even if there’s a market downturn—when you’re ready to withdraw your down payment.
Now that we’ve covered what rebalancing is and why you should (probably, maybe) do it, let’s talk about how to do it.
Look at Your Overall Portfolio
To get an accurate picture of your investments, you need to look at all your accounts combined, not just individual accounts. If you have both a 401(k) and a Roth IRA, you want to know how they're working together. What does your combined portfolio look like? Obviously, you can skip this step if you only have one investment account.
Use one of these three methods to create a combined picture of all your investment accounts.
1. Spreadsheet
On a single sheet, input each of your accounts, each of the investments within those accounts, and how much money you have in each investment. Note whether each investment is a stock, bond, or cash holding, and then calculate the percentage of your total holdings allocated to each category. This isn’t the easiest or fastest method, but it might be fun if you’re a personal finance geek who likes making spreadsheets.
Next, compare the allocation of your holdings in each category to your target allocation. If any of your holdings are target-date funds or balanced funds, which will include both stocks and bonds, consult the website of the company that offers those funds (e.g., Fidelity, Vanguard, Schwab) or a research site such as Morningstar, which is what we used to create the spreadsheet below, to see how they’re allocated.
Account
Ticker
Fund name
Stocks
Bonds
Cash
Total
401(k)
VTSMX
Vanguard Total Stock Market Index Fund
$9,998
–
$2
$10,000
VBMFX
Vanguard Total Bond Market Index Fund
–
$9,895
$15
$10,000*
Roth IRA
IVV
iShares Core S&P 500 Index ETF
$5,984
–
$16
$6,000
GOVT
iShares U.S. Treasury Bond ETF
–
$1,989
$11
$2,000
Total
$15,982
$11,884
$44
$28,000*
Current Allocation
57.1%
42.4%
0.2%
100%*
Target Allocation
60.0%
40.0%
0.0%
100%
Difference
-2.9%
2.4%
0.2%
*0.89% of VBMFX's asset allocation is listed as "not classified."Thanks to MoneyUnder30.com for the basic format of this spreadsheet.
You can break down the stock and bond categories further for a more detailed picture. What percentage of your stocks, for example, are small-cap or large-cap? What percentage are domestic or international? What percentage of your bonds are corporate and what percentage are government-issued securities?
You’ll notice when you look up your funds’ asset allocations that funds supposedly 100% dedicated to a specific asset class often have a tiny percentage of their holdings, perhaps 0.5% to 2%, in cash. Don’t sweat this small detail when rebalancing your portfolio.
Also, in the example above, you’ll note that our investor hasn’t strayed far from their target asset allocation. They might decide not to bother rebalancing until the difference is 5% or even 10%.
2. Brokerage Software
Some brokerage firms allow their customers to view all their investments in one place, not just the investments they hold with that brokerage. Examples include the Merrill Edge Asset Allocator and Fidelity’s Full View.
You’ll need to provide your login information for each account whose details you want to view. If you’re using Fidelity’s Full View, for example, and you have a self-employed 401(k) with Fidelity and a Roth IRA with Vanguard, you’ll need to give Fidelity your Vanguard login details so you can see your two accounts’ combined asset allocation.
3. Apps
Apps such as Empower Personal Dashboard, SigFig’s Portfolio Tracker, FutureAdvisor, and Wealthica (for Canadian investors) can sync with your existing accounts to provide a regularly-updated and complete picture of your investments.
You can use these apps for free; their providers are hoping you’ll sign up for one of the company’s paid services, such as portfolio management. Again, you’ll have to provide these sites with the login details of your brokerage accounts to see your combined asset allocation.
If you think finding a way to examine your overall portfolio is too much work or if you don’t want to share your login details across sites, here’s another strategy: Strive to maintain your target asset allocation in each of your accounts. Make sure your 401(k) is allocated the right percentage to stocks and to bonds, and do the same for your individual retirement account (IRA). Then rebalance within each account as needed.
Analyze Your Portfolio
Once you have a complete view of your portfolio holdings, examine these four things:
1. Overall Asset Allocation
What percentage of your investments are in stocks, bonds, and cash, and how does this allocation compare to your target allocation?
If you own shares of Berkshire Hathaway, pay careful attention. While it’s technically a stock, it has large cash and bond holdings. You might have to do some manual asset allocation calculations if the software you’re using isn’t smart enough to recognize this.
2. Overall Risk
If you find that you have 70% stocks and 30% bonds, is that too risky for you? If you find that you have 20% cash, 30% bonds, and 50% stocks, are you not taking enough risk to meet your investment goals?
3. Overall Fees
Ideally, you want your investment fees to be as close to zero as possible, and thanks to increased innovation and competition in the investment marketplace you might be able to achieve this goal. Fidelity Total Market Index Fund (FSKAX), for example, has an annual expense ratio of 0.015%.
The higher your investment fees, the lower your returns, all else being equal. Other fees to watch out for include loads for buying and selling mutual funds and commissions for buying and selling stocks and exchange-traded funds (ETFs). For long-term buy-and-hold investors, loads and commissions may cost less over time than annual expense ratios.
4. Returns
Are your portfolio’s returns meeting your goals? If they aren’t, that’s not necessarily a problem: What you really care about are the long-term average annual returns. That’s why you want to look at how your portfolio’s investments are performing compared to similar investments.
Is your stock market fund tracking the index it’s supposed to track? You can look this up on Morningstar, which has determined appropriate benchmarks for different funds and has created color-coded graphs to show you how your fund has performed against its benchmark.
Another possibility is that your portfolio’s asset allocation can’t possibly meet your goals. If your goal is to earn an 8% average annual return and your portfolio consists of 80% bonds and 20% stocks, there’s almost no chance you’re going to meet your goal unless you flip your asset allocation to 80% stocks and 20% bonds.
If at this stage, you find that you have an unwieldy number of accounts—perhaps you have several 401(k) plans with several former employers—consider consolidating them. You can roll over old 401(k) balances to an individual retirement account (IRA).The old plans can be traditional or Roth, depending on which kind of 401(k) you have or whether you're willing to pay taxes to switch to a Roth. The IRA switch will give you maximum control over your fees and investments. Or, if you like your current employer’s 401(k) and your current employer allows it, you can roll your old 401(k) balances into your current 401(k). Note that 401(k) balances have more protection against creditors.
Learn What’s New
Investment innovation might mean that what you currently hold isn’t the best option for meeting your goals. As an example, you might have an index mutual fund that charges an expense ratio of 0.5% when you could be holding a nearly identical index ETF with an expense ratio of 0.05%.
Does this sound too good to be true? How could you get a nearly identical investment for so much less? Unlike some mutual funds, ETFs rarely charge sales loads or 12b-1 (marketing) fees. Also, ETFs are usually passively managed (they follow a given index by investing in all the stocks in that index), not actively managed by human fund managers picking winners and losers. Passive management is not only less expensive but tends to yield better returns—partly due to the lower fees.
Another possibility is to move your assets to a robo-advisor, which can help lower your fees and eliminate the task of managing your own investments. We talk more about robo-advisors a bit later in this article.
What Should You Sell vs. Buy?
Next, it’s time to figure out which investments to unload from your portfolio. Primarily, you want to sell overweighted assets. If stocks have been outperforming bonds, then your desired asset allocation will have gotten out of whack in favor of stocks. You might be holding 75% stocks and 25% bonds when your goal is to hold 70% stocks and 30% bonds. In that case, you’ll need to sell 5% of your stock holdings.
Which stocks, including stock mutual funds and stock ETFs, should you sell? Start with these:
Stock funds with fees that are too high
Stock funds you don’t understand
Stocks of companies whose business model you don’t understand
Stocks and funds that are too risky or not risky enough for your tolerance
Stocks and funds that haven’t performed as well as their benchmarks or as well as you expected them to
Individual stocks that are overvalued or underperforming their peers or that no longer have a positive outlook
If it's bonds you’re looking to sell, consider these criteria:
Bonds whose credit rating has dropped (these bonds are now riskier than they were when you purchased them)
Bonds that are underperforming their benchmarks
Bonds with returns that aren’t keeping pace with inflation
Bond funds with fees that are higher than they need to be (that is, you could get a nearly identical bond fund for less)
If none of these traits apply to your holdings, sell the investment with the lowest trading fee, such as shares of a no-transaction-fee mutual fund or ETF.
Before you can purchase new investments, you’ll have to wait for your sales to settle. Settlement times, the time it takes for your sale to finalize and your cash proceeds to appear in your account, vary depending on the type of investment bought or sold.
Most traditional security transactions settle in two business days, which in industry jargon is described as T+2—T is the date you place the trade and the 2 represents two business days. Keep in mind that if you place a trade after the market closes, it won’t be executed until the following business day.
While your sales are settling, decide what you want to buy. The easiest approach is to buy more of what you already have that you’re underweight in. Reexamine that investment and ask yourself, “Would I buy it today?” If not, seek out a new investment that aligns with your goals.
Portfolio Rebalancing by Age/Goals
Portfolio rebalancing in and of itself isn’t really a function of how old you are or what you’re trying to achieve with your portfolio. But since choosing an asset allocation is the precursor to portfolio rebalancing, let’s talk about how you might allocate your portfolio at different key times in your life.
Age 25
You’ve probably read that young investors should place a high percentage of their money in stocks since they have a long time horizon and stocks tend to perform the best in the long run. But your ideal asset allocation depends not just on your age but also on your risk tolerance. If a 10% drop in the stock market would cause you to panic and start selling stocks, you have a lower risk tolerance than someone who would see that same market drop as a buying opportunity.
This short Vanguard risk tolerance quiz can help you evaluate your risk tolerance and get an idea of how to allocate your portfolio. A simplistic formula like 100 minus your age to get the percentage of your portfolio to allocate to stocks (75% for a 25-year-old) might be a useful starting point, but you’ll need to tweak that percentage to suit your investing personality. You can invest 100% in stocks if you have a very high risk tolerance and a long time horizon, for example.
That Vanguard study we were talking about earlier found that with a hypothetical portfolio invested from 1926 through 2018, average annualized returns would be as low as 5.4% for someone invested 100% in bonds and as high as 9.5% for someone invested 100% in stocks.
But the difference between investing 100% in stocks versus 80% in stocks and 20% in bonds was just a percentage point, with the latter earning average annualized returns of 8.7%. Meanwhile, someone who invested 70% in stocks and 30% in bonds would have earned 8.2%, while a 60/40 investor would have earned 7.8%.
What we can take away from these findings is the importance of investing in something tried and true; maybe don’t invest 100% or even 20% of your portfolio in Bitcoin, which is still considered highly speculative.
Since most people are more upset when they lose money in the stock market than they are happy when they make money in the stock market, a strategy that makes you comfortable with the amount of risk you’re taking and helps you stay the course during market corrections is the best strategy for you. So, if you’re 25 years old and keep hearing that you should be invested 80% in stocks, you don’t necessarily need to follow that advice. If you’re only comfortable with 50% in stocks and want to keep the other 50% in bonds, that’s fine.
Age 45
At this point in your life, you might have received an inheritance from a parent or grandparent and be wondering what to do with the money and how the windfall should affect your investment strategy. Another scenario many people face around age 45 is needing money to send a child to college—tens of thousands or maybe even hundreds of thousands of dollars, if you have multiple children or a private school-bound child who didn’t receive any financial aid.
If you inherit assets, such as stocks, you have to decide how they fit into your overall portfolio and rebalance accordingly. Having more money might mean you’d prefer a more conservative allocation since you don’t need to take on as much risk to achieve the growth you need.
Inheriting lots of stocks might throw your target allocation way out of whack; you might need to sell off a lot of them and buy bonds. Or you might have inherited lots of bonds and want to own more stocks. You’ll also want to think about whether the particular assets you’ve inherited are things you would buy if you were picking out investments with your own money. And if you inherit cash, well, you can just use the money to purchase the stocks and bonds you want to create your ideal asset allocation.
As far as paying for college, let’s say you have a 529 plan, a tax-advantaged account that helps families save money for education expenses. When your child is 10 or more years away from college, you can use an aggressive asset allocation with a high percentage of stocks. As your child gets closer to college age, you need to rebalance in a way that makes your asset allocation more conservative. Use account contributions to buy bonds instead of stocks.
The account’s value needs to become less volatile and more stable over time, so you’ll be able to withdraw money for your child’s education when you need it without having to sell investments at a loss. Some 529 plans even have age-based options that act like target-date retirement funds but with a shorter time horizon associated with raising kids and sending them to college.
Also at age 45, if you’ve been highly successful and watched your spending carefully, you might be on track to retire early. If that’s the case, you might need to start rebalancing toward a more conservative asset allocation. Then again, you might not want to—it depends on your philosophy about stock ownership during retirement, which again has to do with your risk tolerance.
When you’re zero to 10 years away from retirement, your portfolio is considered to be in the transition stage. Most experts say you should be moving toward an asset allocation that’s weighted more heavily toward bonds than toward stocks—but not too heavily, because you still need continued growth so you won’t outlive your portfolio.
Instead of moving toward the 40% bond and 60% stock asset allocation that might be recommended for someone planning to retire at age 65, you might move toward a 50/50 allocation. When rebalancing, you’ll be selling stocks and buying bonds.
Age 65
Age 65 represents the early years of retirement, at least for those people able to afford to stop working. The full Social Security retirement age for those born between 1943 and 1954 is 66; Medicare starts at 65. In any case, at this juncture in life, give or take a few years, you'll be thinking about withdrawing retirement account assets for income.
Rebalancing your portfolio at this age could mean selling stocks to gradually move your portfolio toward a heavier bond weighting as you get older. The only catch is that you won’t want to sell stocks at a loss; which investments you’ll sell for income will depend on what you can sell for a profit.
Being diversified within each major asset class (for example, holding both large-cap and small-cap stock funds, both international and domestic stock funds, and both government and corporate bonds) gives you a better chance of always having assets to sell at a profit.
You should also have a retirement drawdown strategy in place. Perhaps you’re going to withdraw 4% of your portfolio balance in year one and adjust that dollar amount by the inflation rate in each following year. Portfolio rebalancing will require a different approach because you’re now accounting for regular withdrawals, whereas before retirement you were accounting only (or mostly) for contributions.
You might also be making withdrawals from multiple accounts, which might mean rebalancing multiple accounts. Once you reach age 73 if you were born between 1951 and 1959 or 75 if you were born in 1960 or after, you will have to start taking required minimum distributions (RMDs) from 401(k)s and traditional IRAs to avoid tax penalties.
When you take RMDs, you can rebalance your portfolio by selling an overweight asset class. Keep in mind that you’ll be paying taxes on withdrawals of earnings and pre-tax contributions unless it’s a Roth account. People with significant assets outside of retirement accounts can rebalance in a low-cost, tax-efficient way by gifting appreciated investments to charity or gifting low-basis shares (stock shares with huge capital gains on their original value) to friends or family.
Now that you understand how the rebalancing process works, the next question is whether to do it yourself, use a robo-advisor, or use a real, live investment advisor to help you. Consider the pros and cons of each in terms of skill, time, and cost.
DIY Portfolio Rebalancing
Rebalancing your portfolio on your own, without the help of a robo-advisor or investment advisor, doesn’t require you to spend any money. What it does cost you is time; how much time depends on the complexity of your investments and your grasp of how to rebalance. If you have one IRA with one stock ETF and one bond ETF, rebalancing will be quick and easy. The more accounts and the more funds you have, the more complicated the task becomes.
The most common rebalancing advice is to sell the investments you’re overweight in (which will almost always be stocks, since they grow faster than bonds, as we mentioned earlier) and use that money to buy the investments you’re underweight in, which will almost always be bonds. But a simpler method that may have lower transaction costs is to use any new contributions to your account to purchase the investments you need more of.
If you receive a year-end bonus, a tax refund, or a large gift, use that money. If you make a lump-sum contribution to your IRA, divvy that money up between stocks and bonds in a way that rebalances your portfolio.
You might not end up perfectly reallocating your investments back to your target ratio, but you might get close enough to avoid incurring any transaction costs from selling. That being said, many brokerage firms offer no-transaction-fee mutual funds and ETFs, in which case it won’t cost you anything to buy and sell exactly what you need.
The biggest risks to DIY portfolio rebalancing are not doing it at all and, if you’re working with a taxable account, incurring taxes—especially short-term capital gains taxes, which have a higher rate than long-term capital gains taxes. Any time you pay investment taxes, you’re hurting your net returns.
To sum up, here’s an example of how this whole process plays out.
Allocation before rebalancing:
Stock mutual fund value: $7,500 (75% of your portfolio)Bond mutual fund value: $2,500 (25% of your portfolio)
To rebalance:
Sell: $500 of the stock mutual fundBuy: $500 of the bond mutual fund
Allocation after rebalancing:
Stock mutual fund value: $7,000 (70% of your portfolio)Bond mutual fund value: $3,000 (30% of your portfolio)
One thing that might complicate this process is if the bond mutual fund you want to purchase additional shares of has a minimum investment that’s higher than $500. If that happens, you could purchase shares of a nearly identical bond ETF that doesn’t have any investment minimum.
Also, if you have to pay any commissions to buy or sell, your total ending portfolio value will dip below $10,000.
Automatic Portfolio Rebalancing
The easiest way to rebalance your DIY portfolio is to choose funds whose managers do the rebalancing for you. Target-date funds, which are mutual funds that hold a basket of investments and have an asset allocation that’s based on your projected (target) retirement date, are an example of a type of fund that is rebalanced automatically. You don’t have to do anything.
A fund for investors with a target retirement date of 2040, for example, might have a starting target asset allocation of 90% stocks and 10% bonds. The fund’s managers will rebalance the fund as often as needed to maintain that target allocation. In addition, they will shift the fund’s asset allocation over time, making it more conservative through 2040. These funds typically have low expense ratios; the industry average was 0.32% in 2022, according to Morningstar.
What about balanced mutual funds? Also called hybrid funds or asset allocation funds, these are similar to target-date funds in that they hold both stocks and bonds and aim to maintain a specific allocation, such as 60% stocks and 40% bonds. However, that allocation doesn’t change over time; balanced funds are for investors of any age.
Robo-Advisor Rebalancing
Working with a robo-advisor requires virtually no time or skill on your part: The robo-advisor does all the work automatically. All you have to do is open an account, put money in it, and choose your target asset allocation or answer the software’s questions to help it set a target asset allocation for you.
Costs are low, too. Robo-advisors such as Betterment, Wealthfront, and SigFig use strategies to make rebalancing less expensive by avoiding or minimizing short- and long-term capital gains taxes. A common strategy is to avoid selling any investments when rebalancing your portfolio. Instead, when you deposit cash or receive a dividend, the robo-advisor uses that money to purchase more of the investment you’re underweight in.
If, for example, your portfolio has drifted from 60% stocks, 40% bonds to 65% stocks, 35% bonds, the next time you add money to your account, the robo-advisor will use your deposit to buy more bonds. By not selling any investments, you don’t face any tax consequences. This strategy is called cash flow rebalancing.
You can use this strategy on your own to save money, too, but it’s only helpful within taxable accounts, not within retirement accounts such as IRAs and 401(k)s. There are no tax consequences when you buy or sell investments within a retirement account.
Another strategy robo-advisors use to keep transaction costs low is to sell whichever asset class you’re overweight in any time you decide to withdraw money from your portfolio.
Further, when your robo-advisor rebalances your portfolio, you won’t incur the commissions, transactions, or trading fees that you might encounter when rebalancing on your own or through an investment advisor. Robo-advisors don’t charge these fees. Instead, they charge an annual fee based on the dollar amount of assets they manage for you.
Betterment, for example, charges an annual fee of 0.25% of assets under management (AUM) and there’s no minimum account balance. And because robo-advisors are automated, they may rebalance your portfolio as often as daily, so it’s usually in near-perfect balance.
Hiring an Investment Advisor
If you hire someone to manage your investments, portfolio rebalancing is one of the tasks they’ll do for you, along with creating an investment plan based on your goals and risk tolerance and recommending investments to help you meet those goals.
It’s certainly possible to manage your investments and rebalance your portfolio yourself. But some people don’t have the time, aren’t confident in their ability to learn what they need to know and perform the right tasks, or just don’t want to deal with it. Other people know how to manage their own investments but find themselves making emotional decisions that hurt their returns. If you fall into one of these categories, hiring an investment advisor could pay off.
Hire a Fee-Only Fiduciary
This type of professional has no conflicts of interest that prevent them from acting outside your best interests. They are paid for the time they spend helping you, not for the specific investments they sell you or the number of trades they make on your behalf.
When choosing a fee-only fiduciary, check their background using the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck website and the Securities and Exchange Commission’s Investment Adviser Public Disclosure website. Depending on the type of advisor, you may be able to check their background at one, both, or neither of these websites.
If they do show up in one of these databases, you can see their work history, exams passed, credentials earned, and any disciplinary actions or customer complaints against them. You can also sometimes check an advisor’s credentials with the credentialing organization. You can verify, for example, an individual’s certified financial planner certification and background on the CFP Board’s website.
Cost Is the Biggest Drawback
The industry average cost is about 1.0% of assets managed per year. So, if your portfolio totals $50,000, you’ll pay your advisor roughly $500 per year. In addition, you’ll pay any commissions and fees associated with the investments in your portfolio. Paying any fees, including an investment advisor’s fees, will reduce your overall returns.
Some advisory services try to beat the industry average. Vanguard claims that on a $250,000 investment using the company’s Personal Advisor Services, which only costs 0.35% of assets under management per year, you would spend $218.75 in quarterly fees compared to an industry average of $625.
An Advisor’s Fee Can Pay For Itself
Investors tend to earn lower returns than the funds they invest in because of their tendency to sell low and buy high. A financial advisor’s behavioral coaching can overcome this problem. Working with an advisor can help you stay the course, especially in bull or bear markets when your emotions might tempt you to stray from your long-term investment strategy.
A study by Vanguard published in June 2020 found that through financial planning, discipline, and guidance—not through trying to outperform the market—advisors can increase their clients’ average annual returns by 3%.
Another reason to hire an investment advisor is if it’s going to mean the difference between actually having an investment plan or doing nothing. The latter is toxic to your long-term financial health.
You don’t have to hire someone on an ongoing basis; you can hire someone to help you on a per-project or hourly basis. Not all advisors work this way, but many offer the option. And you can hire someone anywhere in the country and speak with them online, by Skype, or by phone.
The seemingly free advice offered by some bank and brokerage employees and services may be compensated with commissions on the investments you purchase, which creates a conflict of interest that may dissuade them from recommending your best options.
Of course, there are also downsides to hiring an advisor, including the fact that many of them have investment minimums. You might not have enough assets for certain advisors to take you on as a client. Some services require that you have at least $500,000 to invest.
The funny thing about hiring an advisor to rebalance your portfolio is that they’re probably going to use an automatic asset rebalancing tool (in other words, software). This software accounts for the investor’s risk tolerance, tax goals (such as tax-loss harvesting and avoiding capital gains and wash sales) in the case of a taxable portfolio, and asset location (whether to hold certain investments in a nontaxable account such as a 401(k) or in a taxable brokerage account).
It’s expensive, sophisticated software that you wouldn’t buy on your own, yes. But robo-advisors also use the software. Why not, then, just hire a robo-advisor?
A Vanguard study published in May 2013, analyzing 58,168 self-directed Vanguard IRA investors over the five years ended Dec. 31, 2012, found that investors who made trades for any reason other than rebalancing—such as reacting to market shake-ups—fared worse than those who stayed the course.
If robo-advising won’t prevent you from buying high and selling low, then paying an individual investment advisor to make sure you stay disciplined with your investing strategy can pay off.
How Do I Rebalance My Portfolio?
The purpose of rebalancing is to ensure your investment portfolio is correctly weighted to suit your risk tolerance and financial goals. If you feel that your portfolio has become too risky or too conservative, you can take action to return it to your original asset allocation target by selling something you’re overweight in and replacing it with whatever is lacking.Alternatively, if you don’t want to sell, consider depositing extra funds or using dividend payments to purchase more of the investments you’re underweight in until your portfolio meets your objectives again.
When Should I Adjust My Portfolio?
Generally, it’s advisable to check your portfolio every six months or so and only intervene if your asset allocation has deviated significantly from where it should be and basically left you with an unacceptable risk/return profile. It’s up to you to choose an exact threshold that shouldn’t be crossed. Vanguard reckons investors should act when their preferred asset allocation strays by 5%, believing that this level strikes the best balance between risk management and minimizing costs.
Can You Rebalance Too Often?
Rebalancing your portfolio frequently is not necessary and often counterproductive. Endlessly buying and selling results in higher costs that eat into your returns. Watching your portfolio like a hawk can also encourage panic transactions and a hefty short-term capital gains tax bill.
The Bottom Line
The first time you rebalance your portfolio might be the hardest because everything is new. It’s a good skill to learn and a good habit to get into, though. While it isn’t designed to increase your long-term returns directly, it is designed to increase your risk-adjusted returns.
For most people, taking a little less risk through rebalancing is a good thing because it keeps them from panicking when the market sours and helps them stick with their long-term investment plan. And that means the discipline of rebalancing can increase your long-term returns.
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https://www.investopedia.com/who-is-andrew-w-mellon-what-did-he-accomplish-5217192 | Who Was Andrew W. Mellon? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Andrew W. Mellon, born in 1855 and died in 1937, was an American businessman and statesman. He served as secretary of the treasury under three Republican presidents—Harding, Coolidge, and Hoover—and focused on reducing debt, lowering business taxes, and balancing the federal budget.<span class="ql-inline-citation" data-cite="7"></span> Mellon’s policies were controversial and he resigned after the stock market crash of 1929.
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<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>Andrew W. Mellon was an early investor in major companies like Gulf Oil and Koppers.</li><li>He served as secretary of the treasury under three presidents.</li><li>He was known for the Mellon Plan, which slashed government spending and reduced taxes on businesses.</li><li>Mellon fell out of favor after the stock market crash of 1929 and stepped down as secretary of the treasury.</li><li>In later years, he donated millions to charitable organizations.<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>Investopedia / Lara Antal</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"> Mellon was born in 1855 in Pittsburgh to Judge Thomas and Sarah Jane Mellon. He was their sixth child, but only the fourth to survive infancy. The Mellons were Irish immigrants who had settled in Pittsburgh in the early 1800s. The family started a bank in western Pennsylvania, T. Mellon and Sons.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Privately educated at home, Mellon joined the family business at the age of 17. He attended Western University—now known as the University of Pittsburgh—but never completed a degree. During his time with T. Mellon and Sons, the bank became one of the most prominent institutions in western Pennsylvania, providing financing as the area grew into a major industrial region. Mellon helped found and fund such companies as Gulf Oil and Koppers.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Mellon had two children, Ailsa and Paul, who both founded charitable organizations.
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<span class="heading-toc" id="toc-notable-accomplishments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Notable Accomplishments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Mellon was appointed secretary of the Treasury in 1921 by President Warren G. Harding.<span class="ql-inline-citation" data-cite="7"></span> Although he had been involved in Republican politics in Pittsburgh, his appointment brought him national recognition.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Mellon served during the booming 1920s, a decade known for remarkable economic growth and expansion. He gave his name to the Mellon Plan, which was passed by Congress in 1924. The plan reduced taxes on businesses and wealthy individuals, instituted higher tariffs, and cut government spending.<span class="ql-inline-citation" data-cite="8"></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"> The Mellon Plan plan was designed to encourage economic growth and business expansion, and it helped fuel the '20s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp">bull market</a> for stocks. Notably, it was credited with reducing the nation's debt by some $7 billion by 1929.<span class="ql-inline-citation" data-cite="8"></span> But both Mellon and his plan faced significant criticism after the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock-market-crash-1929.asp">stock market crash of 1929</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> He was named the ambassador to Great Britain in 1932, but after one year of service, returned to private business. With the arrival of the new Democratic administration of President Franklin D. Roosevelt, in 1933, Mellon found himself charged with tax evasion in a case involving his art collection, but he was never convicted.
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<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-note" 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 with-title" id="mntl-sc-block-callout-heading_2-0">Fast Fact</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Andrew W. Mellon was featured on the cover of Time magazine twice in the 1920s (1923 and 1928) and on a U.S. postage stamp in 1955.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="6"></span></p></div></div></div>
<span class="heading-toc" id="toc-wealth-and-philanthropy"></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"> Wealth and Philanthropy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> By the end of the 1920s, Mellon's personal fortune was rumored to be as large as $600 million, making him one of the country's richest men.<span class="ql-inline-citation" data-cite="3"></span> In his later years, he became a philanthropist, giving away millions to educational and charitable organizations in Pittsburgh and Washington, D.C.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Mellon gave both money and artwork to establish the National Gallery of Art in Washington, D.C. He also founded the Mellon Institute in Pittsburgh. In the 1960s, the school merged with Andrew Carnegie's Carnegie Institute of Technology to form what is now known as Carnegie Mellon University.<span class="ql-inline-citation" data-cite="2"></span>
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<span class="heading-toc" id="toc-his-legacy-today"></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"> His Legacy Today </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Mellon was politically conservative and he promoted measures that protected the wealthy and businesses in the belief that wealth would <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trickledowntheory.asp">trickle down</a> to lower levels of society, an idea that lives on to this day in some circles. He was known, in particular, for his conservative tax and spending policies and for the institution of the Mellon Plan, later known as the Revenue Act of 1924.<span class="ql-inline-citation" data-cite="8"></span> During his life, he was one of the wealthiest men in the country and he is remembered as a businessman and philanthropist.
</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 Mellons' family bank, known as Mellon National Bank in Andrew Mellon's lifetime, later became Mellon Financial Corporation, which merged with the Bank of New York in 2007 to become today's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/120915/how-bank-new-york-mellon-makes-money-bny.asp">BNY Mellon</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_33-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-how-did-andrew-w-mellon-get-rich"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Did Andrew W. Mellon Get Rich?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Andrew Mellon's family founded the T. Mellon and Sons bank and financed many industrial businesses in western Pennsylvania. Mellon, who went to work for the bank as a young man, invested in companies in their early stages, such as the Aluminum Company of America (Alcoa) and Gulf Oil. With an uncanny ability to identify companies with substantial potential, his investments made him one of the richest men in the United States.<br/></p></div>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-how-much-would-andrew-mellon-be-worth-today"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Would Andrew Mellon Be Worth Today?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In the 1920s, Mellon’s fortune was valued as high as $600 million. That amount would be worth over $9 billion today.<br/></p></div>
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<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-did-andrew-mellon-do-with-his-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Did Andrew Mellon Do With His Money?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Mellon invested his money in many companies, including oil and industrial firms. He also donated significant portions of his fortune to charitable and educational institutions, including the National Gallery of Art in Washington, D.C.<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_40-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> A controversial figure, Andrew W. Mellon was one of the wealthiest individuals of his time. As a politician and statesman, he was responsible for introducing tax reforms and policies that encouraged economic growth and business expansion, but he received significant criticism after the stock market crash of 1929 and during the Great Depression. His views are still a topic of debate among economists, as Mellon was an advocate for trickle-down policies and an opponent of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042415/what-are-differences-between-regressive-proportional-and-progressive-taxes.asp">progressive taxation</a>.
</p></div> | Andrew W. Mellon, born in 1855 and died in 1937, was an American businessman and statesman. He served as secretary of the treasury under three Republican presidents—Harding, Coolidge, and Hoover—and focused on reducing debt, lowering business taxes, and balancing the federal budget. Mellon’s policies were controversial and he resigned after the stock market crash of 1929.
### Key Takeaways
* Andrew W. Mellon was an early investor in major companies like Gulf Oil and Koppers.
* He served as secretary of the treasury under three presidents.
* He was known for the Mellon Plan, which slashed government spending and reduced taxes on businesses.
* Mellon fell out of favor after the stock market crash of 1929 and stepped down as secretary of the treasury.
* In later years, he donated millions to charitable organizations.
![Andrew W. Mellon]()
:max_bytes(150000):strip_icc()/who-is-andrew-w-mellon-what-did-he-accomplish-5217192-v2-9607c087a8bf440dba5a37a1d841eea4.png)
Investopedia / Lara Antal
## Early Life and Education
Mellon was born in 1855 in Pittsburgh to Judge Thomas and Sarah Jane Mellon. He was their sixth child, but only the fourth to survive infancy. The Mellons were Irish immigrants who had settled in Pittsburgh in the early 1800s. The family started a bank in western Pennsylvania, T. Mellon and Sons.
Privately educated at home, Mellon joined the family business at the age of 17. He attended Western University—now known as the University of Pittsburgh—but never completed a degree. During his time with T. Mellon and Sons, the bank became one of the most prominent institutions in western Pennsylvania, providing financing as the area grew into a major industrial region. Mellon helped found and fund such companies as Gulf Oil and Koppers.
Mellon had two children, Ailsa and Paul, who both founded charitable organizations.
## Notable Accomplishments
Mellon was appointed secretary of the Treasury in 1921 by President Warren G. Harding. Although he had been involved in Republican politics in Pittsburgh, his appointment brought him national recognition.
Mellon served during the booming 1920s, a decade known for remarkable economic growth and expansion. He gave his name to the Mellon Plan, which was passed by Congress in 1924. The plan reduced taxes on businesses and wealthy individuals, instituted higher tariffs, and cut government spending.
The Mellon Plan plan was designed to encourage economic growth and business expansion, and it helped fuel the '20s [bull market](https://www.investopedia.com/terms/b/bullmarket.asp) for stocks. Notably, it was credited with reducing the nation's debt by some $7 billion by 1929. But both Mellon and his plan faced significant criticism after the [stock market crash of 1929](https://www.investopedia.com/terms/s/stock-market-crash-1929.asp).
He was named the ambassador to Great Britain in 1932, but after one year of service, returned to private business. With the arrival of the new Democratic administration of President Franklin D. Roosevelt, in 1933, Mellon found himself charged with tax evasion in a case involving his art collection, but he was never convicted.
### Fast Fact
Andrew W. Mellon was featured on the cover of Time magazine twice in the 1920s (1923 and 1928) and on a U.S. postage stamp in 1955.
## Wealth and Philanthropy
By the end of the 1920s, Mellon's personal fortune was rumored to be as large as $600 million, making him one of the country's richest men. In his later years, he became a philanthropist, giving away millions to educational and charitable organizations in Pittsburgh and Washington, D.C.
Mellon gave both money and artwork to establish the National Gallery of Art in Washington, D.C. He also founded the Mellon Institute in Pittsburgh. In the 1960s, the school merged with Andrew Carnegie's Carnegie Institute of Technology to form what is now known as Carnegie Mellon University.
## His Legacy Today
Mellon was politically conservative and he promoted measures that protected the wealthy and businesses in the belief that wealth would [trickle down](https://www.investopedia.com/terms/t/trickledowntheory.asp) to lower levels of society, an idea that lives on to this day in some circles. He was known, in particular, for his conservative tax and spending policies and for the institution of the Mellon Plan, later known as the Revenue Act of 1924. During his life, he was one of the wealthiest men in the country and he is remembered as a businessman and philanthropist.
The Mellons' family bank, known as Mellon National Bank in Andrew Mellon's lifetime, later became Mellon Financial Corporation, which merged with the Bank of New York in 2007 to become today's [BNY Mellon](https://www.investopedia.com/articles/markets/120915/how-bank-new-york-mellon-makes-money-bny.asp).
## How Did Andrew W. Mellon Get Rich?
Andrew Mellon's family founded the T. Mellon and Sons bank and financed many industrial businesses in western Pennsylvania. Mellon, who went to work for the bank as a young man, invested in companies in their early stages, such as the Aluminum Company of America (Alcoa) and Gulf Oil. With an uncanny ability to identify companies with substantial potential, his investments made him one of the richest men in the United States.
## How Much Would Andrew Mellon Be Worth Today?
In the 1920s, Mellon’s fortune was valued as high as $600 million. That amount would be worth over $9 billion today.
## What Did Andrew Mellon Do With His Money?
Mellon invested his money in many companies, including oil and industrial firms. He also donated significant portions of his fortune to charitable and educational institutions, including the National Gallery of Art in Washington, D.C.
## The Bottom Line
A controversial figure, Andrew W. Mellon was one of the wealthiest individuals of his time. As a politician and statesman, he was responsible for introducing tax reforms and policies that encouraged economic growth and business expansion, but he received significant criticism after the stock market crash of 1929 and during the Great Depression. His views are still a topic of debate among economists, as Mellon was an advocate for trickle-down policies and an opponent of [progressive taxation](https://www.investopedia.com/ask/answers/042415/what-are-differences-between-regressive-proportional-and-progressive-taxes.asp).
| Andrew W. Mellon, born in 1855 and died in 1937, was an American businessman and statesman. He served as secretary of the treasury under three Republican presidents—Harding, Coolidge, and Hoover—and focused on reducing debt, lowering business taxes, and balancing the federal budget. Mellon’s policies were controversial and he resigned after the stock market crash of 1929.
Key Takeaways
Andrew W. Mellon was an early investor in major companies like Gulf Oil and Koppers.He served as secretary of the treasury under three presidents.He was known for the Mellon Plan, which slashed government spending and reduced taxes on businesses.Mellon fell out of favor after the stock market crash of 1929 and stepped down as secretary of the treasury.In later years, he donated millions to charitable organizations.
Investopedia / Lara Antal
Early Life and Education
Mellon was born in 1855 in Pittsburgh to Judge Thomas and Sarah Jane Mellon. He was their sixth child, but only the fourth to survive infancy. The Mellons were Irish immigrants who had settled in Pittsburgh in the early 1800s. The family started a bank in western Pennsylvania, T. Mellon and Sons.
Privately educated at home, Mellon joined the family business at the age of 17. He attended Western University—now known as the University of Pittsburgh—but never completed a degree. During his time with T. Mellon and Sons, the bank became one of the most prominent institutions in western Pennsylvania, providing financing as the area grew into a major industrial region. Mellon helped found and fund such companies as Gulf Oil and Koppers.
Mellon had two children, Ailsa and Paul, who both founded charitable organizations.
Notable Accomplishments
Mellon was appointed secretary of the Treasury in 1921 by President Warren G. Harding. Although he had been involved in Republican politics in Pittsburgh, his appointment brought him national recognition.
Mellon served during the booming 1920s, a decade known for remarkable economic growth and expansion. He gave his name to the Mellon Plan, which was passed by Congress in 1924. The plan reduced taxes on businesses and wealthy individuals, instituted higher tariffs, and cut government spending.
The Mellon Plan plan was designed to encourage economic growth and business expansion, and it helped fuel the '20s bull market for stocks. Notably, it was credited with reducing the nation's debt by some $7 billion by 1929. But both Mellon and his plan faced significant criticism after the stock market crash of 1929.
He was named the ambassador to Great Britain in 1932, but after one year of service, returned to private business. With the arrival of the new Democratic administration of President Franklin D. Roosevelt, in 1933, Mellon found himself charged with tax evasion in a case involving his art collection, but he was never convicted.
Fast Fact
Andrew W. Mellon was featured on the cover of Time magazine twice in the 1920s (1923 and 1928) and on a U.S. postage stamp in 1955.
Wealth and Philanthropy
By the end of the 1920s, Mellon's personal fortune was rumored to be as large as $600 million, making him one of the country's richest men. In his later years, he became a philanthropist, giving away millions to educational and charitable organizations in Pittsburgh and Washington, D.C.
Mellon gave both money and artwork to establish the National Gallery of Art in Washington, D.C. He also founded the Mellon Institute in Pittsburgh. In the 1960s, the school merged with Andrew Carnegie's Carnegie Institute of Technology to form what is now known as Carnegie Mellon University.
His Legacy Today
Mellon was politically conservative and he promoted measures that protected the wealthy and businesses in the belief that wealth would trickle down to lower levels of society, an idea that lives on to this day in some circles. He was known, in particular, for his conservative tax and spending policies and for the institution of the Mellon Plan, later known as the Revenue Act of 1924. During his life, he was one of the wealthiest men in the country and he is remembered as a businessman and philanthropist.
The Mellons' family bank, known as Mellon National Bank in Andrew Mellon's lifetime, later became Mellon Financial Corporation, which merged with the Bank of New York in 2007 to become today's BNY Mellon.
How Did Andrew W. Mellon Get Rich?
Andrew Mellon's family founded the T. Mellon and Sons bank and financed many industrial businesses in western Pennsylvania. Mellon, who went to work for the bank as a young man, invested in companies in their early stages, such as the Aluminum Company of America (Alcoa) and Gulf Oil. With an uncanny ability to identify companies with substantial potential, his investments made him one of the richest men in the United States.
How Much Would Andrew Mellon Be Worth Today?
In the 1920s, Mellon’s fortune was valued as high as $600 million. That amount would be worth over $9 billion today.
What Did Andrew Mellon Do With His Money?
Mellon invested his money in many companies, including oil and industrial firms. He also donated significant portions of his fortune to charitable and educational institutions, including the National Gallery of Art in Washington, D.C.
The Bottom Line
A controversial figure, Andrew W. Mellon was one of the wealthiest individuals of his time. As a politician and statesman, he was responsible for introducing tax reforms and policies that encouraged economic growth and business expansion, but he received significant criticism after the stock market crash of 1929 and during the Great Depression. His views are still a topic of debate among economists, as Mellon was an advocate for trickle-down policies and an opponent of progressive taxation.
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https://www.investopedia.com/multiple-brokerage-accounts-pros-cons-5213275 | Should You Have Multiple Brokerage Accounts? | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> In investing, as with much in life, complexity is generally avoided. So why own more than one <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>, which means having multiple passwords, balances, interfaces, and tax forms?
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Well, it's complicated. But it doesn't have to be. While you may be among those with more than one account, good reasons exist to simplify. Keeping more than one account generally isn't that compelling a strategy for the average investor when balanced against the benefits of simplicity.
</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>While multiple brokerage accounts may provide benefits to a narrow range of retail investors, the added work may outweigh any advantage.</li><li>Having more than one account means getting multiple emails, handling added 1099 tax forms, negotiating different platforms, and remembering multiple passwords</li><li>Most investors will find what they need—meaning tutorials, a knowledge base, and a sufficient number of investment vehicles—on a single platform.</li></ul></div></div></div>
<span class="heading-toc" id="toc-when-less-is-more"></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 Less Is More </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> How do people end up with multiple brokerages? Sometimes it happens for the same reason they have more than one credit card—they saw an offer to open the account and jumped. Maybe one brokerage was offering a better return on the cash savings portion or dangled something consumer-friendly like bill payment. Brokerages often frequently offer a cash bonus for opening an account as well. Others may have more than one account through a marriage that has joined a couple's finances together.
</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"> Whatever the reason, having multiple brokerage accounts means more management: more emails, logins, tax forms, and more. You may want to ask yourself if this is really worth whatever benefits you're getting. Most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">online brokerages</a> offer similar features like selling and buying stocks and bonds, investor education, research tools, and bill paying, minimizing the need for bouncing from one platform to the next. Streamlining may be in the best interest of the average investor.
</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 just more work," <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://sharigrecoreiches.com/">Shari Greco Reiches, co-founder of wealth management firm Rappaport Reiches Capital Management</a> in Skokie, Illinois, said in an interview. "Investing is complex as it is, and having multiple broker accounts means it's harder to track overall <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp">allocations</a>, investments, tax strategies, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp">capital gains</a>. It's just more work."
</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"> Multiple steps are involved in opening and managing an account. There is also the issue of security and passwords. For every account, you must construct a secure password and of course remember it. This gets more difficult with each account added to your financial life.
</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-when-more-is-more"></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"> When More Is More </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Multiple accounts and the added work they bring may have benefits for a narrow group of investors, said Reiches, who is also a <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> expert whose book <em>Maximize Your Return on Life</em> was published June 25, 2021.<span class="ql-inline-citation" data-cite="3"></span> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">Cryptocurrency</a> is one example of an investment that not all platforms trade and a crypto-first brokerage like <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/coinbase-what-it-and-how-do-you-use-it/">Coinbase</a> is probably a better place to trade cryptocurrency than a mainstream brokerage. E*TRADE, for example, doesn't offer individual crypto trading. Fidelity offers crypto trading, but with limitations compared to a crypto-specific platform.
</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"> Alternative investments like private investments and gold coins may also require an account with a specialized brokerage, according to Reiches.
</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"> Not all firms offer the same investment vehicles. For example, one may offer more international exposure, while another may have some esoteric investments not offered by another. Fees may also vary slightly. These are things to research. Still, for the average investor, those minor differences may not be compelling enough when considering the added work from managing multiple accounts.
</p>
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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_23-0"> <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_24-0"> Few advantages are bestowed to the average retail investor by having multiple brokerage accounts. One needs to focus on investing, and more than one account may be an unnecessary, costly, and time-consuming distraction. Most large brokerages will have a wide range of stocks, bonds, <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>, and other funds required by the average investor. Still, if you want to take advantage of small differences in fees and platforms, or if you want to trade cryptocurrencies and esoteric investments, go ahead and explore multiple platforms.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_26-0"><span class="heading-toc" id="toc-what-are-the-benefits-of-having-multiple-brokerage-accounts"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Benefits of Having Multiple Brokerage Accounts?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>For some investors, using multiple brokerage accounts has advantages. These would be people interested in alternative investments like cryptocurrencies, private investments, or gold coins. They would also need to have the time and the management skill necessary to investigate platforms, fees, rates, and a range of investment vehicles.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-are-there-advantages-to-having-only-one-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Advantages To Having Only One Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Simplicity is sometimes its own reward, and a simplified investing structure is probably best for most retail investors. A single login and password, one source of year-end tax forms, and one brokerage sending emails will keep things easy to manage.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-what-about-another-account-for-crypto"></span> <h2 class="mntl-sc-block-questionandanswer__question">What About Another Account for Crypto?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most mainstream brokerages don't offer crypto trading. Others offer it, but with limitations designed to reduce volatility. Platforms like Coinbase specialize in cryptocurrency and may be a good place to start.</p></div>
</div></div> | In investing, as with much in life, complexity is generally avoided. So why own more than one [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp), which means having multiple passwords, balances, interfaces, and tax forms?
Well, it's complicated. But it doesn't have to be. While you may be among those with more than one account, good reasons exist to simplify. Keeping more than one account generally isn't that compelling a strategy for the average investor when balanced against the benefits of simplicity.
### Key Takeaways
* While multiple brokerage accounts may provide benefits to a narrow range of retail investors, the added work may outweigh any advantage.
* Having more than one account means getting multiple emails, handling added 1099 tax forms, negotiating different platforms, and remembering multiple passwords
* Most investors will find what they need—meaning tutorials, a knowledge base, and a sufficient number of investment vehicles—on a single platform.
## When Less Is More
How do people end up with multiple brokerages? Sometimes it happens for the same reason they have more than one credit card—they saw an offer to open the account and jumped. Maybe one brokerage was offering a better return on the cash savings portion or dangled something consumer-friendly like bill payment. Brokerages often frequently offer a cash bonus for opening an account as well. Others may have more than one account through a marriage that has joined a couple's finances together.
Whatever the reason, having multiple brokerage accounts means more management: more emails, logins, tax forms, and more. You may want to ask yourself if this is really worth whatever benefits you're getting. Most [online brokerages](https://www.investopedia.com/best-online-brokers-4587872) offer similar features like selling and buying stocks and bonds, investor education, research tools, and bill paying, minimizing the need for bouncing from one platform to the next. Streamlining may be in the best interest of the average investor.
"It's just more work," [Shari Greco Reiches, co-founder of wealth management firm Rappaport Reiches Capital Management](https://sharigrecoreiches.com/) in Skokie, Illinois, said in an interview. "Investing is complex as it is, and having multiple broker accounts means it's harder to track overall [allocations](https://www.investopedia.com/terms/a/assetallocation.asp), investments, tax strategies, [dividends](https://www.investopedia.com/terms/d/dividend.asp), [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp). It's just more work."
Multiple steps are involved in opening and managing an account. There is also the issue of security and passwords. For every account, you must construct a secure password and of course remember it. This gets more difficult with each account added to your financial life.
## When More Is More
Multiple accounts and the added work they bring may have benefits for a narrow group of investors, said Reiches, who is also a [behavioral finance](https://www.investopedia.com/terms/b/behavioralfinance.asp) expert whose book *Maximize Your Return on Life* was published June 25, 2021. [Cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) is one example of an investment that not all platforms trade and a crypto-first brokerage like [Coinbase](https://www.investopedia.com/tech/coinbase-what-it-and-how-do-you-use-it/) is probably a better place to trade cryptocurrency than a mainstream brokerage. E\*TRADE, for example, doesn't offer individual crypto trading. Fidelity offers crypto trading, but with limitations compared to a crypto-specific platform.
Alternative investments like private investments and gold coins may also require an account with a specialized brokerage, according to Reiches.
Not all firms offer the same investment vehicles. For example, one may offer more international exposure, while another may have some esoteric investments not offered by another. Fees may also vary slightly. These are things to research. Still, for the average investor, those minor differences may not be compelling enough when considering the added work from managing multiple accounts.
## The Bottom Line
Few advantages are bestowed to the average retail investor by having multiple brokerage accounts. One needs to focus on investing, and more than one account may be an unnecessary, costly, and time-consuming distraction. Most large brokerages will have a wide range of stocks, bonds, [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp), and other funds required by the average investor. Still, if you want to take advantage of small differences in fees and platforms, or if you want to trade cryptocurrencies and esoteric investments, go ahead and explore multiple platforms.
## What Are the Benefits of Having Multiple Brokerage Accounts?
For some investors, using multiple brokerage accounts has advantages. These would be people interested in alternative investments like cryptocurrencies, private investments, or gold coins. They would also need to have the time and the management skill necessary to investigate platforms, fees, rates, and a range of investment vehicles.
## Are There Advantages To Having Only One Account?
Simplicity is sometimes its own reward, and a simplified investing structure is probably best for most retail investors. A single login and password, one source of year-end tax forms, and one brokerage sending emails will keep things easy to manage.
## What About Another Account for Crypto?
Most mainstream brokerages don't offer crypto trading. Others offer it, but with limitations designed to reduce volatility. Platforms like Coinbase specialize in cryptocurrency and may be a good place to start.
| In investing, as with much in life, complexity is generally avoided. So why own more than one brokerage account, which means having multiple passwords, balances, interfaces, and tax forms?
Well, it's complicated. But it doesn't have to be. While you may be among those with more than one account, good reasons exist to simplify. Keeping more than one account generally isn't that compelling a strategy for the average investor when balanced against the benefits of simplicity.
Key Takeaways
While multiple brokerage accounts may provide benefits to a narrow range of retail investors, the added work may outweigh any advantage.Having more than one account means getting multiple emails, handling added 1099 tax forms, negotiating different platforms, and remembering multiple passwordsMost investors will find what they need—meaning tutorials, a knowledge base, and a sufficient number of investment vehicles—on a single platform.
When Less Is More
How do people end up with multiple brokerages? Sometimes it happens for the same reason they have more than one credit card—they saw an offer to open the account and jumped. Maybe one brokerage was offering a better return on the cash savings portion or dangled something consumer-friendly like bill payment. Brokerages often frequently offer a cash bonus for opening an account as well. Others may have more than one account through a marriage that has joined a couple's finances together.
Whatever the reason, having multiple brokerage accounts means more management: more emails, logins, tax forms, and more. You may want to ask yourself if this is really worth whatever benefits you're getting. Most online brokerages offer similar features like selling and buying stocks and bonds, investor education, research tools, and bill paying, minimizing the need for bouncing from one platform to the next. Streamlining may be in the best interest of the average investor.
"It's just more work," Shari Greco Reiches, co-founder of wealth management firm Rappaport Reiches Capital Management in Skokie, Illinois, said in an interview. "Investing is complex as it is, and having multiple broker accounts means it's harder to track overall allocations, investments, tax strategies, dividends, capital gains. It's just more work."
Multiple steps are involved in opening and managing an account. There is also the issue of security and passwords. For every account, you must construct a secure password and of course remember it. This gets more difficult with each account added to your financial life.
When More Is More
Multiple accounts and the added work they bring may have benefits for a narrow group of investors, said Reiches, who is also a behavioral finance expert whose book Maximize Your Return on Life was published June 25, 2021. Cryptocurrency is one example of an investment that not all platforms trade and a crypto-first brokerage like Coinbase is probably a better place to trade cryptocurrency than a mainstream brokerage. E*TRADE, for example, doesn't offer individual crypto trading. Fidelity offers crypto trading, but with limitations compared to a crypto-specific platform.
Alternative investments like private investments and gold coins may also require an account with a specialized brokerage, according to Reiches.
Not all firms offer the same investment vehicles. For example, one may offer more international exposure, while another may have some esoteric investments not offered by another. Fees may also vary slightly. These are things to research. Still, for the average investor, those minor differences may not be compelling enough when considering the added work from managing multiple accounts.
The Bottom Line
Few advantages are bestowed to the average retail investor by having multiple brokerage accounts. One needs to focus on investing, and more than one account may be an unnecessary, costly, and time-consuming distraction. Most large brokerages will have a wide range of stocks, bonds, exchange-traded funds (ETFs), and other funds required by the average investor. Still, if you want to take advantage of small differences in fees and platforms, or if you want to trade cryptocurrencies and esoteric investments, go ahead and explore multiple platforms.
What Are the Benefits of Having Multiple Brokerage Accounts?
For some investors, using multiple brokerage accounts has advantages. These would be people interested in alternative investments like cryptocurrencies, private investments, or gold coins. They would also need to have the time and the management skill necessary to investigate platforms, fees, rates, and a range of investment vehicles.
Are There Advantages To Having Only One Account?
Simplicity is sometimes its own reward, and a simplified investing structure is probably best for most retail investors. A single login and password, one source of year-end tax forms, and one brokerage sending emails will keep things easy to manage.
What About Another Account for Crypto?
Most mainstream brokerages don't offer crypto trading. Others offer it, but with limitations designed to reduce volatility. Platforms like Coinbase specialize in cryptocurrency and may be a good place to start.
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[
"Shari Greco Reiches, co-founder of wealth management firm Rappaport Reiches Capital Management",
"https://sharigrecoreiches.com/"
],
[
"allocations",
"https://www.investopedia.com/terms/a/assetallocation.asp"
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]
] |
https://www.investopedia.com/how-to-close-a-cd-5225194 | How to Close 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"> A certificate of deposit (CD) should be closed only when it reaches its maturity date, but if you need the money earlier you'll pay a penalty for withdrawing it.<span class="ql-inline-citation" data-cite="7"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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 wait until the maturity date, you have several options to choose from.
</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>Certificates of deposit (CDs) can be closed when they reach their maturity date or before if necessary. </li><li>If you decide to close a CD before it matures, you generally have to pay a penalty.</li><li>Once your CD reaches its maturity date, you can tell your bank or credit union to roll the money over into a new CD, deposit it in another account, or pay you in cash.</li><li>If you don't give your bank or credit union specific instructions within the grace period, it will usually put your money into a new CD.</li></ul></div></div></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_7-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:67.5%;">
<img alt="How to Close a CD" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/7x1gYMJ2voJenHGuqh0GDsxxuvY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/How-to-close-a-cd-5225194_final-dae823d847df4977bd71bb6321945421.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/7x1gYMJ2voJenHGuqh0GDsxxuvY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/How-to-close-a-cd-5225194_final-dae823d847df4977bd71bb6321945421.png" data-srcset="https://www.investopedia.com/thmb/BbCIGHzuXMTu_og2tzCzabTQzVE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/How-to-close-a-cd-5225194_final-dae823d847df4977bd71bb6321945421.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/>
<noscript>
<img alt="How to Close a CD" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/7x1gYMJ2voJenHGuqh0GDsxxuvY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/How-to-close-a-cd-5225194_final-dae823d847df4977bd71bb6321945421.png" srcset="https://www.investopedia.com/thmb/BbCIGHzuXMTu_og2tzCzabTQzVE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/How-to-close-a-cd-5225194_final-dae823d847df4977bd71bb6321945421.png 750w" width="4000"/>
</noscript>
</div> </div>
<figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Michela Buttignol</p></span>
</figcaption></figure>
<span class="heading-toc" id="toc-closing-a-cd-when-it-matures"></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"> Closing a CD When It Matures </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Certificates of deposit issued by banks and credit unions typically offer a slightly higher interest rate than their other types of accounts like checking or savings. In exchange, the buyer agrees to leave the money in the CD untouched for a set period of time.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">buy CDs</a> that run for a few months or for many years. A month or two before your CD's maturity date, the financial institution should notify you that the CD is about to mature and ask for your instructions on what to do with the funds.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Typically, you'll have three options:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0">
<li><strong>Roll the proceeds into a new CD at that institution</strong>: You can opt for a CD with the same term as your old one or a term that's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/short-term-vs-long-term-cd-terms-5270644">shorter or longer</a>.</li>
<li><strong>Transfer the funds</strong> <strong>into another account at that bank</strong>: Options include a savings, checking, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/042116/money-market-vs-cds-which-better-investment.asp">money market account</a>.</li>
<li><strong>Withdraw the proceeds</strong>: You can have the money transmitted to an account at a different financial institution or mailed to you in a paper check. </li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The financial institution will give you a deadline for providing instructions and indicate what it will do in the absence of any guidance from you.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Generally, its default move will be to roll your proceeds into a new certificate with a term similar to your old one. For example, if you had a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650">one-year certificate</a>, your balance would be rolled into a new one-year CD. The interest rate may be higher or lower than the old CDs, depending on where rates are at the time.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> It's important to act quickly once you receive this notice. After the CD reaches maturity, the account enters a grace period of about 10 days.<span class="ql-inline-citation" data-cite="5"></span> If you do nothing, your bank may automatically roll over your CD into a new one and you may then have to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">pay a penalty</a> if you want your money before the next maturity date.<span class="ql-inline-citation" data-cite="6"></span><br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Under the federal Truth in Savings Act (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulation-dd.asp">Regulation DD</a>), the issuer of your CD is required to disclose when it may impose an early withdrawal penalty and how that penalty will be calculated.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div>
<span class="heading-toc" id="toc-closing-a-cd-early"></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"> Closing a CD Early </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> It's is possible to close a CD and withdraw your money early. The downside is that, for the most common types of CD, you will face a penalty for doing so.
</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 amount of that penalty will depend on your agreement with the financial institution. Federal law specifies a minimum penalty of at least seven days' interest, but there is no maximum, so your actual penalty could be many times that. You could even lose some of the money you put into the account.<span class="ql-inline-citation" data-cite="4"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Most often, the early withdrawal penalty is calculated as a number of months' interest, with a greater number of months for longer CD terms and fewer months for shorter CDs. A typical policy might be to deduct three months' interest for CDs with terms up to 12 months and six months' interest for those with terms up to three years.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> There are some types of CDs—such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp">liquid CDs</a> or no-penalty CDs—that charge low or no penalties if you close the account early. However, they pay lower interest rates than standard ones.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Another exception is <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>. These are certificates that you purchase from a brokerage firm or an independent sales representative. Unlike conventional CDs, brokered CDs trade on a <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>, making it possible to sell one early if you wish to. You won't incur penalties, but you may have to pay a small fee.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-can-you-close-a-cd-before-maturity"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Close a CD Before Maturity?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can close a CD before maturity, but you will probably be charged a penalty. There's no legal cap on this penalty, so you can actually lose some of your principal by taking the money out early. Typically, the longer the term of the CD, the higher the early withdrawal penalty.<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_37-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-is-a-cd-grace-period"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a CD Grace Period?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A CD grace period is the number of days that you have to tell the financial institution that holds your matured CD what you want to do with the proceeds. If you take no action, most banks will put your money into a new CD.<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-how-long-is-a-cd-grace-period"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Is a CD Grace Period?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A grace period of 10 days is fairly common, but some grace periods are as short as seven days. Be prepared to act quickly when you get the notice.<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_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-can-i-avoid-cd-early-withdrawal-penalties"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Avoid CD Early Withdrawal Penalties?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It's difficult to avoid these charges with most types of CDs. In some cases, a financial institution may waive an early withdrawal penalty if you ask, but it isn't required to do so by law.</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"> CDs are intended to remain untouched until the end of their term, but it is possible to get your money out early, if necessary. However, you will most likely have to pay a penalty, and you might even get back less money than you put in. For that reason, it's best not to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-invest-with-cds-4795661">invest in a CD</a> unless you're reasonably certain you won't need the money before it matures.<br/>
</p></div> | A certificate of deposit (CD) should be closed only when it reaches its maturity date, but if you need the money earlier you'll pay a penalty for withdrawing it.
If you wait until the maturity date, you have several options to choose from.
### Key Takeaways
* Certificates of deposit (CDs) can be closed when they reach their maturity date or before if necessary.
* If you decide to close a CD before it matures, you generally have to pay a penalty.
* Once your CD reaches its maturity date, you can tell your bank or credit union to roll the money over into a new CD, deposit it in another account, or pay you in cash.
* If you don't give your bank or credit union specific instructions within the grace period, it will usually put your money into a new CD.
![How to Close a CD]()
:max_bytes(150000):strip_icc()/How-to-close-a-cd-5225194_final-dae823d847df4977bd71bb6321945421.png)
Investopedia / Michela Buttignol
## Closing a CD When It Matures
Certificates of deposit issued by banks and credit unions typically offer a slightly higher interest rate than their other types of accounts like checking or savings. In exchange, the buyer agrees to leave the money in the CD untouched for a set period of time.
You can [buy CDs](https://www.investopedia.com/best-cd-rates-4770214) that run for a few months or for many years. A month or two before your CD's maturity date, the financial institution should notify you that the CD is about to mature and ask for your instructions on what to do with the funds.
Typically, you'll have three options:
* **Roll the proceeds into a new CD at that institution**: You can opt for a CD with the same term as your old one or a term that's [shorter or longer](https://www.investopedia.com/short-term-vs-long-term-cd-terms-5270644).
* **Transfer the funds** **into another account at that bank**: Options include a savings, checking, or [money market account](https://www.investopedia.com/articles/personal-finance/042116/money-market-vs-cds-which-better-investment.asp).
* **Withdraw the proceeds**: You can have the money transmitted to an account at a different financial institution or mailed to you in a paper check.
The financial institution will give you a deadline for providing instructions and indicate what it will do in the absence of any guidance from you.
Generally, its default move will be to roll your proceeds into a new certificate with a term similar to your old one. For example, if you had a [one-year certificate](https://www.investopedia.com/best-1-year-cd-rates-4796650), your balance would be rolled into a new one-year CD. The interest rate may be higher or lower than the old CDs, depending on where rates are at the time.
It's important to act quickly once you receive this notice. After the CD reaches maturity, the account enters a grace period of about 10 days. If you do nothing, your bank may automatically roll over your CD into a new one and you may then have to [pay a penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111) if you want your money before the next maturity date.
###
Under the federal Truth in Savings Act ([Regulation DD](https://www.investopedia.com/terms/r/regulation-dd.asp)), the issuer of your CD is required to disclose when it may impose an early withdrawal penalty and how that penalty will be calculated.
## Closing a CD Early
It's is possible to close a CD and withdraw your money early. The downside is that, for the most common types of CD, you will face a penalty for doing so.
The amount of that penalty will depend on your agreement with the financial institution. Federal law specifies a minimum penalty of at least seven days' interest, but there is no maximum, so your actual penalty could be many times that. You could even lose some of the money you put into the account.
Most often, the early withdrawal penalty is calculated as a number of months' interest, with a greater number of months for longer CD terms and fewer months for shorter CDs. A typical policy might be to deduct three months' interest for CDs with terms up to 12 months and six months' interest for those with terms up to three years.
There are some types of CDs—such as [liquid CDs](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp) or no-penalty CDs—that charge low or no penalties if you close the account early. However, they pay lower interest rates than standard ones.
Another exception is [brokered CDs](https://www.investopedia.com/terms/b/brokered-cd.asp). These are certificates that you purchase from a brokerage firm or an independent sales representative. Unlike conventional CDs, brokered CDs trade on a [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp), making it possible to sell one early if you wish to. You won't incur penalties, but you may have to pay a small fee.
## Can You Close a CD Before Maturity?
You can close a CD before maturity, but you will probably be charged a penalty. There's no legal cap on this penalty, so you can actually lose some of your principal by taking the money out early. Typically, the longer the term of the CD, the higher the early withdrawal penalty.
## What Is a CD Grace Period?
A CD grace period is the number of days that you have to tell the financial institution that holds your matured CD what you want to do with the proceeds. If you take no action, most banks will put your money into a new CD.
## How Long Is a CD Grace Period?
A grace period of 10 days is fairly common, but some grace periods are as short as seven days. Be prepared to act quickly when you get the notice.
## Can I Avoid CD Early Withdrawal Penalties?
It's difficult to avoid these charges with most types of CDs. In some cases, a financial institution may waive an early withdrawal penalty if you ask, but it isn't required to do so by law.
## The Bottom Line
CDs are intended to remain untouched until the end of their term, but it is possible to get your money out early, if necessary. However, you will most likely have to pay a penalty, and you might even get back less money than you put in. For that reason, it's best not to [invest in a CD](https://www.investopedia.com/how-to-invest-with-cds-4795661) unless you're reasonably certain you won't need the money before it matures.
| A certificate of deposit (CD) should be closed only when it reaches its maturity date, but if you need the money earlier you'll pay a penalty for withdrawing it.
If you wait until the maturity date, you have several options to choose from.
Key Takeaways
Certificates of deposit (CDs) can be closed when they reach their maturity date or before if necessary. If you decide to close a CD before it matures, you generally have to pay a penalty.Once your CD reaches its maturity date, you can tell your bank or credit union to roll the money over into a new CD, deposit it in another account, or pay you in cash.If you don't give your bank or credit union specific instructions within the grace period, it will usually put your money into a new CD.
Investopedia / Michela Buttignol
Closing a CD When It Matures
Certificates of deposit issued by banks and credit unions typically offer a slightly higher interest rate than their other types of accounts like checking or savings. In exchange, the buyer agrees to leave the money in the CD untouched for a set period of time.
You can buy CDs that run for a few months or for many years. A month or two before your CD's maturity date, the financial institution should notify you that the CD is about to mature and ask for your instructions on what to do with the funds.
Typically, you'll have three options:
Roll the proceeds into a new CD at that institution: You can opt for a CD with the same term as your old one or a term that's shorter or longer.
Transfer the funds into another account at that bank: Options include a savings, checking, or money market account.
Withdraw the proceeds: You can have the money transmitted to an account at a different financial institution or mailed to you in a paper check.
The financial institution will give you a deadline for providing instructions and indicate what it will do in the absence of any guidance from you.
Generally, its default move will be to roll your proceeds into a new certificate with a term similar to your old one. For example, if you had a one-year certificate, your balance would be rolled into a new one-year CD. The interest rate may be higher or lower than the old CDs, depending on where rates are at the time.
It's important to act quickly once you receive this notice. After the CD reaches maturity, the account enters a grace period of about 10 days. If you do nothing, your bank may automatically roll over your CD into a new one and you may then have to pay a penalty if you want your money before the next maturity date.
Under the federal Truth in Savings Act (Regulation DD), the issuer of your CD is required to disclose when it may impose an early withdrawal penalty and how that penalty will be calculated.
Closing a CD Early
It's is possible to close a CD and withdraw your money early. The downside is that, for the most common types of CD, you will face a penalty for doing so.
The amount of that penalty will depend on your agreement with the financial institution. Federal law specifies a minimum penalty of at least seven days' interest, but there is no maximum, so your actual penalty could be many times that. You could even lose some of the money you put into the account.
Most often, the early withdrawal penalty is calculated as a number of months' interest, with a greater number of months for longer CD terms and fewer months for shorter CDs. A typical policy might be to deduct three months' interest for CDs with terms up to 12 months and six months' interest for those with terms up to three years.
There are some types of CDs—such as liquid CDs or no-penalty CDs—that charge low or no penalties if you close the account early. However, they pay lower interest rates than standard ones.
Another exception is brokered CDs. These are certificates that you purchase from a brokerage firm or an independent sales representative. Unlike conventional CDs, brokered CDs trade on a secondary market, making it possible to sell one early if you wish to. You won't incur penalties, but you may have to pay a small fee.
Can You Close a CD Before Maturity?
You can close a CD before maturity, but you will probably be charged a penalty. There's no legal cap on this penalty, so you can actually lose some of your principal by taking the money out early. Typically, the longer the term of the CD, the higher the early withdrawal penalty.
What Is a CD Grace Period?
A CD grace period is the number of days that you have to tell the financial institution that holds your matured CD what you want to do with the proceeds. If you take no action, most banks will put your money into a new CD.
How Long Is a CD Grace Period?
A grace period of 10 days is fairly common, but some grace periods are as short as seven days. Be prepared to act quickly when you get the notice.
Can I Avoid CD Early Withdrawal Penalties?
It's difficult to avoid these charges with most types of CDs. In some cases, a financial institution may waive an early withdrawal penalty if you ask, but it isn't required to do so by law.
The Bottom Line
CDs are intended to remain untouched until the end of their term, but it is possible to get your money out early, if necessary. However, you will most likely have to pay a penalty, and you might even get back less money than you put in. For that reason, it's best not to invest in a CD unless you're reasonably certain you won't need the money before it matures.
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https://www.investopedia.com/articles/active-trading/102314/top-technical-indicators-commodities-investing.asp | Commodity Investing: Top Technical Indicators | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> In any asset class, the primary motive for any trader, investor, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculator.asp">speculator</a> is to make trading as profitable as possible. In commodities, which include everything from coffee to crude oil, we will analyze the techniques of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentalanalysis.asp">fundamental analysis</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a>, which are employed by traders in their buy, sell, or hold decisions.
</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 technique of fundamental analysis is believed to be ideal for investments involving a longer time period. It is more research-based; it studies demand-supply situations, economic policies, and financials as decision-making criteria.
</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"> Traders commonly use technical analysis, as it is appropriate for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortterm.asp">short-term</a> judgment in markets, and analyzes the past price patterns, trends, and volume to construct charts in order to determine future movement.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The primary motive for any trader is to make as much profit as possible.</li><li>Traders need to first identify the market.</li><li>Momentum indicators are the most popular for commodity trading.</li></ul></div></div></div>
<span class="heading-toc" id="toc-identifying-the-market-for-commodities"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Identifying the Market for Commodities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/momentum.asp">Momentum</a> indicators are the most popular for commodity trading, contributing to the trusted adage, “buy low and sell high.” Momentum indicators are further split into oscillators and trend-following indicators. Traders need to first identify the market (i.e., whether the market is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trend.asp">trending</a> or ranging before <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/011815/top-technical-indicators-rookie-traders.asp">applying</a> any of these indicators). This information is important because the trend following indicators do not perform well in a ranging market; similarly, oscillators tend to be misleading in a trending market.
</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-moving-averages"></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"> Moving Averages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> One of the simplest and most widely used indicators in technical analysis is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/movingaverage.asp">moving average</a> (MA), which is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/averageprice.asp">average price</a> over a specified period for a commodity or stock. For example, a five-period MA will be the average of the closing prices over the last five days, including the current period. When this indicator is used intra-day, the calculation is based on the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currentprice.asp">current price</a> data instead of the closing price.
</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 MA tends to smooth out the random price movement to bring out the concealed trends. It is seen as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/laggingindicator.asp">lagging indicator</a> and is used to observe price patterns. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buy-signal.asp">buy signal</a> is generated when the price crosses above the MA from below bullish sentiments, while the inverse is indicative of bearish sentiments—hence a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sell-signal.asp">sell signal</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> There are many versions of MA that are more elaborate, such as exponential moving average (EMA), volume adjusted moving average, and linear <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/weighted.asp">weighted</a> moving average. MA is not suitable for a ranging market, as it tends to generate <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/false-signal.asp">false signals</a> due to price fluctuations. In the example below, notice that the slope of the MA reflects the direction of the trend. A steeper MA shows the momentum backing the trend, while a flattening MA is a warning signal there may be a trend <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reversal.asp">reversal</a> due to falling momentum.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_19-0"> <div class="figure-media">
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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>Image by Sabrina Jiang © Investopedia 2021</p></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"> In the chart above, the blue line depicts the nine-day MA, while the red line is the 20-day moving average, and the 40-day MA is depicted by the green line. The 40-day MA is the smoothest and least volatile, while the 9-day MA is showing maximum movement, and the 20-day MA falls in between.
</p>
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<span class="heading-toc" id="toc-moving-average-convergence-divergence-macd"></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"> Moving Average Convergence Divergence (MACD) </span> </h2>
<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/m/macd.asp">Moving average convergence divergence</a>, otherwise known as MACD, is a commonly used and effective indicator developed by money manager Gerald Appel. It is a trend-following momentum indicator that uses moving averages or exponential moving averages for calculations. Typically, the MACD is calculated as 12-day EMA minus 26-day EMA. The nine-day EMA of the MACD is called the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/signal_line.asp">signal line</a>, which distinguishes bull and bear indicators.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> A bullish signal is generated when the MACD is a positive value, as the shorter period EMA is higher (stronger) than the longer period EMA. This signifies an increase in upside momentum, but as the value starts declining, it shows a loss in momentum. Similarly, a negative MACD value is indicative of a bearish situation, and an increase further suggests growing downside momentum.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> If negative MACD value decreases, it signals that the downtrend is losing its momentum. There are more interpretations to the movement of these lines such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crossover.asp">crossovers</a>; a bullish crossover is signaled when the MACD crosses above the signal line in an upward direction.
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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>Image by Sabrina Jiang © Investopedia 2021</p></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> In the chart above, the MACD is represented by the orange line and the signal line is purple.<strong> </strong>The MACD histogram (light green bars) is the difference between the MACD line and the signal line. The MACD histogram is plotted on the center line and represents the difference between the MACD line and the signal line shown by bars. When the histogram is positive (above the centerline), it gives out bullish signals, as indicated by the MACD line above its signal line.
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<span class="heading-toc" id="toc-relative-strength-index-rsi"></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"> Relative Strength Index (RSI) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rsi.asp">relative strength index</a> (RSI) is a popular technical-momentum indicator. It attempts to determine the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overbought.asp">overbought</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oversold.asp">oversold</a> level in a market on a scale of 0 to 100, thus indicating if the market has topped or bottomed. According to this indicator, the markets are considered overbought above 70 and oversold below 30. The use of a 14-day RSI was recommended by American technical analyst Welles Wilder. Over time, nine-day RSI and 25-day RSIs have gained popularity.
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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>Image by Sabrina Jiang © Investopedia 2021</p></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> RSI can be used to look for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divergence.asp">divergence</a> and failure swings in addition to overbought and oversold signals. Divergence occurs in situations where the asset is making a new high while RSI fails to move beyond its previous high, signaling an impending reversal. If the RSI falls below its previous low, a confirmation of the impending reversal is given by the failure swing.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> To get more accurate results, be aware of a trending market or ranging market since RSI divergence is not a good enough indicator in case of a trending market. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aroonoscillator.asp">RSI</a> is very useful, especially when used <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/121014/how-do-i-create-trading-strategy-bollinger-bands-and-relative-strength-indicator-rsi.asp">complementary to other indicators</a>.
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<span class="heading-toc" id="toc-stochastic"></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"> Stochastic </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Famed securities trader George Lane based the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stochasticoscillator.asp">Stochastic</a> indicator on the observation that, if the prices have been witnessing an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uptrend.asp">uptrend</a> during the day, then the closing price will tend to settle down near the upper end of the recent price range.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Alternatively, if the prices have been sliding down, the closing price tends to get closer to the lower end of the price range. The indicator measures the relationship between the asset's closing price and its price range over a specified period of time. The stochastic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oscillator.asp">oscillator</a> contains two lines. The first line is the %K, which compares the closing price to the most recent price range. The second line is the %D (signal line), which is a smoothened form of %K value and is considered the more important among the two.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction. Divergence also helps in identifying reversals. The shape of a Stochastic bottom and top also works as a good indicator. Say, for example, a deep and broad bottom indicates that the bears are strong and any rally at such a point could be weak and short-lived.
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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>Image by Sabrina Jiang © Investopedia 2021</p></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> A chart with %K and %D is known as Slow Stochastic. The stochastic indicator is one of the good indicator that can be clubbed best with the RSI, among others.
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<span class="heading-toc" id="toc-bollinger-bands"></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"> Bollinger Bands® </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bollingerbands.asp">Bollinger Band</a>® was developed in the 1980s by financial analyst John Bollinger. It is a good indicator to measure overbought and oversold conditions in the market. Bollinger Bands® are a set of three lines: the centerline (trend), an upper line (resistance), and a lower line (support). When the price of the commodity considered is volatile, the bands tend to expand, while in cases when the prices are range-bound there is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contraction.asp">contraction</a>.
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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>Image by Sabrina Jiang © Investopedia 2021</p></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Bollinger Bands® are helpful to traders seeking to detect the turning points in a range-bound market, buying when the price drops and hits the lower band and selling when the price rises to touch the upper band. However, as the markets enter trending, the indicator starts giving false signals, especially if the price moves away from the range it was trading. Bollinger Bands® are considered apt for low-frequency trend following.
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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_56-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> There are many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalindicator.asp">technical indicators</a> available to traders, and picking the right ones is crucial to informed decisions. Making sure of their suitability to the market conditions, the trend-following indicators are apt for trending markets, while oscillators fit well in ranging market conditions. However, beware: applying technical indicators improperly can result in misleading and false signals, resulting in losses. Therefore, starting with Stochastic or Bollinger Bands® are recommended for those who are new to using technical analysis.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> <em>Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.</em>
</p></div> | In any asset class, the primary motive for any trader, investor, or [speculator](https://www.investopedia.com/terms/s/speculator.asp) is to make trading as profitable as possible. In commodities, which include everything from coffee to crude oil, we will analyze the techniques of [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) and [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp), which are employed by traders in their buy, sell, or hold decisions.
The technique of fundamental analysis is believed to be ideal for investments involving a longer time period. It is more research-based; it studies demand-supply situations, economic policies, and financials as decision-making criteria.
Traders commonly use technical analysis, as it is appropriate for [short-term](https://www.investopedia.com/terms/s/shortterm.asp) judgment in markets, and analyzes the past price patterns, trends, and volume to construct charts in order to determine future movement.
### Key Takeaways
* The primary motive for any trader is to make as much profit as possible.
* Traders need to first identify the market.
* Momentum indicators are the most popular for commodity trading.
## Identifying the Market for Commodities
[Momentum](https://www.investopedia.com/terms/m/momentum.asp) indicators are the most popular for commodity trading, contributing to the trusted adage, “buy low and sell high.” Momentum indicators are further split into oscillators and trend-following indicators. Traders need to first identify the market (i.e., whether the market is [trending](https://www.investopedia.com/terms/t/trend.asp) or ranging before [applying](https://www.investopedia.com/articles/active-trading/011815/top-technical-indicators-rookie-traders.asp) any of these indicators). This information is important because the trend following indicators do not perform well in a ranging market; similarly, oscillators tend to be misleading in a trending market.
## Moving Averages
One of the simplest and most widely used indicators in technical analysis is the [moving average](https://www.investopedia.com/terms/m/movingaverage.asp) (MA), which is the [average price](https://www.investopedia.com/terms/a/averageprice.asp) over a specified period for a commodity or stock. For example, a five-period MA will be the average of the closing prices over the last five days, including the current period. When this indicator is used intra-day, the calculation is based on the [current price](https://www.investopedia.com/terms/c/currentprice.asp) data instead of the closing price.
The MA tends to smooth out the random price movement to bring out the concealed trends. It is seen as a [lagging indicator](https://www.investopedia.com/terms/l/laggingindicator.asp) and is used to observe price patterns. A [buy signal](https://www.investopedia.com/terms/b/buy-signal.asp) is generated when the price crosses above the MA from below bullish sentiments, while the inverse is indicative of bearish sentiments—hence a [sell signal](https://www.investopedia.com/terms/s/sell-signal.asp).
There are many versions of MA that are more elaborate, such as exponential moving average (EMA), volume adjusted moving average, and linear [weighted](https://www.investopedia.com/terms/w/weighted.asp) moving average. MA is not suitable for a ranging market, as it tends to generate [false signals](https://www.investopedia.com/terms/f/false-signal.asp) due to price fluctuations. In the example below, notice that the slope of the MA reflects the direction of the trend. A steeper MA shows the momentum backing the trend, while a flattening MA is a warning signal there may be a trend [reversal](https://www.investopedia.com/terms/r/reversal.asp) due to falling momentum.
![Image]()
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Image by Sabrina Jiang © Investopedia 2021
In the chart above, the blue line depicts the nine-day MA, while the red line is the 20-day moving average, and the 40-day MA is depicted by the green line. The 40-day MA is the smoothest and least volatile, while the 9-day MA is showing maximum movement, and the 20-day MA falls in between.
## Moving Average Convergence Divergence (MACD)
[Moving average convergence divergence](https://www.investopedia.com/terms/m/macd.asp), otherwise known as MACD, is a commonly used and effective indicator developed by money manager Gerald Appel. It is a trend-following momentum indicator that uses moving averages or exponential moving averages for calculations. Typically, the MACD is calculated as 12-day EMA minus 26-day EMA. The nine-day EMA of the MACD is called the [signal line](https://www.investopedia.com/terms/s/signal_line.asp), which distinguishes bull and bear indicators.
A bullish signal is generated when the MACD is a positive value, as the shorter period EMA is higher (stronger) than the longer period EMA. This signifies an increase in upside momentum, but as the value starts declining, it shows a loss in momentum. Similarly, a negative MACD value is indicative of a bearish situation, and an increase further suggests growing downside momentum.
If negative MACD value decreases, it signals that the downtrend is losing its momentum. There are more interpretations to the movement of these lines such as [crossovers](https://www.investopedia.com/terms/c/crossover.asp); a bullish crossover is signaled when the MACD crosses above the signal line in an upward direction.
![Image]()
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Image by Sabrina Jiang © Investopedia 2021
In the chart above, the MACD is represented by the orange line and the signal line is purple.The MACD histogram (light green bars) is the difference between the MACD line and the signal line. The MACD histogram is plotted on the center line and represents the difference between the MACD line and the signal line shown by bars. When the histogram is positive (above the centerline), it gives out bullish signals, as indicated by the MACD line above its signal line.
## Relative Strength Index (RSI)
The [relative strength index](https://www.investopedia.com/terms/r/rsi.asp) (RSI) is a popular technical-momentum indicator. It attempts to determine the [overbought](https://www.investopedia.com/terms/o/overbought.asp) and [oversold](https://www.investopedia.com/terms/o/oversold.asp) level in a market on a scale of 0 to 100, thus indicating if the market has topped or bottomed. According to this indicator, the markets are considered overbought above 70 and oversold below 30. The use of a 14-day RSI was recommended by American technical analyst Welles Wilder. Over time, nine-day RSI and 25-day RSIs have gained popularity.
![Image]()
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Image by Sabrina Jiang © Investopedia 2021
RSI can be used to look for [divergence](https://www.investopedia.com/terms/d/divergence.asp) and failure swings in addition to overbought and oversold signals. Divergence occurs in situations where the asset is making a new high while RSI fails to move beyond its previous high, signaling an impending reversal. If the RSI falls below its previous low, a confirmation of the impending reversal is given by the failure swing.
To get more accurate results, be aware of a trending market or ranging market since RSI divergence is not a good enough indicator in case of a trending market. [RSI](https://www.investopedia.com/terms/a/aroonoscillator.asp) is very useful, especially when used [complementary to other indicators](https://www.investopedia.com/ask/answers/121014/how-do-i-create-trading-strategy-bollinger-bands-and-relative-strength-indicator-rsi.asp).
## Stochastic
Famed securities trader George Lane based the [Stochastic](https://www.investopedia.com/terms/s/stochasticoscillator.asp) indicator on the observation that, if the prices have been witnessing an [uptrend](https://www.investopedia.com/terms/u/uptrend.asp) during the day, then the closing price will tend to settle down near the upper end of the recent price range.
Alternatively, if the prices have been sliding down, the closing price tends to get closer to the lower end of the price range. The indicator measures the relationship between the asset's closing price and its price range over a specified period of time. The stochastic [oscillator](https://www.investopedia.com/terms/o/oscillator.asp) contains two lines. The first line is the %K, which compares the closing price to the most recent price range. The second line is the %D (signal line), which is a smoothened form of %K value and is considered the more important among the two.
The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction. Divergence also helps in identifying reversals. The shape of a Stochastic bottom and top also works as a good indicator. Say, for example, a deep and broad bottom indicates that the bears are strong and any rally at such a point could be weak and short-lived.
![Image]()
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Image by Sabrina Jiang © Investopedia 2021
A chart with %K and %D is known as Slow Stochastic. The stochastic indicator is one of the good indicator that can be clubbed best with the RSI, among others.
## Bollinger Bands®
The [Bollinger Band](https://www.investopedia.com/terms/b/bollingerbands.asp)® was developed in the 1980s by financial analyst John Bollinger. It is a good indicator to measure overbought and oversold conditions in the market. Bollinger Bands® are a set of three lines: the centerline (trend), an upper line (resistance), and a lower line (support). When the price of the commodity considered is volatile, the bands tend to expand, while in cases when the prices are range-bound there is [contraction](https://www.investopedia.com/terms/c/contraction.asp).
![Image]()
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Image by Sabrina Jiang © Investopedia 2021
Bollinger Bands® are helpful to traders seeking to detect the turning points in a range-bound market, buying when the price drops and hits the lower band and selling when the price rises to touch the upper band. However, as the markets enter trending, the indicator starts giving false signals, especially if the price moves away from the range it was trading. Bollinger Bands® are considered apt for low-frequency trend following.
## The Bottom Line
There are many [technical indicators](https://www.investopedia.com/terms/t/technicalindicator.asp) available to traders, and picking the right ones is crucial to informed decisions. Making sure of their suitability to the market conditions, the trend-following indicators are apt for trending markets, while oscillators fit well in ranging market conditions. However, beware: applying technical indicators improperly can result in misleading and false signals, resulting in losses. Therefore, starting with Stochastic or Bollinger Bands® are recommended for those who are new to using technical analysis.
*Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.*
| In any asset class, the primary motive for any trader, investor, or speculator is to make trading as profitable as possible. In commodities, which include everything from coffee to crude oil, we will analyze the techniques of fundamental analysis and technical analysis, which are employed by traders in their buy, sell, or hold decisions.
The technique of fundamental analysis is believed to be ideal for investments involving a longer time period. It is more research-based; it studies demand-supply situations, economic policies, and financials as decision-making criteria.
Traders commonly use technical analysis, as it is appropriate for short-term judgment in markets, and analyzes the past price patterns, trends, and volume to construct charts in order to determine future movement.
Key Takeaways
The primary motive for any trader is to make as much profit as possible.Traders need to first identify the market.Momentum indicators are the most popular for commodity trading.
Identifying the Market for Commodities
Momentum indicators are the most popular for commodity trading, contributing to the trusted adage, “buy low and sell high.” Momentum indicators are further split into oscillators and trend-following indicators. Traders need to first identify the market (i.e., whether the market is trending or ranging before applying any of these indicators). This information is important because the trend following indicators do not perform well in a ranging market; similarly, oscillators tend to be misleading in a trending market.
Moving Averages
One of the simplest and most widely used indicators in technical analysis is the moving average (MA), which is the average price over a specified period for a commodity or stock. For example, a five-period MA will be the average of the closing prices over the last five days, including the current period. When this indicator is used intra-day, the calculation is based on the current price data instead of the closing price.
The MA tends to smooth out the random price movement to bring out the concealed trends. It is seen as a lagging indicator and is used to observe price patterns. A buy signal is generated when the price crosses above the MA from below bullish sentiments, while the inverse is indicative of bearish sentiments—hence a sell signal.
There are many versions of MA that are more elaborate, such as exponential moving average (EMA), volume adjusted moving average, and linear weighted moving average. MA is not suitable for a ranging market, as it tends to generate false signals due to price fluctuations. In the example below, notice that the slope of the MA reflects the direction of the trend. A steeper MA shows the momentum backing the trend, while a flattening MA is a warning signal there may be a trend reversal due to falling momentum.
Image by Sabrina Jiang © Investopedia 2021
In the chart above, the blue line depicts the nine-day MA, while the red line is the 20-day moving average, and the 40-day MA is depicted by the green line. The 40-day MA is the smoothest and least volatile, while the 9-day MA is showing maximum movement, and the 20-day MA falls in between.
Moving Average Convergence Divergence (MACD)
Moving average convergence divergence, otherwise known as MACD, is a commonly used and effective indicator developed by money manager Gerald Appel. It is a trend-following momentum indicator that uses moving averages or exponential moving averages for calculations. Typically, the MACD is calculated as 12-day EMA minus 26-day EMA. The nine-day EMA of the MACD is called the signal line, which distinguishes bull and bear indicators.
A bullish signal is generated when the MACD is a positive value, as the shorter period EMA is higher (stronger) than the longer period EMA. This signifies an increase in upside momentum, but as the value starts declining, it shows a loss in momentum. Similarly, a negative MACD value is indicative of a bearish situation, and an increase further suggests growing downside momentum.
If negative MACD value decreases, it signals that the downtrend is losing its momentum. There are more interpretations to the movement of these lines such as crossovers; a bullish crossover is signaled when the MACD crosses above the signal line in an upward direction.
Image by Sabrina Jiang © Investopedia 2021
In the chart above, the MACD is represented by the orange line and the signal line is purple. The MACD histogram (light green bars) is the difference between the MACD line and the signal line. The MACD histogram is plotted on the center line and represents the difference between the MACD line and the signal line shown by bars. When the histogram is positive (above the centerline), it gives out bullish signals, as indicated by the MACD line above its signal line.
Relative Strength Index (RSI)
The relative strength index (RSI) is a popular technical-momentum indicator. It attempts to determine the overbought and oversold level in a market on a scale of 0 to 100, thus indicating if the market has topped or bottomed. According to this indicator, the markets are considered overbought above 70 and oversold below 30. The use of a 14-day RSI was recommended by American technical analyst Welles Wilder. Over time, nine-day RSI and 25-day RSIs have gained popularity.
Image by Sabrina Jiang © Investopedia 2021
RSI can be used to look for divergence and failure swings in addition to overbought and oversold signals. Divergence occurs in situations where the asset is making a new high while RSI fails to move beyond its previous high, signaling an impending reversal. If the RSI falls below its previous low, a confirmation of the impending reversal is given by the failure swing.
To get more accurate results, be aware of a trending market or ranging market since RSI divergence is not a good enough indicator in case of a trending market. RSI is very useful, especially when used complementary to other indicators.
Stochastic
Famed securities trader George Lane based the Stochastic indicator on the observation that, if the prices have been witnessing an uptrend during the day, then the closing price will tend to settle down near the upper end of the recent price range.
Alternatively, if the prices have been sliding down, the closing price tends to get closer to the lower end of the price range. The indicator measures the relationship between the asset's closing price and its price range over a specified period of time. The stochastic oscillator contains two lines. The first line is the %K, which compares the closing price to the most recent price range. The second line is the %D (signal line), which is a smoothened form of %K value and is considered the more important among the two.
The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction. Divergence also helps in identifying reversals. The shape of a Stochastic bottom and top also works as a good indicator. Say, for example, a deep and broad bottom indicates that the bears are strong and any rally at such a point could be weak and short-lived.
Image by Sabrina Jiang © Investopedia 2021
A chart with %K and %D is known as Slow Stochastic. The stochastic indicator is one of the good indicator that can be clubbed best with the RSI, among others.
Bollinger Bands®
The Bollinger Band® was developed in the 1980s by financial analyst John Bollinger. It is a good indicator to measure overbought and oversold conditions in the market. Bollinger Bands® are a set of three lines: the centerline (trend), an upper line (resistance), and a lower line (support). When the price of the commodity considered is volatile, the bands tend to expand, while in cases when the prices are range-bound there is contraction.
Image by Sabrina Jiang © Investopedia 2021
Bollinger Bands® are helpful to traders seeking to detect the turning points in a range-bound market, buying when the price drops and hits the lower band and selling when the price rises to touch the upper band. However, as the markets enter trending, the indicator starts giving false signals, especially if the price moves away from the range it was trading. Bollinger Bands® are considered apt for low-frequency trend following.
The Bottom Line
There are many technical indicators available to traders, and picking the right ones is crucial to informed decisions. Making sure of their suitability to the market conditions, the trend-following indicators are apt for trending markets, while oscillators fit well in ranging market conditions. However, beware: applying technical indicators improperly can result in misleading and false signals, resulting in losses. Therefore, starting with Stochastic or Bollinger Bands® are recommended for those who are new to using technical analysis.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.
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https://www.investopedia.com/terms/a/affluenza.asp | Affluenza | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-affluenza"></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 Affluenza? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> "Affluenza" is a social condition that arises from the desire to be more wealthy or successful. It can also be defined as the inability of an individual to understand the consequences of their actions because of their social status or economic privilege.
</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>Affluenza is a social condition that presents itself in privileged individuals who believe that they will not be held accountable for their actions because of their social position.</li><li>Individuals who suffer from affluenza fail to recognize the societal repercussions of their actions, which may cause mental or physical harm or anguish upon others.</li><li>Affluenza also refers to the single-minded pursuit of accumulating wealth and success, which can damage relationships and cause depression or anxiety.</li><li>Social scientists blame the appearance of affluenza on contemporary culture that fetishizes wealth but provides strategies to avoid this social condition.</li><li>Some symptoms of affluenza are an all-consuming focus on work and earning money and a self-image tied directly to financial status.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-affluenza"></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 Affluenza </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The word affluenza is a combination of the words "affluence" and "influenza." It is a symptom of a culture with strong materialistic values, where the accumulation of riches is considered one of the highest achievements. People said to be impacted by this condition typically find the economic success they've been pursuing in a singleminded way leaves them feeling unfulfilled once they've achieved. They live in a constant state of dissatisfaction because they always want more than what they already have.
</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"> Proponents of affluenza theory claim that those afflicted by the condition operate under the assumption that money will buy them happiness. However, they often find that the pursuit of wealth robs them of fulfillment and leaves them feeling perpetually unsatisfied. They usually have trouble functioning in everyday society and distinguishing between right and wrong because the world of privilege they live in insulates them from the rest of the world and prevents them from developing empathy for people of modest backgrounds.
</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 society of growing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income-inequality.asp" rel="noopener noreferrer">income inequality,</a> those with financial privilege are more likely to sequester themselves from the population at large. This phenomenon fosters a sense of entitlement that can be self-perpetuating: the wealthy feel they have earned their way into a social class with superior intellect and talent. As a result, they believe the rules of society that apply to other people do not apply to them.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Symptoms of affluenza include a myopic focus on work and earning money, strained personal relationships, depression, a self-image tied directly to financial status, and difficulty interacting with or relating to others.
</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>Where you live and raise your children also seems to affect social mobility, as well. Most upper-middle-class families live in safe neighborhoods with good schools, all of which may contribute to success later in life.</p></div></div></div>
<span class="heading-toc" id="toc-affluenza-and-the-media"></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"> Affluenza and the Media </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Affluenza as a social condition has been the subject of books and television shows and has been used as a defense in criminal trials.
</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 December 2013, a Texas teenager who struck and killed four pedestrians while driving drunk was sentenced to 10 years of probation and zero jail time after his attorney successfully argued that his privileged upbringing precluded his ability to understand the consequences of his actions.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> In June 2016, a Stanford University swimmer convicted of sexually assaulting a female student on campus received a six-month jail sentence. While reading the sentence and justifying its leniency, the judge in the case stated a prison term "would have a severe impact on" the defendant. Critics allege this was an allusion to the student's wealth and sheltered upbringing, both factors that influenced his sentence.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div>
<span class="heading-toc" id="toc-affluenza-in-america"></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"> Affluenza in America </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Affluenza is the most prevalent in economically viable countries, such as the U.S., which has a reputation as being the home of rugged individualism. However, research has shown that reaching the top tier of income earners is much easier if previous generations of your family were also in the top tier of income earners, including your parents. The socioeconomic class where Americans are born strongly correlates with the social status they achieve; this perpetuates the social situation where the condition of affluenza develops.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A 2019 paper authored by two Stanford researchers published a study that analyzed the “intergenerational elasticity” (IGE) of American families—in other words, the degree to which parents’ income affected the children’s earnings in adulthood. Overall, they found an average IGE of around 0.5, meaning that parental income accounts for about half of a child’s eventual wages (the IGE was marginally higher for men than women—0.52 vs. 0.47) when they looked at those on the higher end of the income scale, however, the correlation was more like two-thirds. So you’re a lot more likely to end up affluent if you were born that way.<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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> It’s worth noting, however, that not every segment of society is equally influenced by the generation that preceded it. For example, the Stanford team found that females had a lower correlation between their income and their parents than males. One possibility: women simply work less when their husbands make a fairly large salary.<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_30-0"></div>
<span class="heading-toc" id="toc-the-transmission-of-advantage"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> "The Transmission of Advantage" </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> There are several possible explanations for what social scientists dub “the intergenerational transmission of advantage.” One of the most basic is the vital influence of education on future wages. Wealthier parents are more likely to have college degrees, thereby serving as role models for their children to attend university. They also have the means to put their kids in better schools.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> A Johns Hopkins study tracked<strong> </strong>790 students living in Baltimore from first grade until their late 20s. Only 4% of lower-income students went on to earn a college education, compared to 45% of kids from more affluent families. Students armed with a university degree are in a much better position to find a high-paying job.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> In addition to education, the transmission of assets and advantages also extends to homeownership, stocks, life insurance, and savings within generations of family members.<span class="ql-inline-citation" data-cite="7"></span> Generational wealth continues to grow in America. In the past 50 years, 20% of the highest-earning households bring in a larger share of the total income in the U.S., according to a 2020 report from the Pew Research Center.
</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"> According to the report, the gap between lower and higher-income households is growing exponentially, and middle-class income is dropping. Families with higher income often pass on their children not only money but also opportunities for building wealth.<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_39-0"></div>
<span class="heading-toc" id="toc-avoiding-affluenza"></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"> Avoiding Affluenza </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> There is no official diagnosis of affluenza, which means it's not a disorder unto itself but instead refers to a set of circumstances and environmental factors that contribute to maladaptive behavior. However, there are ways parents can help prevent its development in their offspring.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> In this helicopter era of parenting, children are kept in the dark about money and finances. Still, the sooner you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-influencers-kids-follow-5219006">start teaching them</a> about those things, the more financially responsible they will become.
</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"> Much of what children will learn is by watching you, and so if you tell them about your hard work, show them how you save money in the bank and don’t indulge in impulse shopping, your children won’t either.
</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"> Teach Them How to Handle Money </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> If your children don’t understand the value of money and how to manage it, chances are they won’t hang onto it for too long. An effective way to teach children how to handle money is to set them up with their bank accounts to save the money they earn or deposit cash gifts.
</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"> Give a check for their birthday or a holiday, and they can put it in their savings account. When your children are older, they get to control the account. Often, the child begins to value the money he saved and thinks twice about spending it on something frivolous.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-subheading__text"> Set Boundaries </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Children are hardwired to test the boundaries to see what they can get away with, but if you set limits, it will create financially responsible adults. If you give in to your child’s every whim, it can set them up for a life of instant gratification and debt. And those are not the values you will want your children to have when they <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/suddenwealthsyndrome.asp">receive their inheritance</a>, or the family business is passed down.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_55-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_56-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Teaching your children to be charitable, setting boundaries, and encouraging them to earn their own pocket money, can help prevent a sense of "entitlement" as young adults.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Take gifts as an example: if your child receives a monetary one, have them save three-quarters of it and spend one-quarter. If they had his heart set on buying something with the money, that would teach him how to wait and save instead of being gratified instantly.
</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"> Don’t Help Them Out of Sticky Situations </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Handling money correctly takes time, and children will make plenty of mistakes along the way. But if your children mess up, you shouldn’t bail them out. Let’s say your child blows their allowance for the week but wants the latest iPhone app. If you give in and purchase it for him, you are doing him a big disservice. Children have to learn that everything costs money and their spending choices have consequences.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-subheading__text"> Create a Smart Shopper </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> In this always-on, advertising-driven world, children have to learn early about how to be smart shoppers. It’s easy to get duped into overpaying for something or buying a worthless warranty. It’s the parents’ job to teach their children how to comparison shop and to get the best deal. By researching any big-ticket item before purchasing, children will learn to make wise decisions and avoid hasty ones.
</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"> Encourage Your Children to Work </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Education will be your children's primary focus during the high school years, but that doesn’t mean they shouldn't earn some money along the way. It may not be possible to have your child work every day after school, but a couple of shifts at the local grocery store or babysitting on the weekends may go a long way in instilling a strong work ethic. Doing chores around the house or in the neighborhood is also a way to teach your children about the importance of working.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<span class="heading-toc" id="toc-affluenza-faqs"></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"> Affluenza FAQs </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_69-0"> <span class="mntl-sc-block-subheading__text"> What is the Affluenza Defense? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> There have been some court cases where legal counsel mounted an "affluenza defense" to state that their client's social condition afflicted them, causing them not to understand the consequences of their actions. It states a wealthy person isn't criminally liable for their actions. This legal defense has been argued in U.S. courtrooms, and in some cases, the perpetrator received a less severe sentence due to a legal defense citing "affluenza" affliction.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_72-0"> <span class="mntl-sc-block-subheading__text"> Who or What is the "Affluenza Teen"? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> In 2013, Ethan Couch, then age 16, was labeled the "affluenza teen" by the media when he was brought to trial in Texas for involuntary manslaughter. Couch killed four pedestrians while he was driving drunk. The judge sentenced him to 10 years of probation and zero jail time because Couch's attorney successfully argued he didn't understand the consequences of his actions due to his family's wealth.<span class="ql-inline-citation" data-cite="9"></span> Many members of society and the media were appalled at the judge's decision to allow the "affluenza" defense to be mounted.<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_74-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Couch did two years of jail time after the court case for violating his parole and fleeing to Mexico.<span class="ql-inline-citation" data-cite="11"></span> He was released from jail in 2018. Couch was arrested again in 2020 for drug use, and the media continued to call him the "affluenza teen," although he was 22 years old at the time of his drug-related arrest.<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_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"> What is the Opposite of Affluenza? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> The opposite of affluenza could be someone who has lived in poverty and cannot see their way out of the economic challenges facing them. It could mean someone who tries to live a frugal lifestyle and doesn't crave designer items or wealth. The Huff Post reported a story that coined a term called "lowcashism" to be the opposite of affluenza. The 2013 article stated young people suffering from "lowcashism" were trapped in a "vicious cycle of poverty, disenfranchisement and bad choices."<span class="ql-inline-citation" data-cite="12"></span>
</p></div> | ## What Is Affluenza?
"Affluenza" is a social condition that arises from the desire to be more wealthy or successful. It can also be defined as the inability of an individual to understand the consequences of their actions because of their social status or economic privilege.
### Key Takeaways
* Affluenza is a social condition that presents itself in privileged individuals who believe that they will not be held accountable for their actions because of their social position.
* Individuals who suffer from affluenza fail to recognize the societal repercussions of their actions, which may cause mental or physical harm or anguish upon others.
* Affluenza also refers to the single-minded pursuit of accumulating wealth and success, which can damage relationships and cause depression or anxiety.
* Social scientists blame the appearance of affluenza on contemporary culture that fetishizes wealth but provides strategies to avoid this social condition.
* Some symptoms of affluenza are an all-consuming focus on work and earning money and a self-image tied directly to financial status.
## Understanding Affluenza
The word affluenza is a combination of the words "affluence" and "influenza." It is a symptom of a culture with strong materialistic values, where the accumulation of riches is considered one of the highest achievements. People said to be impacted by this condition typically find the economic success they've been pursuing in a singleminded way leaves them feeling unfulfilled once they've achieved. They live in a constant state of dissatisfaction because they always want more than what they already have.
Proponents of affluenza theory claim that those afflicted by the condition operate under the assumption that money will buy them happiness. However, they often find that the pursuit of wealth robs them of fulfillment and leaves them feeling perpetually unsatisfied. They usually have trouble functioning in everyday society and distinguishing between right and wrong because the world of privilege they live in insulates them from the rest of the world and prevents them from developing empathy for people of modest backgrounds.
In a society of growing [income inequality,](https://www.investopedia.com/terms/i/income-inequality.asp) those with financial privilege are more likely to sequester themselves from the population at large. This phenomenon fosters a sense of entitlement that can be self-perpetuating: the wealthy feel they have earned their way into a social class with superior intellect and talent. As a result, they believe the rules of society that apply to other people do not apply to them.
Symptoms of affluenza include a myopic focus on work and earning money, strained personal relationships, depression, a self-image tied directly to financial status, and difficulty interacting with or relating to others.
###
Where you live and raise your children also seems to affect social mobility, as well. Most upper-middle-class families live in safe neighborhoods with good schools, all of which may contribute to success later in life.
## Affluenza and the Media
Affluenza as a social condition has been the subject of books and television shows and has been used as a defense in criminal trials.
In December 2013, a Texas teenager who struck and killed four pedestrians while driving drunk was sentenced to 10 years of probation and zero jail time after his attorney successfully argued that his privileged upbringing precluded his ability to understand the consequences of his actions.
In June 2016, a Stanford University swimmer convicted of sexually assaulting a female student on campus received a six-month jail sentence. While reading the sentence and justifying its leniency, the judge in the case stated a prison term "would have a severe impact on" the defendant. Critics allege this was an allusion to the student's wealth and sheltered upbringing, both factors that influenced his sentence.
## Affluenza in America
Affluenza is the most prevalent in economically viable countries, such as the U.S., which has a reputation as being the home of rugged individualism. However, research has shown that reaching the top tier of income earners is much easier if previous generations of your family were also in the top tier of income earners, including your parents. The socioeconomic class where Americans are born strongly correlates with the social status they achieve; this perpetuates the social situation where the condition of affluenza develops.
A 2019 paper authored by two Stanford researchers published a study that analyzed the “intergenerational elasticity” (IGE) of American families—in other words, the degree to which parents’ income affected the children’s earnings in adulthood. Overall, they found an average IGE of around 0.5, meaning that parental income accounts for about half of a child’s eventual wages (the IGE was marginally higher for men than women—0.52 vs. 0.47) when they looked at those on the higher end of the income scale, however, the correlation was more like two-thirds. So you’re a lot more likely to end up affluent if you were born that way.
It’s worth noting, however, that not every segment of society is equally influenced by the generation that preceded it. For example, the Stanford team found that females had a lower correlation between their income and their parents than males. One possibility: women simply work less when their husbands make a fairly large salary.
## "The Transmission of Advantage"
There are several possible explanations for what social scientists dub “the intergenerational transmission of advantage.” One of the most basic is the vital influence of education on future wages. Wealthier parents are more likely to have college degrees, thereby serving as role models for their children to attend university. They also have the means to put their kids in better schools.
A Johns Hopkins study tracked790 students living in Baltimore from first grade until their late 20s. Only 4% of lower-income students went on to earn a college education, compared to 45% of kids from more affluent families. Students armed with a university degree are in a much better position to find a high-paying job.
In addition to education, the transmission of assets and advantages also extends to homeownership, stocks, life insurance, and savings within generations of family members. Generational wealth continues to grow in America. In the past 50 years, 20% of the highest-earning households bring in a larger share of the total income in the U.S., according to a 2020 report from the Pew Research Center.
According to the report, the gap between lower and higher-income households is growing exponentially, and middle-class income is dropping. Families with higher income often pass on their children not only money but also opportunities for building wealth.
## Avoiding Affluenza
There is no official diagnosis of affluenza, which means it's not a disorder unto itself but instead refers to a set of circumstances and environmental factors that contribute to maladaptive behavior. However, there are ways parents can help prevent its development in their offspring.
In this helicopter era of parenting, children are kept in the dark about money and finances. Still, the sooner you [start teaching them](https://www.investopedia.com/financial-influencers-kids-follow-5219006) about those things, the more financially responsible they will become.
Much of what children will learn is by watching you, and so if you tell them about your hard work, show them how you save money in the bank and don’t indulge in impulse shopping, your children won’t either.
### Teach Them How to Handle Money
If your children don’t understand the value of money and how to manage it, chances are they won’t hang onto it for too long. An effective way to teach children how to handle money is to set them up with their bank accounts to save the money they earn or deposit cash gifts.
Give a check for their birthday or a holiday, and they can put it in their savings account. When your children are older, they get to control the account. Often, the child begins to value the money he saved and thinks twice about spending it on something frivolous.
### Set Boundaries
Children are hardwired to test the boundaries to see what they can get away with, but if you set limits, it will create financially responsible adults. If you give in to your child’s every whim, it can set them up for a life of instant gratification and debt. And those are not the values you will want your children to have when they [receive their inheritance](https://www.investopedia.com/terms/s/suddenwealthsyndrome.asp), or the family business is passed down.
###
Teaching your children to be charitable, setting boundaries, and encouraging them to earn their own pocket money, can help prevent a sense of "entitlement" as young adults.
Take gifts as an example: if your child receives a monetary one, have them save three-quarters of it and spend one-quarter. If they had his heart set on buying something with the money, that would teach him how to wait and save instead of being gratified instantly.
### Don’t Help Them Out of Sticky Situations
Handling money correctly takes time, and children will make plenty of mistakes along the way. But if your children mess up, you shouldn’t bail them out. Let’s say your child blows their allowance for the week but wants the latest iPhone app. If you give in and purchase it for him, you are doing him a big disservice. Children have to learn that everything costs money and their spending choices have consequences.
### Create a Smart Shopper
In this always-on, advertising-driven world, children have to learn early about how to be smart shoppers. It’s easy to get duped into overpaying for something or buying a worthless warranty. It’s the parents’ job to teach their children how to comparison shop and to get the best deal. By researching any big-ticket item before purchasing, children will learn to make wise decisions and avoid hasty ones.
### Encourage Your Children to Work
Education will be your children's primary focus during the high school years, but that doesn’t mean they shouldn't earn some money along the way. It may not be possible to have your child work every day after school, but a couple of shifts at the local grocery store or babysitting on the weekends may go a long way in instilling a strong work ethic. Doing chores around the house or in the neighborhood is also a way to teach your children about the importance of working.
## Affluenza FAQs
### What is the Affluenza Defense?
There have been some court cases where legal counsel mounted an "affluenza defense" to state that their client's social condition afflicted them, causing them not to understand the consequences of their actions. It states a wealthy person isn't criminally liable for their actions. This legal defense has been argued in U.S. courtrooms, and in some cases, the perpetrator received a less severe sentence due to a legal defense citing "affluenza" affliction.
### Who or What is the "Affluenza Teen"?
In 2013, Ethan Couch, then age 16, was labeled the "affluenza teen" by the media when he was brought to trial in Texas for involuntary manslaughter. Couch killed four pedestrians while he was driving drunk. The judge sentenced him to 10 years of probation and zero jail time because Couch's attorney successfully argued he didn't understand the consequences of his actions due to his family's wealth. Many members of society and the media were appalled at the judge's decision to allow the "affluenza" defense to be mounted.
Couch did two years of jail time after the court case for violating his parole and fleeing to Mexico. He was released from jail in 2018. Couch was arrested again in 2020 for drug use, and the media continued to call him the "affluenza teen," although he was 22 years old at the time of his drug-related arrest.
### What is the Opposite of Affluenza?
The opposite of affluenza could be someone who has lived in poverty and cannot see their way out of the economic challenges facing them. It could mean someone who tries to live a frugal lifestyle and doesn't crave designer items or wealth. The Huff Post reported a story that coined a term called "lowcashism" to be the opposite of affluenza. The 2013 article stated young people suffering from "lowcashism" were trapped in a "vicious cycle of poverty, disenfranchisement and bad choices."
| What Is Affluenza?
"Affluenza" is a social condition that arises from the desire to be more wealthy or successful. It can also be defined as the inability of an individual to understand the consequences of their actions because of their social status or economic privilege.
Key Takeaways
Affluenza is a social condition that presents itself in privileged individuals who believe that they will not be held accountable for their actions because of their social position.Individuals who suffer from affluenza fail to recognize the societal repercussions of their actions, which may cause mental or physical harm or anguish upon others.Affluenza also refers to the single-minded pursuit of accumulating wealth and success, which can damage relationships and cause depression or anxiety.Social scientists blame the appearance of affluenza on contemporary culture that fetishizes wealth but provides strategies to avoid this social condition.Some symptoms of affluenza are an all-consuming focus on work and earning money and a self-image tied directly to financial status.
Understanding Affluenza
The word affluenza is a combination of the words "affluence" and "influenza." It is a symptom of a culture with strong materialistic values, where the accumulation of riches is considered one of the highest achievements. People said to be impacted by this condition typically find the economic success they've been pursuing in a singleminded way leaves them feeling unfulfilled once they've achieved. They live in a constant state of dissatisfaction because they always want more than what they already have.
Proponents of affluenza theory claim that those afflicted by the condition operate under the assumption that money will buy them happiness. However, they often find that the pursuit of wealth robs them of fulfillment and leaves them feeling perpetually unsatisfied. They usually have trouble functioning in everyday society and distinguishing between right and wrong because the world of privilege they live in insulates them from the rest of the world and prevents them from developing empathy for people of modest backgrounds.
In a society of growing income inequality, those with financial privilege are more likely to sequester themselves from the population at large. This phenomenon fosters a sense of entitlement that can be self-perpetuating: the wealthy feel they have earned their way into a social class with superior intellect and talent. As a result, they believe the rules of society that apply to other people do not apply to them.
Symptoms of affluenza include a myopic focus on work and earning money, strained personal relationships, depression, a self-image tied directly to financial status, and difficulty interacting with or relating to others.
Where you live and raise your children also seems to affect social mobility, as well. Most upper-middle-class families live in safe neighborhoods with good schools, all of which may contribute to success later in life.
Affluenza and the Media
Affluenza as a social condition has been the subject of books and television shows and has been used as a defense in criminal trials.
In December 2013, a Texas teenager who struck and killed four pedestrians while driving drunk was sentenced to 10 years of probation and zero jail time after his attorney successfully argued that his privileged upbringing precluded his ability to understand the consequences of his actions.
In June 2016, a Stanford University swimmer convicted of sexually assaulting a female student on campus received a six-month jail sentence. While reading the sentence and justifying its leniency, the judge in the case stated a prison term "would have a severe impact on" the defendant. Critics allege this was an allusion to the student's wealth and sheltered upbringing, both factors that influenced his sentence.
Affluenza in America
Affluenza is the most prevalent in economically viable countries, such as the U.S., which has a reputation as being the home of rugged individualism. However, research has shown that reaching the top tier of income earners is much easier if previous generations of your family were also in the top tier of income earners, including your parents. The socioeconomic class where Americans are born strongly correlates with the social status they achieve; this perpetuates the social situation where the condition of affluenza develops.
A 2019 paper authored by two Stanford researchers published a study that analyzed the “intergenerational elasticity” (IGE) of American families—in other words, the degree to which parents’ income affected the children’s earnings in adulthood. Overall, they found an average IGE of around 0.5, meaning that parental income accounts for about half of a child’s eventual wages (the IGE was marginally higher for men than women—0.52 vs. 0.47) when they looked at those on the higher end of the income scale, however, the correlation was more like two-thirds. So you’re a lot more likely to end up affluent if you were born that way.
It’s worth noting, however, that not every segment of society is equally influenced by the generation that preceded it. For example, the Stanford team found that females had a lower correlation between their income and their parents than males. One possibility: women simply work less when their husbands make a fairly large salary.
"The Transmission of Advantage"
There are several possible explanations for what social scientists dub “the intergenerational transmission of advantage.” One of the most basic is the vital influence of education on future wages. Wealthier parents are more likely to have college degrees, thereby serving as role models for their children to attend university. They also have the means to put their kids in better schools.
A Johns Hopkins study tracked 790 students living in Baltimore from first grade until their late 20s. Only 4% of lower-income students went on to earn a college education, compared to 45% of kids from more affluent families. Students armed with a university degree are in a much better position to find a high-paying job.
In addition to education, the transmission of assets and advantages also extends to homeownership, stocks, life insurance, and savings within generations of family members. Generational wealth continues to grow in America. In the past 50 years, 20% of the highest-earning households bring in a larger share of the total income in the U.S., according to a 2020 report from the Pew Research Center.
According to the report, the gap between lower and higher-income households is growing exponentially, and middle-class income is dropping. Families with higher income often pass on their children not only money but also opportunities for building wealth.
Avoiding Affluenza
There is no official diagnosis of affluenza, which means it's not a disorder unto itself but instead refers to a set of circumstances and environmental factors that contribute to maladaptive behavior. However, there are ways parents can help prevent its development in their offspring.
In this helicopter era of parenting, children are kept in the dark about money and finances. Still, the sooner you start teaching them about those things, the more financially responsible they will become.
Much of what children will learn is by watching you, and so if you tell them about your hard work, show them how you save money in the bank and don’t indulge in impulse shopping, your children won’t either.
Teach Them How to Handle Money
If your children don’t understand the value of money and how to manage it, chances are they won’t hang onto it for too long. An effective way to teach children how to handle money is to set them up with their bank accounts to save the money they earn or deposit cash gifts.
Give a check for their birthday or a holiday, and they can put it in their savings account. When your children are older, they get to control the account. Often, the child begins to value the money he saved and thinks twice about spending it on something frivolous.
Set Boundaries
Children are hardwired to test the boundaries to see what they can get away with, but if you set limits, it will create financially responsible adults. If you give in to your child’s every whim, it can set them up for a life of instant gratification and debt. And those are not the values you will want your children to have when they receive their inheritance, or the family business is passed down.
Teaching your children to be charitable, setting boundaries, and encouraging them to earn their own pocket money, can help prevent a sense of "entitlement" as young adults.
Take gifts as an example: if your child receives a monetary one, have them save three-quarters of it and spend one-quarter. If they had his heart set on buying something with the money, that would teach him how to wait and save instead of being gratified instantly.
Don’t Help Them Out of Sticky Situations
Handling money correctly takes time, and children will make plenty of mistakes along the way. But if your children mess up, you shouldn’t bail them out. Let’s say your child blows their allowance for the week but wants the latest iPhone app. If you give in and purchase it for him, you are doing him a big disservice. Children have to learn that everything costs money and their spending choices have consequences.
Create a Smart Shopper
In this always-on, advertising-driven world, children have to learn early about how to be smart shoppers. It’s easy to get duped into overpaying for something or buying a worthless warranty. It’s the parents’ job to teach their children how to comparison shop and to get the best deal. By researching any big-ticket item before purchasing, children will learn to make wise decisions and avoid hasty ones.
Encourage Your Children to Work
Education will be your children's primary focus during the high school years, but that doesn’t mean they shouldn't earn some money along the way. It may not be possible to have your child work every day after school, but a couple of shifts at the local grocery store or babysitting on the weekends may go a long way in instilling a strong work ethic. Doing chores around the house or in the neighborhood is also a way to teach your children about the importance of working.
Affluenza FAQs
What is the Affluenza Defense?
There have been some court cases where legal counsel mounted an "affluenza defense" to state that their client's social condition afflicted them, causing them not to understand the consequences of their actions. It states a wealthy person isn't criminally liable for their actions. This legal defense has been argued in U.S. courtrooms, and in some cases, the perpetrator received a less severe sentence due to a legal defense citing "affluenza" affliction.
Who or What is the "Affluenza Teen"?
In 2013, Ethan Couch, then age 16, was labeled the "affluenza teen" by the media when he was brought to trial in Texas for involuntary manslaughter. Couch killed four pedestrians while he was driving drunk. The judge sentenced him to 10 years of probation and zero jail time because Couch's attorney successfully argued he didn't understand the consequences of his actions due to his family's wealth. Many members of society and the media were appalled at the judge's decision to allow the "affluenza" defense to be mounted.
Couch did two years of jail time after the court case for violating his parole and fleeing to Mexico. He was released from jail in 2018. Couch was arrested again in 2020 for drug use, and the media continued to call him the "affluenza teen," although he was 22 years old at the time of his drug-related arrest.
What is the Opposite of Affluenza?
The opposite of affluenza could be someone who has lived in poverty and cannot see their way out of the economic challenges facing them. It could mean someone who tries to live a frugal lifestyle and doesn't crave designer items or wealth. The Huff Post reported a story that coined a term called "lowcashism" to be the opposite of affluenza. The 2013 article stated young people suffering from "lowcashism" were trapped in a "vicious cycle of poverty, disenfranchisement and bad choices."
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https://www.investopedia.com/terms/w/work-cell.asp | Work Cell: 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-a-work-cell"></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 Work Cell? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A work cell is a logical and strategic arrangement of resources in a business environment. These arrangements are put into place to organize and improve process flow, increase efficiency, reduce costs, and eliminate wastage.
</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 concept of work cells is based on the platform of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lean-enterprise.asp">lean manufacturing</a>, which focuses on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/111014/basics-value-chain-analysis.asp">value creation</a> for the end customer and reduction of wastage. Work cells, which are also referred to as <em>workcells,</em> are typically found in manufacturing and office environments.
</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 work cell is a term used to describe the logical and strategic arrangement of resources in a business environment including people, machinery, and other equipment.</li><li>Work cells are based on the platform of lean manufacturing, which focuses on value creation for the end customer and reduction of wastage.</li><li>In the office or administrative context, work cells may facilitate a better flow of communication and more efficient use of shared resources.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-work-cells"></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 Work Cells </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A work cell is generally set up in order to complete a specific activity, most often in the manufacturing industry. It is the grouping of machines, people, and other equipment companies use in their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/manufacturing-production.asp">manufacturing production</a> process. These cells are often implemented to reduce the costs associated with production and ramp up productivity. Many companies also significantly reduce the rate of error by putting work cells into place.
</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 manufacturing facility, the machines involved in the production process would be arranged so the goods being produced move smoothly and seamlessly from one stage to the next. This would only be possible if the machines are grouped in work cells that facilitate the logical progression of the goods being produced—from <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> at one end to finished product at the other.
</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"> Work cells may also be found in the office or administrative departments. In this context, work cells may facilitate a better flow of communication and more efficient use of shared resources.
</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>Work cells are a product of the lean manufacturing process.</p></div></div></div>
<span class="heading-toc" id="toc-cellular-manufacturing"></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"> Cellular Manufacturing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Cellular manufacturing is a manufacturing process which is a subsection of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/jit.asp">just-in-time</a> manufacturing and lean manufacturing encompassing group technology. The goal of cellular manufacturing is to move as quickly as possible, making a wide variety of similar products, while producing as little waste as possible.
</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"> Cellular <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-analysis/091016/key-financial-ratios-manufacturing-companies.asp">manufacturing</a> involves the use of multiple cells in an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assembly-line.asp-0">assembly line</a> fashion. A cell is created by consolidating the processes required to create a specific output, such as a part or a set of instructions. These cells allow for the reduction of extraneous steps in the process of creating the specific output, facilitate quick identification of problems, and encourage communication of employees within the cell in order to resolve issues that arise quickly.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<span class="heading-toc" id="toc-example-of-a-work-cell"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Example of a Work Cell </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Let's say a firm that assembles air-handling products faces high inventories and erratic delivery. It originally assembled units on a traditional production line. Long setups and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/logistics.asp">logistics</a> required long production runs. It often found that it had to pull products from finished goods and rebuild them for custom orders.
</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"> Using a lean methodology, the company assembles cells to include twelve small (one to three-person) assembly work cells that were always set up and ready. People now work in different cells each day and assemble products per customer orders. Finished goods inventory dropped by 96%, lead-time was 24 hours, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/productivity.asp">productivity</a> improved by as much as 30%.
</p></div> | ## What Is a Work Cell?
A work cell is a logical and strategic arrangement of resources in a business environment. These arrangements are put into place to organize and improve process flow, increase efficiency, reduce costs, and eliminate wastage.
The concept of work cells is based on the platform of [lean manufacturing](https://www.investopedia.com/terms/l/lean-enterprise.asp), which focuses on [value creation](https://www.investopedia.com/articles/investing/111014/basics-value-chain-analysis.asp) for the end customer and reduction of wastage. Work cells, which are also referred to as *workcells,* are typically found in manufacturing and office environments.
### Key Takeaways
* A work cell is a term used to describe the logical and strategic arrangement of resources in a business environment including people, machinery, and other equipment.
* Work cells are based on the platform of lean manufacturing, which focuses on value creation for the end customer and reduction of wastage.
* In the office or administrative context, work cells may facilitate a better flow of communication and more efficient use of shared resources.
## Understanding Work Cells
A work cell is generally set up in order to complete a specific activity, most often in the manufacturing industry. It is the grouping of machines, people, and other equipment companies use in their [manufacturing production](https://www.investopedia.com/terms/m/manufacturing-production.asp) process. These cells are often implemented to reduce the costs associated with production and ramp up productivity. Many companies also significantly reduce the rate of error by putting work cells into place.
In a manufacturing facility, the machines involved in the production process would be arranged so the goods being produced move smoothly and seamlessly from one stage to the next. This would only be possible if the machines are grouped in work cells that facilitate the logical progression of the goods being produced—from [raw materials](https://www.investopedia.com/terms/r/rawmaterials.asp) at one end to finished product at the other.
Work cells may also be found in the office or administrative departments. In this context, work cells may facilitate a better flow of communication and more efficient use of shared resources.
###
Work cells are a product of the lean manufacturing process.
## Cellular Manufacturing
Cellular manufacturing is a manufacturing process which is a subsection of [just-in-time](https://www.investopedia.com/terms/j/jit.asp) manufacturing and lean manufacturing encompassing group technology. The goal of cellular manufacturing is to move as quickly as possible, making a wide variety of similar products, while producing as little waste as possible.
Cellular [manufacturing](https://www.investopedia.com/articles/financial-analysis/091016/key-financial-ratios-manufacturing-companies.asp) involves the use of multiple cells in an [assembly line](https://www.investopedia.com/terms/a/assembly-line.asp-0) fashion. A cell is created by consolidating the processes required to create a specific output, such as a part or a set of instructions. These cells allow for the reduction of extraneous steps in the process of creating the specific output, facilitate quick identification of problems, and encourage communication of employees within the cell in order to resolve issues that arise quickly.
## Example of a Work Cell
Let's say a firm that assembles air-handling products faces high inventories and erratic delivery. It originally assembled units on a traditional production line. Long setups and [logistics](https://www.investopedia.com/terms/l/logistics.asp) required long production runs. It often found that it had to pull products from finished goods and rebuild them for custom orders.
Using a lean methodology, the company assembles cells to include twelve small (one to three-person) assembly work cells that were always set up and ready. People now work in different cells each day and assemble products per customer orders. Finished goods inventory dropped by 96%, lead-time was 24 hours, and [productivity](https://www.investopedia.com/terms/p/productivity.asp) improved by as much as 30%.
| What Is a Work Cell?
A work cell is a logical and strategic arrangement of resources in a business environment. These arrangements are put into place to organize and improve process flow, increase efficiency, reduce costs, and eliminate wastage.
The concept of work cells is based on the platform of lean manufacturing, which focuses on value creation for the end customer and reduction of wastage. Work cells, which are also referred to as workcells, are typically found in manufacturing and office environments.
Key Takeaways
A work cell is a term used to describe the logical and strategic arrangement of resources in a business environment including people, machinery, and other equipment.Work cells are based on the platform of lean manufacturing, which focuses on value creation for the end customer and reduction of wastage.In the office or administrative context, work cells may facilitate a better flow of communication and more efficient use of shared resources.
Understanding Work Cells
A work cell is generally set up in order to complete a specific activity, most often in the manufacturing industry. It is the grouping of machines, people, and other equipment companies use in their manufacturing production process. These cells are often implemented to reduce the costs associated with production and ramp up productivity. Many companies also significantly reduce the rate of error by putting work cells into place.
In a manufacturing facility, the machines involved in the production process would be arranged so the goods being produced move smoothly and seamlessly from one stage to the next. This would only be possible if the machines are grouped in work cells that facilitate the logical progression of the goods being produced—from raw materials at one end to finished product at the other.
Work cells may also be found in the office or administrative departments. In this context, work cells may facilitate a better flow of communication and more efficient use of shared resources.
Work cells are a product of the lean manufacturing process.
Cellular Manufacturing
Cellular manufacturing is a manufacturing process which is a subsection of just-in-time manufacturing and lean manufacturing encompassing group technology. The goal of cellular manufacturing is to move as quickly as possible, making a wide variety of similar products, while producing as little waste as possible.
Cellular manufacturing involves the use of multiple cells in an assembly line fashion. A cell is created by consolidating the processes required to create a specific output, such as a part or a set of instructions. These cells allow for the reduction of extraneous steps in the process of creating the specific output, facilitate quick identification of problems, and encourage communication of employees within the cell in order to resolve issues that arise quickly.
Example of a Work Cell
Let's say a firm that assembles air-handling products faces high inventories and erratic delivery. It originally assembled units on a traditional production line. Long setups and logistics required long production runs. It often found that it had to pull products from finished goods and rebuild them for custom orders.
Using a lean methodology, the company assembles cells to include twelve small (one to three-person) assembly work cells that were always set up and ready. People now work in different cells each day and assemble products per customer orders. Finished goods inventory dropped by 96%, lead-time was 24 hours, and productivity improved by as much as 30%.
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"https://www.investopedia.com/terms/a/assembly-line.asp-0"
],
[
"logistics",
"https://www.investopedia.com/terms/l/logistics.asp"
],
[
"productivity",
"https://www.investopedia.com/terms/p/productivity.asp"
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] |
https://www.investopedia.com/shopify-stock-sinks-on-disappointing-guidance-8645226 | Shopify Stock Sinks on Disappointing Guidance | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Shopify gave weaker-than-expected current-quarter guidance as its quarterly revenue continued to slide.</li><li>The e-commerce firm posted a net loss on the impact of the sale of its logistics business last year.</li><li>First-quarter adjusted earnings and revenue exceeded forecasts.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Shares of Shopify (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SHOP">SHOP</a>) plunged in intraday trading Wednesday after the e-commerce firm gave guidance that was lower than forecasts as sales growth slowed and its results were impacted by the sale of its logistics business last year.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div>
<span class="heading-toc" id="toc-disappointing-q2-revenue-guidance"></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"> Disappointing Q2 Revenue Guidance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The popular retail platform said it sees current-quarter revenue increasing at a high-teens percentage year-over-year. That would put it below analyst estimates compiled by Visible Alpha, and be a continuation of the recent decline in quarterly sales gains.<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The outlook came as Shopify reported a first-quarter net loss of $273 million on the effects of the logistics business sale.
</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-q1-revenue-adjusted-profit-beat-expectations"></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"> Q1 Revenue, Adjusted Profit Beat Expectations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The news offset an otherwise strong Q1 earnings report, which showed that without those charges, the company posted an adjusted profit of $0.20 per share. Revenue rose 23% to $1.86 billion. Both were above estimates.
</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"> Shopify also beat expectations for gross merchandise volume from merchant transactions (up 23% to $60.9 billion), merchant solutions revenue (up 20% to $1.4 billion), and subscription solutions revenue (up 34% to $511 million).
</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"> Shopify shares slumped 20% as of 10:51 a.m. ET Wednesday to $61.66, a six-month low.<br/>
</p></div> | ### Key Takeaways
* Shopify gave weaker-than-expected current-quarter guidance as its quarterly revenue continued to slide.
* The e-commerce firm posted a net loss on the impact of the sale of its logistics business last year.
* First-quarter adjusted earnings and revenue exceeded forecasts.
Shares of Shopify ([SHOP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SHOP)) plunged in intraday trading Wednesday after the e-commerce firm gave guidance that was lower than forecasts as sales growth slowed and its results were impacted by the sale of its logistics business last year.
## Disappointing Q2 Revenue Guidance
The popular retail platform said it sees current-quarter revenue increasing at a high-teens percentage year-over-year. That would put it below analyst estimates compiled by Visible Alpha, and be a continuation of the recent decline in quarterly sales gains.
The outlook came as Shopify reported a first-quarter net loss of $273 million on the effects of the logistics business sale.
## Q1 Revenue, Adjusted Profit Beat Expectations
The news offset an otherwise strong Q1 earnings report, which showed that without those charges, the company posted an adjusted profit of $0.20 per share. Revenue rose 23% to $1.86 billion. Both were above estimates.
Shopify also beat expectations for gross merchandise volume from merchant transactions (up 23% to $60.9 billion), merchant solutions revenue (up 20% to $1.4 billion), and subscription solutions revenue (up 34% to $511 million).
Shopify shares slumped 20% as of 10:51 a.m. ET Wednesday to $61.66, a six-month low.
| Key Takeaways
Shopify gave weaker-than-expected current-quarter guidance as its quarterly revenue continued to slide.The e-commerce firm posted a net loss on the impact of the sale of its logistics business last year.First-quarter adjusted earnings and revenue exceeded forecasts.
Shares of Shopify (SHOP) plunged in intraday trading Wednesday after the e-commerce firm gave guidance that was lower than forecasts as sales growth slowed and its results were impacted by the sale of its logistics business last year.
Disappointing Q2 Revenue Guidance
The popular retail platform said it sees current-quarter revenue increasing at a high-teens percentage year-over-year. That would put it below analyst estimates compiled by Visible Alpha, and be a continuation of the recent decline in quarterly sales gains.
The outlook came as Shopify reported a first-quarter net loss of $273 million on the effects of the logistics business sale.
Q1 Revenue, Adjusted Profit Beat Expectations
The news offset an otherwise strong Q1 earnings report, which showed that without those charges, the company posted an adjusted profit of $0.20 per share. Revenue rose 23% to $1.86 billion. Both were above estimates.
Shopify also beat expectations for gross merchandise volume from merchant transactions (up 23% to $60.9 billion), merchant solutions revenue (up 20% to $1.4 billion), and subscription solutions revenue (up 34% to $511 million).
Shopify shares slumped 20% as of 10:51 a.m. ET Wednesday to $61.66, a six-month low.
| [
[
"SHOP",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=SHOP"
]
] |
https://www.investopedia.com/terms/z/zacks-lifecycle-indexes.asp | Zacks Lifecycle Indices | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-zacks-lifecycle-indices"></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 Zacks Lifecycle Indices? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Zacks Lifecycle Indices are a series of indexes developed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/zacks-investment-research.asp">Zacks Investment Research, Inc</a>., that provide a benchmark for the lifecycle allocation of various <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/target-date_fund.asp">target-date funds</a>, with a different index for each target date.
</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>Zacks Lifecycle Indices are benchmarks used to measure the relative performance of target-date funds.</li><li>Target-date funds are pooled investments that begin with more risky investments and gradually become more conservative over time as retirement approaches.</li><li>As such, there are several Zacks Lifecycle indexes, each with a date corresponding with the terminal date of target-date funds, typically in 10-year increments</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-zacks-lifecycle-indices"></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 Zacks Lifecycle Indices </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Zacks Lifecycle Indices provide comparative benchmarks for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/life_cycle_funds.asp">lifecycle</a> or target-date funds that have become popular with investors saving for retirement, especially those without the knowledge or interest to be actively involved in the management of their investments. As the target date approaches, the asset allocation, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/glide-path.asp">glide path</a>, gradually becomes more conservative.
</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"> Zacks, a provider of proprietary research on securities and packaged investments, launched its lifecycle indexes in 2007. It uses proprietary selection rules to identify stocks and bonds with risk/return profiles consistent with general market benchmarks. At launch, the five Zacks indices consisted of different combinations of U.S. stocks, international developed markets stocks and U.S. bonds for funds with target dates of “at retirement” as well as 2010, 2020, 2030 and 2040.
</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-example-the-zacks-2040-lifecyle-index"></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"> Example: The Zacks 2040 Lifecyle Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The Zacks 2040 Lifecycle Index (ticker: TDAXFO) is designed for investors expecting to retire in 2040. According to Zack's website, the objective of the Index is to select a diversified group of stocks, bonds, and complementary securities with the potential to outperform on a risk-adjusted basis general market benchmarks.<span class="ql-inline-citation" data-cite="1"></span> The Index constituent selection methodology utilizes multi-factor proprietary selection rules to determine the optimal mix of domestic stocks, international stocks and fixed income securities in the overall allocation and to identify those securities that offer the greatest potential from a risk/return perspective. The approach is specifically designed to enhance investment applications and investability. The Index is adjusted annually, or as required, to assure timely stock selections.
</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-motivation-for-zacks-lifecycle-indices"></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"> Motivation for Zacks Lifecycle Indices </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Zacks created the lifecycle indexes to provide more in-depth details on the risk and return characteristics of target date funds or TDFs. Educating shareholders in these funds about the high level of equity exposure – and thus risk of principal loss – at the target date was one of the primary motivations for the series.
</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"> Most target date funds define their target as either <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.blackrock.com/investing/literature/whitepaper/to-versus-through-whitepaper.pdf">“to or through”</a> the probable retirement age of a fund shareholder, either investing “through” that date or “to” that date. As Zacks explained in its launch, most TDF glidepaths target actuarial life expectancies. In other words, most of these funds assume the shareholder will remain invested and need some combination of growth and conservation of capital during retirement and keep a portion of their allocation in higher-risk equities. Zacks believed this setup created undue risk for investors with short-term capital needs, such as funding a college education or paying for medical expenses, where losing a large portion of principal was unacceptable.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> A TDF investing “to” a target date, meanwhile, would permanently shift to a conservative, capital preservation-based allocation at retirement consisting mostly of bonds and cash, with the goal of generating income while protecting principal. Critics of these TDFs suggest that retirees expected to be in retirement for 20 to 30 years or more need the capital appreciation provided by equity exposure to prevent them from outliving their retirement savings.
</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"> Another consideration is the differing glide paths followed by each provider of target date funds. The Fidelity Freedom 2030 Fund is expected to hold 53% equities, 40% bonds and 7% cash at retirement in 2030, a more aggressive allocation than the T. Rowe Price Target 2030 Fund, which would hold 42.5% equities and 57.5% bonds.
</p></div> | ## What Are Zacks Lifecycle Indices?
Zacks Lifecycle Indices are a series of indexes developed by [Zacks Investment Research, Inc](https://www.investopedia.com/terms/z/zacks-investment-research.asp)., that provide a benchmark for the lifecycle allocation of various [target-date funds](https://www.investopedia.com/terms/t/target-date_fund.asp), with a different index for each target date.
### Key Takeaways
* Zacks Lifecycle Indices are benchmarks used to measure the relative performance of target-date funds.
* Target-date funds are pooled investments that begin with more risky investments and gradually become more conservative over time as retirement approaches.
* As such, there are several Zacks Lifecycle indexes, each with a date corresponding with the terminal date of target-date funds, typically in 10-year increments
## Understanding Zacks Lifecycle Indices
Zacks Lifecycle Indices provide comparative benchmarks for [lifecycle](https://www.investopedia.com/terms/l/life_cycle_funds.asp) or target-date funds that have become popular with investors saving for retirement, especially those without the knowledge or interest to be actively involved in the management of their investments. As the target date approaches, the asset allocation, or [glide path](https://www.investopedia.com/terms/g/glide-path.asp), gradually becomes more conservative.
Zacks, a provider of proprietary research on securities and packaged investments, launched its lifecycle indexes in 2007. It uses proprietary selection rules to identify stocks and bonds with risk/return profiles consistent with general market benchmarks. At launch, the five Zacks indices consisted of different combinations of U.S. stocks, international developed markets stocks and U.S. bonds for funds with target dates of “at retirement” as well as 2010, 2020, 2030 and 2040.
## Example: The Zacks 2040 Lifecyle Index
The Zacks 2040 Lifecycle Index (ticker: TDAXFO) is designed for investors expecting to retire in 2040. According to Zack's website, the objective of the Index is to select a diversified group of stocks, bonds, and complementary securities with the potential to outperform on a risk-adjusted basis general market benchmarks. The Index constituent selection methodology utilizes multi-factor proprietary selection rules to determine the optimal mix of domestic stocks, international stocks and fixed income securities in the overall allocation and to identify those securities that offer the greatest potential from a risk/return perspective. The approach is specifically designed to enhance investment applications and investability. The Index is adjusted annually, or as required, to assure timely stock selections.
## Motivation for Zacks Lifecycle Indices
Zacks created the lifecycle indexes to provide more in-depth details on the risk and return characteristics of target date funds or TDFs. Educating shareholders in these funds about the high level of equity exposure – and thus risk of principal loss – at the target date was one of the primary motivations for the series.
Most target date funds define their target as either [“to or through”](https://www.blackrock.com/investing/literature/whitepaper/to-versus-through-whitepaper.pdf) the probable retirement age of a fund shareholder, either investing “through” that date or “to” that date. As Zacks explained in its launch, most TDF glidepaths target actuarial life expectancies. In other words, most of these funds assume the shareholder will remain invested and need some combination of growth and conservation of capital during retirement and keep a portion of their allocation in higher-risk equities. Zacks believed this setup created undue risk for investors with short-term capital needs, such as funding a college education or paying for medical expenses, where losing a large portion of principal was unacceptable.
A TDF investing “to” a target date, meanwhile, would permanently shift to a conservative, capital preservation-based allocation at retirement consisting mostly of bonds and cash, with the goal of generating income while protecting principal. Critics of these TDFs suggest that retirees expected to be in retirement for 20 to 30 years or more need the capital appreciation provided by equity exposure to prevent them from outliving their retirement savings.
Another consideration is the differing glide paths followed by each provider of target date funds. The Fidelity Freedom 2030 Fund is expected to hold 53% equities, 40% bonds and 7% cash at retirement in 2030, a more aggressive allocation than the T. Rowe Price Target 2030 Fund, which would hold 42.5% equities and 57.5% bonds.
| What Are Zacks Lifecycle Indices?
Zacks Lifecycle Indices are a series of indexes developed by Zacks Investment Research, Inc., that provide a benchmark for the lifecycle allocation of various target-date funds, with a different index for each target date.
Key Takeaways
Zacks Lifecycle Indices are benchmarks used to measure the relative performance of target-date funds.Target-date funds are pooled investments that begin with more risky investments and gradually become more conservative over time as retirement approaches.As such, there are several Zacks Lifecycle indexes, each with a date corresponding with the terminal date of target-date funds, typically in 10-year increments
Understanding Zacks Lifecycle Indices
Zacks Lifecycle Indices provide comparative benchmarks for lifecycle or target-date funds that have become popular with investors saving for retirement, especially those without the knowledge or interest to be actively involved in the management of their investments. As the target date approaches, the asset allocation, or glide path, gradually becomes more conservative.
Zacks, a provider of proprietary research on securities and packaged investments, launched its lifecycle indexes in 2007. It uses proprietary selection rules to identify stocks and bonds with risk/return profiles consistent with general market benchmarks. At launch, the five Zacks indices consisted of different combinations of U.S. stocks, international developed markets stocks and U.S. bonds for funds with target dates of “at retirement” as well as 2010, 2020, 2030 and 2040.
Example: The Zacks 2040 Lifecyle Index
The Zacks 2040 Lifecycle Index (ticker: TDAXFO) is designed for investors expecting to retire in 2040. According to Zack's website, the objective of the Index is to select a diversified group of stocks, bonds, and complementary securities with the potential to outperform on a risk-adjusted basis general market benchmarks. The Index constituent selection methodology utilizes multi-factor proprietary selection rules to determine the optimal mix of domestic stocks, international stocks and fixed income securities in the overall allocation and to identify those securities that offer the greatest potential from a risk/return perspective. The approach is specifically designed to enhance investment applications and investability. The Index is adjusted annually, or as required, to assure timely stock selections.
Motivation for Zacks Lifecycle Indices
Zacks created the lifecycle indexes to provide more in-depth details on the risk and return characteristics of target date funds or TDFs. Educating shareholders in these funds about the high level of equity exposure – and thus risk of principal loss – at the target date was one of the primary motivations for the series.
Most target date funds define their target as either “to or through” the probable retirement age of a fund shareholder, either investing “through” that date or “to” that date. As Zacks explained in its launch, most TDF glidepaths target actuarial life expectancies. In other words, most of these funds assume the shareholder will remain invested and need some combination of growth and conservation of capital during retirement and keep a portion of their allocation in higher-risk equities. Zacks believed this setup created undue risk for investors with short-term capital needs, such as funding a college education or paying for medical expenses, where losing a large portion of principal was unacceptable.
A TDF investing “to” a target date, meanwhile, would permanently shift to a conservative, capital preservation-based allocation at retirement consisting mostly of bonds and cash, with the goal of generating income while protecting principal. Critics of these TDFs suggest that retirees expected to be in retirement for 20 to 30 years or more need the capital appreciation provided by equity exposure to prevent them from outliving their retirement savings.
Another consideration is the differing glide paths followed by each provider of target date funds. The Fidelity Freedom 2030 Fund is expected to hold 53% equities, 40% bonds and 7% cash at retirement in 2030, a more aggressive allocation than the T. Rowe Price Target 2030 Fund, which would hold 42.5% equities and 57.5% bonds.
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],
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],
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https://www.investopedia.com/terms/v/variableinterestrate.asp | Variable Interest Rate: Definition, Pros & Cons, Vs. Fixed | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-variable-interest-rate"></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 Variable Interest Rate? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A variable interest rate (sometimes called an “adjustable” or a “floating” rate) is an interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically.
</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 obvious advantage of a variable interest rate is that if the underlying interest rate or index declines, the borrower’s interest payments also fall. Conversely, if the underlying index rises, interest payments increase. Unlike variable interest rates, fixed interest rates do not fluctuate.<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>A variable interest rate fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically with the market.</li><li>The underlying benchmark interest rate or index for a variable interest rate depends on the type of loan or security, but it is frequently linked to the LIBOR or the federal funds rate.</li><li>Variable interest rates can be found in mortgages, credit cards, corporate bonds, derivatives, and other securities or loans.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-variable-interest-rates"></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 Variable Interest Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A variable interest rate is a rate that moves up and down with the rest of the market or along with an index. The underlying benchmark interest rate or index for a variable interest rate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/loan_types.asp" rel="noopener noreferrer">depends on the type of loan</a> or security, but it is often associated with either the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor.asp" rel="noopener noreferrer">London Inter-Bank Offered Rate</a> (LIBOR) or the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp" rel="noopener noreferrer">federal funds rate</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"> Variable interest rates for mortgages, automobiles, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-card-interest-rate-5076674" rel="noopener noreferrer">credit cards</a> may be based on a benchmark rate, such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primerate.asp" rel="noopener noreferrer">prime rate</a> in a country. Banks and financial institutions charge consumers a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spread.asp" rel="noopener noreferrer">spread</a> over this benchmark rate, with the spread depending on several factors, such as the type of asset and the consumer’s <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrating.asp" rel="noopener noreferrer">credit rating</a>. Thus, a variable rate may bill itself as “the LIBOR plus 200 basis points” (plus 2%).<span class="ql-inline-citation" data-cite="2"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-rates/how-it-works/" rel="noopener noreferrer">Residential mortgages, for instance, can be obtained</a> with fixed interest rates, which are static and cannot change for the duration of the mortgage agreement, or with a floating or adjustable interest rate, which is variable and changes periodically with the market. Variable interest rates can also be found in credit cards, corporate bond issues, swap contracts, and other securities.<span class="ql-inline-citation" data-cite="3"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<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>Due to recent scandals and questions around its validity as a benchmark rate, LIBOR is being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954" rel="noopener noreferrer">Secured Overnight Financing Rate</a> (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.<span class="ql-inline-citation" data-cite="8"></span> </p></div></div></div>
<span class="heading-toc" id="toc-variable-interest-rate-credit-cards"></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"> Variable-Interest-Rate Credit Cards </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Variable-interest-rate credit cards have an <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">annual percentage rate</a> (APR) tied to a particular index, such as the prime rate. The prime rate most commonly changes when the Federal Reserve adjusts the federal funds rate, resulting in a change in the rate of the associated credit card. The rates on variable-interest-rate credit cards can change without advance notice to the cardholder.<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_19-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_20-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_21-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Variable-interest-rate credit cards can change rates without telling their customers.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Within the “terms and conditions” document associated with the credit card, the interest rate is most commonly expressed as the prime rate plus a particular percentage, with the listed percentage being tied to the creditworthiness of the cardholder.<span class="ql-inline-citation" data-cite="7"></span> An example of the format is the prime rate plus 11.9%.
</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-variable-interest-rate-loans-and-mortgages"></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"> Variable-Interest-Rate Loans and Mortgages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Variable-interest-rate loans function similarly to credit cards except for the payment schedule. While a credit card is considered a revolving line of credit, most loans are installment loans, with a specified number of payments leading to the loan being paid off by a particular date. As interest rates vary, the required payment will go up or down according to the change in rate and the number of payments remaining before completion.
</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"> When a mortgage has a variable interest rate, it is more commonly referred to as an <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</a> (ARM). Many ARMs start with a low fixed interest rate for the first few years of the loan, only adjusting after that period has expired. Common fixed-interest-rate periods on an ARM are three, five, or seven years, expressed as a 3/1, 5/1, or 7/1 ARM, respectively. There are also usually adjustment “caps” that put a limit on how much the interest rate can go up or down when it adjusts.<span class="ql-inline-citation" data-cite="4"></span> You can use an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.mortgagecalculator.org/calcs/arm.php" rel="noopener noreferrer">online calculator</a> to get an estimate of current interest rates on adjustable-rate mortgages.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> In most cases, ARMs have rates that adjust based on a preset margin and a major mortgage index, such as the LIBOR, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/cofi.asp" rel="noopener noreferrer">11th District Cost of Funds Index</a> (COFI), or the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mtaindex.asp" rel="noopener noreferrer">Monthly Treasury Average Index</a> (MTA Index). If, for example, someone takes out an ARM with a 2% margin based on the LIBOR, and the LIBOR is at 3% when the mortgage’s rate adjusts, the rate resets at 5% (the margin plus the index).
</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-variable-interest-rate-bonds-and-securities"></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"> Variable-Interest-Rate Bonds and Securities </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> For variable-interest-rate bonds, the benchmark rate may be the LIBOR.<span class="ql-inline-citation" data-cite="5"></span> Some variable-rate bonds also use the five-year, 10-year, or 30-year U.S. Treasury <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond-yield.asp" rel="noopener noreferrer">bond yield</a> as the benchmark interest rate, offering a coupon rate that is set at <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/100814/why-10-year-us-treasury-rates-matter.asp" rel="noopener noreferrer">a certain spread above the yield on U.S. Treasuries</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Fixed-income derivatives also can carry variable rates. An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrateswap.asp" rel="noopener noreferrer">interest rate swap</a>, for example, is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates—or to obtain a marginally lower interest rate than would have been possible without the swap.<span class="ql-inline-citation" data-cite="6"></span> A swap can also involve the exchange of one type of floating rate for another, which is called a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basisrateswap.asp" rel="noopener noreferrer">basis swap</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<span class="heading-toc" id="toc-pros-and-cons-of-variable-interest-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-heading__text"> Pros and Cons of Variable Interest Rates </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">Pros</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Variable interest rates are generally lower than fixed interest rates.</p></li>
<li><p>If interest rates go down, the borrower will benefit.</p></li>
<li><p>If interest rates go up, the lender will benefit.</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>Variable interest rates can go up to the point where the borrower may have difficulty paying the loan.</p></li>
<li><p>The unpredictability of variable interest rates makes it harder for a borrower to budget.</p></li>
<li><p>It also makes it harder for a lender to predict future cash flows.</p></li>
</ul>
</div>
</div></div></div> | ## What Is a Variable Interest Rate?
A variable interest rate (sometimes called an “adjustable” or a “floating” rate) is an interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically.
The obvious advantage of a variable interest rate is that if the underlying interest rate or index declines, the borrower’s interest payments also fall. Conversely, if the underlying index rises, interest payments increase. Unlike variable interest rates, fixed interest rates do not fluctuate.
### Key Takeaways
* A variable interest rate fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically with the market.
* The underlying benchmark interest rate or index for a variable interest rate depends on the type of loan or security, but it is frequently linked to the LIBOR or the federal funds rate.
* Variable interest rates can be found in mortgages, credit cards, corporate bonds, derivatives, and other securities or loans.
## Understanding Variable Interest Rates
A variable interest rate is a rate that moves up and down with the rest of the market or along with an index. The underlying benchmark interest rate or index for a variable interest rate [depends on the type of loan](https://www.investopedia.com/articles/pf/07/loan_types.asp) or security, but it is often associated with either the [London Inter-Bank Offered Rate](https://www.investopedia.com/terms/l/libor.asp) (LIBOR) or the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp).
Variable interest rates for mortgages, automobiles, and [credit cards](https://www.investopedia.com/average-credit-card-interest-rate-5076674) may be based on a benchmark rate, such as the [prime rate](https://www.investopedia.com/terms/p/primerate.asp) in a country. Banks and financial institutions charge consumers a [spread](https://www.investopedia.com/terms/s/spread.asp) over this benchmark rate, with the spread depending on several factors, such as the type of asset and the consumer’s [credit rating](https://www.investopedia.com/terms/c/creditrating.asp). Thus, a variable rate may bill itself as “the LIBOR plus 200 basis points” (plus 2%).
[Residential mortgages, for instance, can be obtained](https://www.investopedia.com/mortgage/mortgage-rates/how-it-works/) with fixed interest rates, which are static and cannot change for the duration of the mortgage agreement, or with a floating or adjustable interest rate, which is variable and changes periodically with the market. Variable interest rates can also be found in credit cards, corporate bond issues, swap contracts, and other securities.
###
Due to recent scandals and questions around its validity as a benchmark rate, LIBOR is being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the [Secured Overnight Financing Rate](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954) (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.
## Variable-Interest-Rate Credit Cards
Variable-interest-rate credit cards have an [annual percentage rate](https://www.investopedia.com/terms/a/apr.asp) (APR) tied to a particular index, such as the prime rate. The prime rate most commonly changes when the Federal Reserve adjusts the federal funds rate, resulting in a change in the rate of the associated credit card. The rates on variable-interest-rate credit cards can change without advance notice to the cardholder.
###
Variable-interest-rate credit cards can change rates without telling their customers.
Within the “terms and conditions” document associated with the credit card, the interest rate is most commonly expressed as the prime rate plus a particular percentage, with the listed percentage being tied to the creditworthiness of the cardholder. An example of the format is the prime rate plus 11.9%.
## Variable-Interest-Rate Loans and Mortgages
Variable-interest-rate loans function similarly to credit cards except for the payment schedule. While a credit card is considered a revolving line of credit, most loans are installment loans, with a specified number of payments leading to the loan being paid off by a particular date. As interest rates vary, the required payment will go up or down according to the change in rate and the number of payments remaining before completion.
When a mortgage has a variable interest rate, it is more commonly referred to as an [adjustable-rate mortgage](https://www.investopedia.com/terms/a/arm.asp) (ARM). Many ARMs start with a low fixed interest rate for the first few years of the loan, only adjusting after that period has expired. Common fixed-interest-rate periods on an ARM are three, five, or seven years, expressed as a 3/1, 5/1, or 7/1 ARM, respectively. There are also usually adjustment “caps” that put a limit on how much the interest rate can go up or down when it adjusts. You can use an [online calculator](https://www.mortgagecalculator.org/calcs/arm.php) to get an estimate of current interest rates on adjustable-rate mortgages.
In most cases, ARMs have rates that adjust based on a preset margin and a major mortgage index, such as the LIBOR, the [11th District Cost of Funds Index](https://www.investopedia.com/terms/1/cofi.asp) (COFI), or the [Monthly Treasury Average Index](https://www.investopedia.com/terms/m/mtaindex.asp) (MTA Index). If, for example, someone takes out an ARM with a 2% margin based on the LIBOR, and the LIBOR is at 3% when the mortgage’s rate adjusts, the rate resets at 5% (the margin plus the index).
## Variable-Interest-Rate Bonds and Securities
For variable-interest-rate bonds, the benchmark rate may be the LIBOR. Some variable-rate bonds also use the five-year, 10-year, or 30-year U.S. Treasury [bond yield](https://www.investopedia.com/terms/b/bond-yield.asp) as the benchmark interest rate, offering a coupon rate that is set at [a certain spread above the yield on U.S. Treasuries](https://www.investopedia.com/articles/investing/100814/why-10-year-us-treasury-rates-matter.asp).
Fixed-income derivatives also can carry variable rates. An [interest rate swap](https://www.investopedia.com/terms/i/interestrateswap.asp), for example, is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates—or to obtain a marginally lower interest rate than would have been possible without the swap. A swap can also involve the exchange of one type of floating rate for another, which is called a [basis swap](https://www.investopedia.com/terms/b/basisrateswap.asp).
## Pros and Cons of Variable Interest Rates
Pros
* Variable interest rates are generally lower than fixed interest rates.
* If interest rates go down, the borrower will benefit.
* If interest rates go up, the lender will benefit.
Cons
* Variable interest rates can go up to the point where the borrower may have difficulty paying the loan.
* The unpredictability of variable interest rates makes it harder for a borrower to budget.
* It also makes it harder for a lender to predict future cash flows.
| What Is a Variable Interest Rate?
A variable interest rate (sometimes called an “adjustable” or a “floating” rate) is an interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically.
The obvious advantage of a variable interest rate is that if the underlying interest rate or index declines, the borrower’s interest payments also fall. Conversely, if the underlying index rises, interest payments increase. Unlike variable interest rates, fixed interest rates do not fluctuate.
Key Takeaways
A variable interest rate fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically with the market.The underlying benchmark interest rate or index for a variable interest rate depends on the type of loan or security, but it is frequently linked to the LIBOR or the federal funds rate.Variable interest rates can be found in mortgages, credit cards, corporate bonds, derivatives, and other securities or loans.
Understanding Variable Interest Rates
A variable interest rate is a rate that moves up and down with the rest of the market or along with an index. The underlying benchmark interest rate or index for a variable interest rate depends on the type of loan or security, but it is often associated with either the London Inter-Bank Offered Rate (LIBOR) or the federal funds rate.
Variable interest rates for mortgages, automobiles, and credit cards may be based on a benchmark rate, such as the prime rate in a country. Banks and financial institutions charge consumers a spread over this benchmark rate, with the spread depending on several factors, such as the type of asset and the consumer’s credit rating. Thus, a variable rate may bill itself as “the LIBOR plus 200 basis points” (plus 2%).
Residential mortgages, for instance, can be obtained with fixed interest rates, which are static and cannot change for the duration of the mortgage agreement, or with a floating or adjustable interest rate, which is variable and changes periodically with the market. Variable interest rates can also be found in credit cards, corporate bond issues, swap contracts, and other securities.
Due to recent scandals and questions around its validity as a benchmark rate, LIBOR is being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.
Variable-Interest-Rate Credit Cards
Variable-interest-rate credit cards have an annual percentage rate (APR) tied to a particular index, such as the prime rate. The prime rate most commonly changes when the Federal Reserve adjusts the federal funds rate, resulting in a change in the rate of the associated credit card. The rates on variable-interest-rate credit cards can change without advance notice to the cardholder.
Variable-interest-rate credit cards can change rates without telling their customers.
Within the “terms and conditions” document associated with the credit card, the interest rate is most commonly expressed as the prime rate plus a particular percentage, with the listed percentage being tied to the creditworthiness of the cardholder. An example of the format is the prime rate plus 11.9%.
Variable-Interest-Rate Loans and Mortgages
Variable-interest-rate loans function similarly to credit cards except for the payment schedule. While a credit card is considered a revolving line of credit, most loans are installment loans, with a specified number of payments leading to the loan being paid off by a particular date. As interest rates vary, the required payment will go up or down according to the change in rate and the number of payments remaining before completion.
When a mortgage has a variable interest rate, it is more commonly referred to as an adjustable-rate mortgage (ARM). Many ARMs start with a low fixed interest rate for the first few years of the loan, only adjusting after that period has expired. Common fixed-interest-rate periods on an ARM are three, five, or seven years, expressed as a 3/1, 5/1, or 7/1 ARM, respectively. There are also usually adjustment “caps” that put a limit on how much the interest rate can go up or down when it adjusts. You can use an online calculator to get an estimate of current interest rates on adjustable-rate mortgages.
In most cases, ARMs have rates that adjust based on a preset margin and a major mortgage index, such as the LIBOR, the 11th District Cost of Funds Index (COFI), or the Monthly Treasury Average Index (MTA Index). If, for example, someone takes out an ARM with a 2% margin based on the LIBOR, and the LIBOR is at 3% when the mortgage’s rate adjusts, the rate resets at 5% (the margin plus the index).
Variable-Interest-Rate Bonds and Securities
For variable-interest-rate bonds, the benchmark rate may be the LIBOR. Some variable-rate bonds also use the five-year, 10-year, or 30-year U.S. Treasury bond yield as the benchmark interest rate, offering a coupon rate that is set at a certain spread above the yield on U.S. Treasuries.
Fixed-income derivatives also can carry variable rates. An interest rate swap, for example, is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates—or to obtain a marginally lower interest rate than would have been possible without the swap. A swap can also involve the exchange of one type of floating rate for another, which is called a basis swap.
Pros and Cons of Variable Interest Rates
Pros
Variable interest rates are generally lower than fixed interest rates.
If interest rates go down, the borrower will benefit.
If interest rates go up, the lender will benefit.
Cons
Variable interest rates can go up to the point where the borrower may have difficulty paying the loan.
The unpredictability of variable interest rates makes it harder for a borrower to budget.
It also makes it harder for a lender to predict future cash flows.
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https://www.investopedia.com/how-to-gift-your-credit-card-rewards-points-or-miles-5207089 | How to Gift Your Credit Card Rewards, Points, or Miles | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you have a significant amount of credit card rewards points or miles, you can give them to your family and friends as a fabulous gift for any occasion—potentially without having to spend another dime. To do this, you may have to first redeem them for airline or hotel points or miles, and then transfer them to the person if they have a loyalty membership with the same company. Keep reading to learn how to turn your credit card rewards into memorable gifts.
</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>Most credit card rewards programs don’t allow you to transfer your points directly to another person, but you can oftentimes convert them to airline miles or hotel points and give the person those.</li><li>Be mindful that you might have to pay transfer fees.</li><li>JetBlue, Hawaiian Airlines, and Spirit are a few companies that make it easy to transfer miles free of charge.</li><li>Other ways to gift your points or miles include using them to buy gift cards or merchandise for the people on your gift list.</li></ul></div></div></div>
<span class="heading-toc" id="toc-gifting-credit-card-airline-miles-to-someone-else"></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"> Gifting Credit Card Airline Miles to Someone Else </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Rewards credit cards are great for helping to pay for personal travel. However, it can be tough to use them all every year. Whether it's <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">points, miles, or cash back</a>, if they're sitting in your account waiting to be used, then you have the opportunity to turn them into a thoughtful gift for a loved one.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In most cases, you can’t transfer credit card miles or points directly to someone else; instead, you have to redeem them for airline frequent flyer miles or hotel points and transfer those to the person of your choice if they are a member of the same loyalty program.
</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"> Some airlines allow you to transfer miles, but charge a fee. For example, United Airlines charges $7.50 per 500 miles transferred to another MileagePlus member plus a $30 processing fee.<span class="ql-inline-citation" data-cite="12"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Here are a few airline rewards programs that do not charge fees:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-subheading__text"> JetBlue </span> </h3>
<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/jetblue-credit-card-review-4799010">JetBlue’s credit cards</a> allow you to earn points that you can redeem for flights. And with JetBlue’s Points Pooling program, you can create a pool of up to seven friends or family members. As you earn points, 100% of your points are entered into the pool, and the designated pool leader can redeem those points for award flights with zero transfer 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_16-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> However, if you wish to transfer or gift JetBlue points to another JetBlue member outside of a pooling partner there may be a fee involved. To gift points that are not yours in your account, JetBlue says in its TrueBlue portal that the fee is approximately $32.08 per 1,000 points. To transfer points, you must have at least 1,000 points in your account, and it was unclear in the portal as to whether there's a fee to transfer points.
</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"> Hawaiian Airlines </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <strong><span class="ql-cursor"></span></strong>If you or the recipient have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/hawaiian-airlines-world-elite-mastercard-review-4800971">Hawaiian Airlines World Elite MasterCard</a>, Bankoh Hawaiian Airlines Visa check card, or Hawaiian Airlines Visa credit card-Japan, you can share your miles with other people without paying transaction fees. To do so, log into your credit card account and click on the “Share Miles” option. Enter the recipient’s name and the number of miles that you want to transfer.<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_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"> Spirit Airlines </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Like JetBlue, Spirit Airlines has a Free Spirit Points Pooling program where you can pool points with up to eight friends or family members. And if you have the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spirit-airlines-world-mastercard-review-4800333">Free Spirit Travel More World Elite Mastercard</a>, you can earn miles and pool them even faster. Points can be redeemed with as little as 2,500 miles.<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_24-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Ultimate Rewards Points</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Chase allows users to transfer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-ultimate-guide-to-chase-ultimate-rewards-5070944">Ultimate Rewards</a> points to another person for free with no limit as long as that person is a member of their household. If you’re trying to transfer Ultimate Rewards to a friend or family member, you’ll need their account number and last name to be able to add them to your transfer profile. This option is best left for close family members whom you want to gift points to regularly.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div>
<span class="heading-toc" id="toc-gifting-credit-card-hotel-points"></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"> Gifting Credit Card Hotel Points </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you have Marriott, Hilton, or Hyatt points, you can transfer them to another member at no cost.
</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"> Marriott allows you to transfer points in increments of 1,000, up to a maximum of 100,000 Marriott Bonvoy Points per year.<span class="ql-inline-citation" data-cite="6"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Hilton allows you to transfer unlimited points to another Hilton Honors member in increments of 1,000 points, up to a total of 500,000 points at one time. People can only receive up to 2 million points in total.<span class="ql-inline-citation" data-cite="5"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Hyatt allows individuals to transfer World of Hyatt points with no published limit. You'll need to call or fill out a form to make the transfer. You can also purchase points as a gift for a cost.<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_35-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_36-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_37-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">American Express Membership Rewards Points</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>American Express Membership Rewards points transfer to Hilton at a ratio of 1:2.<span class="ql-inline-citation" data-cite="9"></span> For example, you could transfer 50,000 Membership Rewards points to your own Hilton Honors account and then transfer 100,000 points to a friend’s or family member’s Hilton Honors account for free. Hilton allows guests to stay every fifth night on points for free.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<span class="heading-toc" id="toc-other-ways-to-use-your-credit-cards-rewards-for-gifts"></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"> Other Ways to Use Your Credit Cards Rewards for Gifts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Because most airlines charge fees for transferring your points or miles to another person, it’s not always the best use of them. However, there are other ways that you can use your rewards to give meaningful gifts:
</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"> 1. Make Travel Arrangements for Them </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> While transferring miles can incur a fee, you can avoid that by booking another person’s travel arrangements for them. You can give them a handmade gift certificate that says you’ll cover the cost of their flight or hotel stay. Once they’ve made their plans, you can go ahead and book their travel through your credit card rewards redemption page, using your rewards as the payment method.
</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"> 2. Use Your Rewards to Purchase Gift Cards </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Most rewards cards offer multiple redemption options, and many include gift cards as one of them. You can use your points for cards that you give as gifts, or you can get cards for popular retailers and use them as your payment method when you do your holiday shopping.
</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"> 3. Redeem Your Points for Merchandise </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Many cards have the option of redeeming your rewards for merchandise, such as jewelry or electronics. For example, you could use your rewards to purchase a tablet, necklace, or new luggage for your gift recipient.
</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"> 4. Request a Bank Deposit or Statement Credit </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> If you use your card to buy holiday gifts, you can redeem your credit card rewards for bank deposits or statement credits and pay yourself back for those purchases.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-subheading__text"> 5. Donate to Charity in a Loved One’s Name </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Many credit card companies offer the option to donate your rewards to select charities, so you can make a donation in someone’s name as a gift. For example:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0">
<li><strong>American Express</strong>:<strong> </strong>You can use your Amex points to make charitable donations through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://help.justgiving.com/hc/en-us/articles/360000410997-What-is-American-Express-Pay-with-Points-" rel="nofollow">JustGiving</a>. </li>
<li><strong>Citi</strong>:<strong> </strong>You can redeem your points for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.thankyou.com/tyProductListing.htm?category=charitable-gifts" rel="nofollow">charitable donations to organizations</a> like American Red Cross Disaster Relief, Unicef USA, Susan G. Komen, Smile Train, and World Central Kitchen. </li>
<li><strong>Discover</strong>:<strong> </strong>Discover allows cardholders to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.discover.com/company/corporate-responsibility/charitable-partners/" rel="nofollow">donate their rewards</a> to charities like the American Red Cross, American Cancer Society, ASCPA, Make-A-Wish, or the World Wildlife Fund.<br/></li>
</ul>
<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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_58-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/GuX8B/3/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Capital One Announces Agreement to Acquire Discover"></iframe></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 mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_61-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-credit-cards-4801582" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Best Credit Cards 2024</span></a></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-do-credit-card-rewards-expire"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Credit Card Rewards Expire?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In most cases, credit card rewards don’t expire as long as your account is open and in good standing. However, some rewards—particularly those involving airline miles or hotel points that get transferred to loyalty program accounts—will expire if you don’t earn or redeem rewards at least once every set number of months. For example, Hilton Honors points expire after 24 months of no activity.<span class="ql-inline-citation" data-cite="10"></span> It’s worth checking your credit card or loyalty program agreements so that you know the rules. </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-can-you-give-credit-card-rewards-to-someone-else"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Give Credit Card Rewards to Someone Else?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most programs don’t allow you to transfer your credit card rewards directly to another person unless they also have an account with that program and are an immediate family member. To transfer your rewards to someone else outside of your household, you typically have to redeem them for airline miles or hotel points and then transfer those miles or points to someone else who is in the same loyalty program. Or, you can redeem the rewards for airline tickets, hotel nights, gift cards, or merchandise and gift those instead.</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-can-you-get-a-tax-deduction-for-donating-credit-card-rewards"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Get a Tax Deduction for Donating Credit Card Rewards?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Many credit card companies give their cardholders the option of donating their points, miles, or cash back to select charitable partner organizations. However, donations of your credit card rewards aren’t normally <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0411/donations-how-to-maximize-your-deduction.aspx">tax deductible</a> since the rewards were never considered taxable income.</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"> The points, miles, and other rewards that you’ve built up in your rewards credit card and related travel program loyalty program accounts are a resource worth considering when you do your holiday gift shopping this year. But check on the rules for transferring miles or points as a gift, and watch out for any costly transfer fees. Rather than transferring points or miles, you might find that redeeming accumulated rewards directly for travel reservations for family or friends could yield the most value. Otherwise, redeeming points or miles for gift cards or merchandise can be a more convenient gifting option, even if the maximum points or miles redemption value potential isn’t fully realized.<br>
</br></p></div> | If you have a significant amount of credit card rewards points or miles, you can give them to your family and friends as a fabulous gift for any occasion—potentially without having to spend another dime. To do this, you may have to first redeem them for airline or hotel points or miles, and then transfer them to the person if they have a loyalty membership with the same company. Keep reading to learn how to turn your credit card rewards into memorable gifts.
### Key Takeaways
* Most credit card rewards programs don’t allow you to transfer your points directly to another person, but you can oftentimes convert them to airline miles or hotel points and give the person those.
* Be mindful that you might have to pay transfer fees.
* JetBlue, Hawaiian Airlines, and Spirit are a few companies that make it easy to transfer miles free of charge.
* Other ways to gift your points or miles include using them to buy gift cards or merchandise for the people on your gift list.
## Gifting Credit Card Airline Miles to Someone Else
Rewards credit cards are great for helping to pay for personal travel. However, it can be tough to use them all every year. Whether it's [points, miles, or cash back](https://www.investopedia.com/what-are-credit-card-points-and-miles-worth-5203918), if they're sitting in your account waiting to be used, then you have the opportunity to turn them into a thoughtful gift for a loved one.
In most cases, you can’t transfer credit card miles or points directly to someone else; instead, you have to redeem them for airline frequent flyer miles or hotel points and transfer those to the person of your choice if they are a member of the same loyalty program.
Some airlines allow you to transfer miles, but charge a fee. For example, United Airlines charges $7.50 per 500 miles transferred to another MileagePlus member plus a $30 processing fee.
Here are a few airline rewards programs that do not charge fees:
### JetBlue
[JetBlue’s credit cards](https://www.investopedia.com/jetblue-credit-card-review-4799010) allow you to earn points that you can redeem for flights. And with JetBlue’s Points Pooling program, you can create a pool of up to seven friends or family members. As you earn points, 100% of your points are entered into the pool, and the designated pool leader can redeem those points for award flights with zero transfer fees.
However, if you wish to transfer or gift JetBlue points to another JetBlue member outside of a pooling partner there may be a fee involved. To gift points that are not yours in your account, JetBlue says in its TrueBlue portal that the fee is approximately $32.08 per 1,000 points. To transfer points, you must have at least 1,000 points in your account, and it was unclear in the portal as to whether there's a fee to transfer points.
### Hawaiian Airlines
If you or the recipient have a [Hawaiian Airlines World Elite MasterCard](https://www.investopedia.com/hawaiian-airlines-world-elite-mastercard-review-4800971), Bankoh Hawaiian Airlines Visa check card, or Hawaiian Airlines Visa credit card-Japan, you can share your miles with other people without paying transaction fees. To do so, log into your credit card account and click on the “Share Miles” option. Enter the recipient’s name and the number of miles that you want to transfer.
### Spirit Airlines
Like JetBlue, Spirit Airlines has a Free Spirit Points Pooling program where you can pool points with up to eight friends or family members. And if you have the [Free Spirit Travel More World Elite Mastercard](https://www.investopedia.com/spirit-airlines-world-mastercard-review-4800333), you can earn miles and pool them even faster. Points can be redeemed with as little as 2,500 miles.
### Ultimate Rewards Points
Chase allows users to transfer [Ultimate Rewards](https://www.investopedia.com/the-ultimate-guide-to-chase-ultimate-rewards-5070944) points to another person for free with no limit as long as that person is a member of their household. If you’re trying to transfer Ultimate Rewards to a friend or family member, you’ll need their account number and last name to be able to add them to your transfer profile. This option is best left for close family members whom you want to gift points to regularly.
## Gifting Credit Card Hotel Points
If you have Marriott, Hilton, or Hyatt points, you can transfer them to another member at no cost.
Marriott allows you to transfer points in increments of 1,000, up to a maximum of 100,000 Marriott Bonvoy Points per year.
Hilton allows you to transfer unlimited points to another Hilton Honors member in increments of 1,000 points, up to a total of 500,000 points at one time. People can only receive up to 2 million points in total.
Hyatt allows individuals to transfer World of Hyatt points with no published limit. You'll need to call or fill out a form to make the transfer. You can also purchase points as a gift for a cost.
### American Express Membership Rewards Points
American Express Membership Rewards points transfer to Hilton at a ratio of 1:2. For example, you could transfer 50,000 Membership Rewards points to your own Hilton Honors account and then transfer 100,000 points to a friend’s or family member’s Hilton Honors account for free. Hilton allows guests to stay every fifth night on points for free.
## Other Ways to Use Your Credit Cards Rewards for Gifts
Because most airlines charge fees for transferring your points or miles to another person, it’s not always the best use of them. However, there are other ways that you can use your rewards to give meaningful gifts:
### 1. Make Travel Arrangements for Them
While transferring miles can incur a fee, you can avoid that by booking another person’s travel arrangements for them. You can give them a handmade gift certificate that says you’ll cover the cost of their flight or hotel stay. Once they’ve made their plans, you can go ahead and book their travel through your credit card rewards redemption page, using your rewards as the payment method.
### 2. Use Your Rewards to Purchase Gift Cards
Most rewards cards offer multiple redemption options, and many include gift cards as one of them. You can use your points for cards that you give as gifts, or you can get cards for popular retailers and use them as your payment method when you do your holiday shopping.
### 3. Redeem Your Points for Merchandise
Many cards have the option of redeeming your rewards for merchandise, such as jewelry or electronics. For example, you could use your rewards to purchase a tablet, necklace, or new luggage for your gift recipient.
### 4. Request a Bank Deposit or Statement Credit
If you use your card to buy holiday gifts, you can redeem your credit card rewards for bank deposits or statement credits and pay yourself back for those purchases.
### 5. Donate to Charity in a Loved One’s Name
Many credit card companies offer the option to donate your rewards to select charities, so you can make a donation in someone’s name as a gift. For example:
* **American Express**:You can use your Amex points to make charitable donations through [JustGiving](https://help.justgiving.com/hc/en-us/articles/360000410997-What-is-American-Express-Pay-with-Points-).
* **Citi**:You can redeem your points for [charitable donations to organizations](https://www.thankyou.com/tyProductListing.htm?category=charitable-gifts) like American Red Cross Disaster Relief, Unicef USA, Susan G. Komen, Smile Train, and World Central Kitchen.
* **Discover**:Discover allows cardholders to [donate their rewards](https://www.discover.com/company/corporate-responsibility/charitable-partners/) to charities like the American Red Cross, American Cancer Society, ASCPA, Make-A-Wish, or the World Wildlife Fund.
[Best Credit Cards 2024](https://www.investopedia.com/best-credit-cards-4801582)
## Do Credit Card Rewards Expire?
In most cases, credit card rewards don’t expire as long as your account is open and in good standing. However, some rewards—particularly those involving airline miles or hotel points that get transferred to loyalty program accounts—will expire if you don’t earn or redeem rewards at least once every set number of months. For example, Hilton Honors points expire after 24 months of no activity. It’s worth checking your credit card or loyalty program agreements so that you know the rules.
## Can You Give Credit Card Rewards to Someone Else?
Most programs don’t allow you to transfer your credit card rewards directly to another person unless they also have an account with that program and are an immediate family member. To transfer your rewards to someone else outside of your household, you typically have to redeem them for airline miles or hotel points and then transfer those miles or points to someone else who is in the same loyalty program. Or, you can redeem the rewards for airline tickets, hotel nights, gift cards, or merchandise and gift those instead.
## Can You Get a Tax Deduction for Donating Credit Card Rewards?
Many credit card companies give their cardholders the option of donating their points, miles, or cash back to select charitable partner organizations. However, donations of your credit card rewards aren’t normally [tax deductible](https://www.investopedia.com/financial-edge/0411/donations-how-to-maximize-your-deduction.aspx) since the rewards were never considered taxable income.
## The Bottom Line
The points, miles, and other rewards that you’ve built up in your rewards credit card and related travel program loyalty program accounts are a resource worth considering when you do your holiday gift shopping this year. But check on the rules for transferring miles or points as a gift, and watch out for any costly transfer fees. Rather than transferring points or miles, you might find that redeeming accumulated rewards directly for travel reservations for family or friends could yield the most value. Otherwise, redeeming points or miles for gift cards or merchandise can be a more convenient gifting option, even if the maximum points or miles redemption value potential isn’t fully realized.
| If you have a significant amount of credit card rewards points or miles, you can give them to your family and friends as a fabulous gift for any occasion—potentially without having to spend another dime. To do this, you may have to first redeem them for airline or hotel points or miles, and then transfer them to the person if they have a loyalty membership with the same company. Keep reading to learn how to turn your credit card rewards into memorable gifts.
Key Takeaways
Most credit card rewards programs don’t allow you to transfer your points directly to another person, but you can oftentimes convert them to airline miles or hotel points and give the person those.Be mindful that you might have to pay transfer fees.JetBlue, Hawaiian Airlines, and Spirit are a few companies that make it easy to transfer miles free of charge.Other ways to gift your points or miles include using them to buy gift cards or merchandise for the people on your gift list.
Gifting Credit Card Airline Miles to Someone Else
Rewards credit cards are great for helping to pay for personal travel. However, it can be tough to use them all every year. Whether it's points, miles, or cash back, if they're sitting in your account waiting to be used, then you have the opportunity to turn them into a thoughtful gift for a loved one.
In most cases, you can’t transfer credit card miles or points directly to someone else; instead, you have to redeem them for airline frequent flyer miles or hotel points and transfer those to the person of your choice if they are a member of the same loyalty program.
Some airlines allow you to transfer miles, but charge a fee. For example, United Airlines charges $7.50 per 500 miles transferred to another MileagePlus member plus a $30 processing fee.
Here are a few airline rewards programs that do not charge fees:
JetBlue
JetBlue’s credit cards allow you to earn points that you can redeem for flights. And with JetBlue’s Points Pooling program, you can create a pool of up to seven friends or family members. As you earn points, 100% of your points are entered into the pool, and the designated pool leader can redeem those points for award flights with zero transfer fees.
However, if you wish to transfer or gift JetBlue points to another JetBlue member outside of a pooling partner there may be a fee involved. To gift points that are not yours in your account, JetBlue says in its TrueBlue portal that the fee is approximately $32.08 per 1,000 points. To transfer points, you must have at least 1,000 points in your account, and it was unclear in the portal as to whether there's a fee to transfer points.
Hawaiian Airlines
If you or the recipient have a Hawaiian Airlines World Elite MasterCard, Bankoh Hawaiian Airlines Visa check card, or Hawaiian Airlines Visa credit card-Japan, you can share your miles with other people without paying transaction fees. To do so, log into your credit card account and click on the “Share Miles” option. Enter the recipient’s name and the number of miles that you want to transfer.
Spirit Airlines
Like JetBlue, Spirit Airlines has a Free Spirit Points Pooling program where you can pool points with up to eight friends or family members. And if you have the Free Spirit Travel More World Elite Mastercard, you can earn miles and pool them even faster. Points can be redeemed with as little as 2,500 miles.
Ultimate Rewards Points
Chase allows users to transfer Ultimate Rewards points to another person for free with no limit as long as that person is a member of their household. If you’re trying to transfer Ultimate Rewards to a friend or family member, you’ll need their account number and last name to be able to add them to your transfer profile. This option is best left for close family members whom you want to gift points to regularly.
Gifting Credit Card Hotel Points
If you have Marriott, Hilton, or Hyatt points, you can transfer them to another member at no cost.
Marriott allows you to transfer points in increments of 1,000, up to a maximum of 100,000 Marriott Bonvoy Points per year.
Hilton allows you to transfer unlimited points to another Hilton Honors member in increments of 1,000 points, up to a total of 500,000 points at one time. People can only receive up to 2 million points in total.
Hyatt allows individuals to transfer World of Hyatt points with no published limit. You'll need to call or fill out a form to make the transfer. You can also purchase points as a gift for a cost.
American Express Membership Rewards Points
American Express Membership Rewards points transfer to Hilton at a ratio of 1:2. For example, you could transfer 50,000 Membership Rewards points to your own Hilton Honors account and then transfer 100,000 points to a friend’s or family member’s Hilton Honors account for free. Hilton allows guests to stay every fifth night on points for free.
Other Ways to Use Your Credit Cards Rewards for Gifts
Because most airlines charge fees for transferring your points or miles to another person, it’s not always the best use of them. However, there are other ways that you can use your rewards to give meaningful gifts:
1. Make Travel Arrangements for Them
While transferring miles can incur a fee, you can avoid that by booking another person’s travel arrangements for them. You can give them a handmade gift certificate that says you’ll cover the cost of their flight or hotel stay. Once they’ve made their plans, you can go ahead and book their travel through your credit card rewards redemption page, using your rewards as the payment method.
2. Use Your Rewards to Purchase Gift Cards
Most rewards cards offer multiple redemption options, and many include gift cards as one of them. You can use your points for cards that you give as gifts, or you can get cards for popular retailers and use them as your payment method when you do your holiday shopping.
3. Redeem Your Points for Merchandise
Many cards have the option of redeeming your rewards for merchandise, such as jewelry or electronics. For example, you could use your rewards to purchase a tablet, necklace, or new luggage for your gift recipient.
4. Request a Bank Deposit or Statement Credit
If you use your card to buy holiday gifts, you can redeem your credit card rewards for bank deposits or statement credits and pay yourself back for those purchases.
5. Donate to Charity in a Loved One’s Name
Many credit card companies offer the option to donate your rewards to select charities, so you can make a donation in someone’s name as a gift. For example:
American Express: You can use your Amex points to make charitable donations through JustGiving.
Citi: You can redeem your points for charitable donations to organizations like American Red Cross Disaster Relief, Unicef USA, Susan G. Komen, Smile Train, and World Central Kitchen.
Discover: Discover allows cardholders to donate their rewards to charities like the American Red Cross, American Cancer Society, ASCPA, Make-A-Wish, or the World Wildlife Fund.
Best Credit Cards 2024
Do Credit Card Rewards Expire?
In most cases, credit card rewards don’t expire as long as your account is open and in good standing. However, some rewards—particularly those involving airline miles or hotel points that get transferred to loyalty program accounts—will expire if you don’t earn or redeem rewards at least once every set number of months. For example, Hilton Honors points expire after 24 months of no activity. It’s worth checking your credit card or loyalty program agreements so that you know the rules.
Can You Give Credit Card Rewards to Someone Else?
Most programs don’t allow you to transfer your credit card rewards directly to another person unless they also have an account with that program and are an immediate family member. To transfer your rewards to someone else outside of your household, you typically have to redeem them for airline miles or hotel points and then transfer those miles or points to someone else who is in the same loyalty program. Or, you can redeem the rewards for airline tickets, hotel nights, gift cards, or merchandise and gift those instead.
Can You Get a Tax Deduction for Donating Credit Card Rewards?
Many credit card companies give their cardholders the option of donating their points, miles, or cash back to select charitable partner organizations. However, donations of your credit card rewards aren’t normally tax deductible since the rewards were never considered taxable income.
The Bottom Line
The points, miles, and other rewards that you’ve built up in your rewards credit card and related travel program loyalty program accounts are a resource worth considering when you do your holiday gift shopping this year. But check on the rules for transferring miles or points as a gift, and watch out for any costly transfer fees. Rather than transferring points or miles, you might find that redeeming accumulated rewards directly for travel reservations for family or friends could yield the most value. Otherwise, redeeming points or miles for gift cards or merchandise can be a more convenient gifting option, even if the maximum points or miles redemption value potential isn’t fully realized.
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https://www.investopedia.com/terms/r/repurchaseagreement.asp | Repurchase Agreement (Repo): Definition, Examples, and Risks | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. For a repo, a dealer sells government securities to an investor, usually overnight, and buys them back the following day at a slightly higher price. The small price difference is an implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also commonly used in central bank open market operations. During the early 2020s, the Federal Reserve instituted changes that massively increased the volume of repos traded, a trend it began to unwind in 2023.
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A repurchase agreement (repo) is a short-term agreement to sell securities and repurchase them later at a slightly higher price.</li><li>The party selling the repo is effectively borrowing whatever is traded for the securities, and the implicit interest paid is the difference in price from the initial sale to repurchase.</li><li>Repos and reverse repos are used for short-term borrowing and lending, often from overnight to 48 hours.</li><li>The implicit interest rate on these agreements is known as the repo rate.</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"> Those involved in the agreement are in different stances: the party selling the security and agreeing to repurchase it later is involved in a repo. Meanwhile, the party buying the security and agreeing to sell it back is engaged in a reverse repurchase agreement.<span class="ql-inline-citation" data-cite="41"></span>
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<img alt="Repurchase Agreement" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/sg6-X3H9OLCFQNxSDSmV4oCRM9M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/repurchaseagreement_final-b6e7c46c5bdd404e93d5ac0cc47ca328.jpg" srcset="https://www.investopedia.com/thmb/5CSbWNBZfUAz1fF5mYkTwG1aMP4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/repurchaseagreement_final-b6e7c46c5bdd404e93d5ac0cc47ca328.jpg 750w" width="1500"/>
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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 / Katie Kerpel</p></span>
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<span class="heading-toc" id="toc-understanding-repurchase-agreements"></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 Repurchase Agreements </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Repurchase agreements are generally safe investments because the securities involved, typically <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">Treasury bonds</a>, serve as collateral. Classified as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">money market</a> instrument, a repo is thus a short-term, collateral-backed, interest-bearing loan. The buyer acts as a short-term lender, while the seller is a short-term borrower. The securities sold are the collateral.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="28"></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"> Repurchase agreements are made between a variety of parties. The Federal Reserve uses repos to regulate the money supply and bank reserves. Individuals typically use them to finance the purchase of debt securities or other investments. Repurchase agreements are strictly short-term investments, and their maturity period is called the "rate," the "term," or the "tenor."<span class="ql-inline-citation" data-cite="28"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Despite the similarities with collateralized loans, repos count as purchases. However, because the buyer only temporarily owns the security, these agreements are usually treated as loans for tax and accounting purposes.<span class="ql-inline-citation" data-cite="42"></span> When there's a bankruptcy, repo investors can generally sell their collateral. This distinguishes repos and collateralized loans; for most collateralized loans, bankrupt investors would be subject to an automatic stay.<span class="ql-inline-citation" data-cite="31"></span>
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<span class="heading-toc" id="toc-repurchase-agreement-example"></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"> Repurchase Agreement Example </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Suppose a bank needs a quick cash injection. It agrees with an investor, who offers to give it the money it needs so long as it pays it back quickly with interest. In the meantime, the bank also provides collateral for peace of mind.
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<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"> At issue in the agreement are Treasury bonds. The bank sells them to the investor with a deal that it will repurchase them very soon at a slight premium. The Treasury bonds serve as collateral: the bank temporarily relinquishes control of the bonds for the cash it needs. Then, at a predetermined time in the near future, the bank receives them back by paying back the money it received for them plus a little extra.
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<span class="heading-toc" id="toc-term-vs-open-repurchase-agreements"></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"> Term vs. Open Repurchase Agreements </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The major difference between a term and an open repo lies in the time between the sale and the repurchase of the securities.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Repos with a specified maturity date (usually the following day, though it can be up to a week) are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/term-repurchase-agreement.asp">term repurchase agreements</a>.<span class="ql-inline-citation" data-cite="32"></span> A dealer sells securities to a counterparty who agrees to repurchase them at a higher price on a given date. Under the agreement, the counterparty gets the securities for the transaction term and earns interest through the difference between the initial sale price and the buyback price. The interest rate is fixed and is paid at maturity by the dealer. A term repo is used to invest cash or finance assets when the parties know how long they need to do so.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> An open repurchase agreement or "on-demand repo" works the same way as a term repo, except that the dealer and the counterparty agree to the transaction without setting the maturity date. Instead, either party can end the trade by giving notice to the other before an agreed-upon deadline that arises daily. If an open repo is not closed, it automatically rolls over into the next day.<span class="ql-inline-citation" data-cite="33"></span> Interest is paid monthly, and the interest rate is periodically re-priced by mutual agreement.<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_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The interest rate on an open repo is generally close to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a>.<span class="ql-inline-citation" data-cite="36"></span><span class="ql-inline-citation" data-cite="35"></span> An open repo is used to invest cash or finance assets when the parties do not know how long they will need to do so. But almost all open agreements conclude within one to two years.<span class="ql-inline-citation" data-cite="23"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div>
<span class="heading-toc" id="toc-the-significance-of-the-tenor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> The Significance of the Tenor </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Repos with longer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenor.asp">tenors</a> are usually considered higher risk. A longer tenor means that more can happen that affects the repurchaser's ability to do so. Also, interest rate fluctuations are more likely to influence the value of the repurchased asset.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> It's like the factors that affect bond interest rates. Under normal credit market conditions, a longer-duration bond yields higher interest. Investors buy long-term bonds as part of a wager that interest rates will not rise substantially during its term. A tail event is more likely to drive interest rates above forecast ranges when there's a longer duration. If there is a period of high inflation, the interest paid on bonds preceding that period will be worth less in real terms.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The same principles apply to repos. The longer the term of the repo, the more likely the collateral securities' value will fluctuate before the repurchase, and business activities can affect the repurchaser's ability to complete the contract. Counterparty credit risk is primary in repos.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As with any loan, the creditor bears the risk that the debtor will be unable to repay the principal. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gcf.asp">Repos function as collateralized debt</a>, which reduces the total risk. And because the repo price exceeds the collateral's value, these agreements mutually benefit buyers and sellers.<span class="ql-inline-citation" data-cite="37"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<span class="heading-toc" id="toc-types-of-repurchase-agreements"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> Types of Repurchase Agreements </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> There are three main types of repurchase agreements:
</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"> Third-party repos </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Also known as a tri-party repo, this is the most common. In <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tri-party-agreement.asp">this arrangement involving three entities</a>, a clearing agent or bank conducts the transactions between the buyer and seller and protects the interests of each. It holds the securities and ensures that the seller receives cash at the onset, that the buyer transfers funds for the benefit of the seller, and that the securities are delivered at maturity. Clearing banks for tri-party repos in the U.S. have included JPMorgan Chase & Co. and Bank of New York Mellon.
</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 addition to taking custody of the securities involved, clearing agents also value the securities and ensure that a set margin is applied. They settle the transaction on their books and help dealers with collateral.<span class="ql-inline-citation" data-cite="38"></span> However, clearing banks don't act as matchmakers: they don't find dealers for cash investors or vice versa, and they do not act as brokers.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Typically, clearing banks begin to settle repos early in the day, although they're not technically settled until the end of the day. This delay usually means that billions of dollars of intraday credit are extended to dealers daily. These agreements constitute about 80% of the repurchase agreement market, which was approximately $3.65 trillion in January 2024.<span class="ql-inline-citation" data-cite="38"></span><span class="ql-inline-citation" data-cite="6"></span>
</p>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-subheading__text"> Specialized delivery repo </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Specialized repos have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/guaranteedbond.asp">bond guarantee</a> at the beginning of the agreement and at maturity, along with the collateral. This type of agreement is uncommon.
</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"> Held-in-custody repo </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> In this kind of agreement, the seller gets cash for the security but holds it in a custodial account for the buyer. This type is even less common than specialized delivery repos because there is a risk that the seller may become insolvent and the borrower may not have access to the collateral.
</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-near-and-far-legs"></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"> Near and Far Legs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Like many parts of the financial world, repurchase agreements involve terminology not common elsewhere. One common term in the repo space is the “leg.” For instance, the part of the repurchase agreement in which the security is initially sold is sometimes called the “start leg,” while the repurchase that follows is the “close leg.”
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> These terms are also sometimes exchanged for “near leg” and “far leg,” respectively. In the near leg of a repo transaction, the security is sold. In the far leg, it is repurchased.<span class="ql-inline-citation" data-cite="23"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div>
<span class="heading-toc" id="toc-significance-of-the-repo-rate"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-heading__text"> Significance of the Repo Rate </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> When central banks repurchase securities from private banks, they do so at a discounted rate, known as the repo rate. Like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primerate.asp">prime rates</a>, repo rates are set by central banks.<span class="ql-inline-citation" data-cite="10"></span> The repo rate system allows governments to control the money supply by increasing or decreasing available funds.
</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"> An increase in repo rates means banks pay more for the money they borrow from the central bank. This squeezes lenders' profits and increases interest rates on loans made to the public. This generally discourages people and businesses from taking out loans, which can cut consumer spending, business investment, and the amount of money circulating in the economy. This might be necessary if the central bank is attempting to tackle inflation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> A decrease in the repo rates has the opposite effect. It makes borrowing cheaper, resulting in more money being spent and swirling around the economy. This can be helpful when central banks want to stimulate the economy.
</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"> To determine the costs and benefits of a repurchase agreement, a buyer or seller should make three different calculations:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> <li>Cash paid in the initial security sale</li><li>Cash to be paid for the repurchase of the security</li><li>Implied interest rate</li>
</ol>
<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 cash paid for the initial security sale and the money paid for the repurchase will depend on the value and type of security involved in the repo. In the case of a bond, for instance, both will derive from the clean price and the value of the accrued interest for the bond.
</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"> A crucial calculation for any repo agreement is the implied rate of interest. If the interest rate is unfavorable, a repo agreement may not be the most efficient way to access short-term cash. A formula that can be used to calculate the real rate of interest is below:
</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"> Interest rate = [(future value/present value) – 1] x year/number of days between consecutive legs
</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"> Once the real interest rate has been calculated, comparing the rate against other funding sources should reveal whether the repurchase agreement is a good deal. Generally, as a secured form of lending, repurchase agreements offer better terms than money market cash lending agreements. From the perspective of a reverse repo participant, the agreement can also produce extra income on excess cash reserves.
</p>
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<span class="heading-toc" id="toc-risks-of-repo"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-heading__text"> Risks of Repo </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> Repurchase agreements are generally seen as low risk. The largest risk in a repo is that the seller may fail to repurchase the securities at the maturity date. When this happens, the security buyer may liquidate the security to recover the cash it paid.<span class="ql-inline-citation" data-cite="40"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> This still constitutes a risk since the security value may decline after the initial sale, and the buyer may have few options other than to hold onto the security, which it never wanted for this purpose, or sell it for a loss. The borrower also faces some risk: if the security value rises above the agreed-upon terms, the creditor may not return the security.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> There are ways to mitigate these risks in repurchase agreements. For instance, many repos are over-collateralized. In these cases, if the collateral falls in value, a margin call will require the borrower to amend the securities offered. If it seems likely that the security value may rise and the creditor may not sell it back to the borrower, under-collateralization can be utilized to mitigate this risk.<span class="ql-inline-citation" data-cite="37"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Generally, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrisk.asp">credit risk</a> for repurchase agreements depends on many factors, including the terms of the transaction, the liquidity of the security, and the needs of the counterparties involved.
</p>
<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-financial-crisis-and-the-repo-market"></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 Financial Crisis and the Repo Market </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> After the 2008 financial crisis, investors focused on a particular type of repo known as repo 105. There was speculation that these repos played a part in Lehman Brothers’ attempts at hiding its declining financial health leading up to the crisis.<span class="ql-inline-citation" data-cite="17"></span> During this time, the repo market in the U.S. and abroad shrunk significantly, though it has since recovered and continues to grow.<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_89-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> The crisis revealed problems with the repo market in general. Since then, the Federal Reserve has stepped in to analyze and mitigate systemic risk. The Fed identified at least three areas of concern:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> <li>The tri-party repo market’s reliance on the intraday credit that the clearing banks provide</li><li>A lack of effective plans to help liquidate collateral when a dealer defaults</li><li>A shortage of viable risk management practices</li>
</ol>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Starting in late 2008, the Fed and other regulators established new rules to address these and other concerns. The new regulations increased pressure on banks to maintain their safest assets, such as Treasurys, giving them incentives not to lend them through repos.<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_95-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> Despite these and other regulatory changes over the last decade, there are still systemic risks within the repo space. The Fed continues to worry that a default by a major repo dealer could inspire a fire sale among money funds, which would then negatively affect the broader market. The future of the repo space may involve continuing regulations that limit the actions of these transactors, or it may involve a shift toward a centralized clearinghouse system. For the time being, though, repurchase agreements remain an important means of facilitating short-term borrowing.<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_97-0"></div>
<span class="heading-toc" id="toc-recent-changes-in-the-repo-market"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_98-0"> <span class="mntl-sc-block-heading__text"> Recent Changes in the Repo Market </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> The results from the Fed's post-2008 actions were significant: up through late 2008, the estimated value of global securities lent this way was close to $4 trillion. That figure hovered near $2 trillion for much of the next decade.<span class="ql-inline-citation" data-cite="27"></span> By the 2020s, the Fed was progressively entering into repurchase (or reverse repurchase) agreements to offset temporary swings in bank reserves. The major jump comes from 2021 to 2023, when there was a major boost in the estimated value of repos traded, peaking at about $4.7 trillion in June 2023 before settling back under $4.0 trillion by the end of that year.<span class="ql-inline-citation" data-cite="6"></span> Until 2021, the Fed was a relatively minor player in repo transactions when its role expanded considerably, with Overnight Reverse Repurchase (ON RRP ) agreements growing just above $1 trillion in the spring of 2021 to $2.7 trillion in assets by December 2022 for its part of the overall repo market.<span class="ql-inline-citation" data-cite="26"></span> By 2023, the repo market was about three times larger than at the beginning of 2021, with the Fed serving as the critical counterparty for most of these transactions.
</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"> The significant rise in repo volumes can be attributed to several prominent changes within the market and the broader economy. The pandemic set off a rush for safe assets, driven by the period's extensive economic uncertainties. In July 2021, the Federal Open Market Committee (FOMC) established the Standing Repo Facility (SRF) as a backstop in the money markets. The SRF was intended to smooth liquidity in the repo market further and provide a dependable source of cash in exchange for safe investments like government bonds. It soon became a crucial part of how major financial institutions across the U.S. managed their short-term liquidity needs. Under the SRF, eligible institutions could borrow money overnight from the Federal Reserve, using securities such as Treasury bonds as collateral. The interest rate on these loans, known as the repo rate, is set by the FOMC and is generally above the market rate, ensuring the SRF is used as a backstop rather than a primary funding source.<span class="ql-inline-citation" data-cite="39"></span> Concurrently, the Fed's increase in bond holdings, a measure to improve market liquidity, was part of its broader monetary policy to stabilize and support the economy.<br/>
</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"> However, from mid-2022 through 2023, the Fed was winding down these holdings under a policy known as "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/quantitative-tightening-6361478">quantitative tightening</a>," marking a shift from its earlier expansionary monetary stance.<span class="ql-inline-citation" data-cite="25"></span><span class="ql-inline-citation" data-cite="24"></span> Pulling back its efforts to support the economy (by this time, inflation was becoming a critical worry), the Fed sought to decrease the size of its balance sheet. Reducing the Fed's balance sheet mainly involves cuts in three crucial areas of Federal Reserve liabilities: deposits of the U.S. Treasury at the Fed, deposits of banks at the Fed (known as reserves), and deposits of money market funds at the Fed through the ON RRP.<span class="ql-inline-citation" data-cite="26"></span> The size of its part in the repo market would be easier to cut, given that the Fed has less control over the other two.
</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"> As the Fed sought to decrease its balance sheet, ON RRP made the most sense to pull back. Although bank reserves were to play a key role in future cuts to the Fed's balance sheet, scaling back the ON RRP is generally regarded as less disruptive to the monetary system than cuts to bank reserves. Changes in the ON RRP should cause a move away from the Fed as a primary counterparty toward the private sector. However, the capacity of the private repo market to handle much higher volumes is in some doubt.<span class="ql-inline-citation" data-cite="26"></span><span class="ql-inline-citation" data-cite="25"></span> The Fed's active participation has significantly increased the repo market's size, and it's unknown if the private sector could adjust to step in for the Fed's increased part in the repo market.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_107-0"><span class="heading-toc" id="toc-who-benefits-in-a-repurchase-agreement"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Benefits in a Repurchase Agreement?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In theory, all parties benefit. The seller gets the cash injection it needs, while the buyer gets to make money from lending capital.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_108-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_109-0"><span class="heading-toc" id="toc-who-buys-repurchase-agreements"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Buys Repurchase Agreements?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The sellers of repo agreements can be banks, hedge funds, insurance companies, money market mutual funds, and any other entity in need of a short-term infusion of cash. On the other side of the trade, the buyers are commercial banks, central banks, asset managers with temporary cash surpluses, and so on.<span class="ql-inline-citation" data-cite="40"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_111-0"><span class="heading-toc" id="toc-which-types-of-securities-are-used-in-a-repo-agreement"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Types of Securities Are Used in a Repo Agreement?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>High-quality debt instruments with little risk of default are most commonly used, such as government bonds, corporate bonds, or <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</a>. The collateral needs to have a predictable value, reflect the value of the loan, and be easy to sell in the event the loan isn't repaid on time. The collateral doesn't need to be debt. Other assets can be used, including, for example, equity market indexes.<span class="ql-inline-citation" data-cite="19"></span></p></div>
</div>
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<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_113-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> A repurchase agreement, or repo, is a short-term lending instrument that involves a bank selling securities, usually government bonds or other debt instruments with steady values, to an investor and then repurchasing them a short time later at a slightly higher price. Repos essentially act as short-term, collateral-backed, interest-bearing loans, with the buyer playing the role of lender, the seller as the borrower, and the security as the collateral.
</p></div> | A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. For a repo, a dealer sells government securities to an investor, usually overnight, and buys them back the following day at a slightly higher price. The small price difference is an implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also commonly used in central bank open market operations. During the early 2020s, the Federal Reserve instituted changes that massively increased the volume of repos traded, a trend it began to unwind in 2023.
### Key Takeaways
* A repurchase agreement (repo) is a short-term agreement to sell securities and repurchase them later at a slightly higher price.
* The party selling the repo is effectively borrowing whatever is traded for the securities, and the implicit interest paid is the difference in price from the initial sale to repurchase.
* Repos and reverse repos are used for short-term borrowing and lending, often from overnight to 48 hours.
* The implicit interest rate on these agreements is known as the repo rate.
Those involved in the agreement are in different stances: the party selling the security and agreeing to repurchase it later is involved in a repo. Meanwhile, the party buying the security and agreeing to sell it back is engaged in a reverse repurchase agreement.
![Repurchase Agreement]()
:max_bytes(150000):strip_icc()/repurchaseagreement_final-b6e7c46c5bdd404e93d5ac0cc47ca328.jpg)
Investopedia / Katie Kerpel
## Understanding Repurchase Agreements
Repurchase agreements are generally safe investments because the securities involved, typically [Treasury bonds](https://www.investopedia.com/terms/t/treasurybond.asp), serve as collateral. Classified as a [money market](https://www.investopedia.com/terms/m/moneymarket.asp) instrument, a repo is thus a short-term, collateral-backed, interest-bearing loan. The buyer acts as a short-term lender, while the seller is a short-term borrower. The securities sold are the collateral.
Repurchase agreements are made between a variety of parties. The Federal Reserve uses repos to regulate the money supply and bank reserves. Individuals typically use them to finance the purchase of debt securities or other investments. Repurchase agreements are strictly short-term investments, and their maturity period is called the "rate," the "term," or the "tenor."
Despite the similarities with collateralized loans, repos count as purchases. However, because the buyer only temporarily owns the security, these agreements are usually treated as loans for tax and accounting purposes. When there's a bankruptcy, repo investors can generally sell their collateral. This distinguishes repos and collateralized loans; for most collateralized loans, bankrupt investors would be subject to an automatic stay.
## Repurchase Agreement Example
Suppose a bank needs a quick cash injection. It agrees with an investor, who offers to give it the money it needs so long as it pays it back quickly with interest. In the meantime, the bank also provides collateral for peace of mind.
At issue in the agreement are Treasury bonds. The bank sells them to the investor with a deal that it will repurchase them very soon at a slight premium. The Treasury bonds serve as collateral: the bank temporarily relinquishes control of the bonds for the cash it needs. Then, at a predetermined time in the near future, the bank receives them back by paying back the money it received for them plus a little extra.
## Term vs. Open Repurchase Agreements
The major difference between a term and an open repo lies in the time between the sale and the repurchase of the securities.
Repos with a specified maturity date (usually the following day, though it can be up to a week) are [term repurchase agreements](https://www.investopedia.com/terms/t/term-repurchase-agreement.asp). A dealer sells securities to a counterparty who agrees to repurchase them at a higher price on a given date. Under the agreement, the counterparty gets the securities for the transaction term and earns interest through the difference between the initial sale price and the buyback price. The interest rate is fixed and is paid at maturity by the dealer. A term repo is used to invest cash or finance assets when the parties know how long they need to do so.
An open repurchase agreement or "on-demand repo" works the same way as a term repo, except that the dealer and the counterparty agree to the transaction without setting the maturity date. Instead, either party can end the trade by giving notice to the other before an agreed-upon deadline that arises daily. If an open repo is not closed, it automatically rolls over into the next day. Interest is paid monthly, and the interest rate is periodically re-priced by mutual agreement.
The interest rate on an open repo is generally close to the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp). An open repo is used to invest cash or finance assets when the parties do not know how long they will need to do so. But almost all open agreements conclude within one to two years.
## The Significance of the Tenor
Repos with longer [tenors](https://www.investopedia.com/terms/t/tenor.asp) are usually considered higher risk. A longer tenor means that more can happen that affects the repurchaser's ability to do so. Also, interest rate fluctuations are more likely to influence the value of the repurchased asset.
It's like the factors that affect bond interest rates. Under normal credit market conditions, a longer-duration bond yields higher interest. Investors buy long-term bonds as part of a wager that interest rates will not rise substantially during its term. A tail event is more likely to drive interest rates above forecast ranges when there's a longer duration. If there is a period of high inflation, the interest paid on bonds preceding that period will be worth less in real terms.
The same principles apply to repos. The longer the term of the repo, the more likely the collateral securities' value will fluctuate before the repurchase, and business activities can affect the repurchaser's ability to complete the contract. Counterparty credit risk is primary in repos.
As with any loan, the creditor bears the risk that the debtor will be unable to repay the principal. [Repos function as collateralized debt](https://www.investopedia.com/terms/g/gcf.asp), which reduces the total risk. And because the repo price exceeds the collateral's value, these agreements mutually benefit buyers and sellers.
## Types of Repurchase Agreements
There are three main types of repurchase agreements:
### Third-party repos
Also known as a tri-party repo, this is the most common. In [this arrangement involving three entities](https://www.investopedia.com/terms/t/tri-party-agreement.asp), a clearing agent or bank conducts the transactions between the buyer and seller and protects the interests of each. It holds the securities and ensures that the seller receives cash at the onset, that the buyer transfers funds for the benefit of the seller, and that the securities are delivered at maturity. Clearing banks for tri-party repos in the U.S. have included JPMorgan Chase & Co. and Bank of New York Mellon.
In addition to taking custody of the securities involved, clearing agents also value the securities and ensure that a set margin is applied. They settle the transaction on their books and help dealers with collateral. However, clearing banks don't act as matchmakers: they don't find dealers for cash investors or vice versa, and they do not act as brokers.
Typically, clearing banks begin to settle repos early in the day, although they're not technically settled until the end of the day. This delay usually means that billions of dollars of intraday credit are extended to dealers daily. These agreements constitute about 80% of the repurchase agreement market, which was approximately $3.65 trillion in January 2024.
### Specialized delivery repo
Specialized repos have a [bond guarantee](https://www.investopedia.com/terms/g/guaranteedbond.asp) at the beginning of the agreement and at maturity, along with the collateral. This type of agreement is uncommon.
### Held-in-custody repo
In this kind of agreement, the seller gets cash for the security but holds it in a custodial account for the buyer. This type is even less common than specialized delivery repos because there is a risk that the seller may become insolvent and the borrower may not have access to the collateral.
## Near and Far Legs
Like many parts of the financial world, repurchase agreements involve terminology not common elsewhere. One common term in the repo space is the “leg.” For instance, the part of the repurchase agreement in which the security is initially sold is sometimes called the “start leg,” while the repurchase that follows is the “close leg.”
These terms are also sometimes exchanged for “near leg” and “far leg,” respectively. In the near leg of a repo transaction, the security is sold. In the far leg, it is repurchased.
## Significance of the Repo Rate
When central banks repurchase securities from private banks, they do so at a discounted rate, known as the repo rate. Like [prime rates](https://www.investopedia.com/terms/p/primerate.asp), repo rates are set by central banks. The repo rate system allows governments to control the money supply by increasing or decreasing available funds.
An increase in repo rates means banks pay more for the money they borrow from the central bank. This squeezes lenders' profits and increases interest rates on loans made to the public. This generally discourages people and businesses from taking out loans, which can cut consumer spending, business investment, and the amount of money circulating in the economy. This might be necessary if the central bank is attempting to tackle inflation.
A decrease in the repo rates has the opposite effect. It makes borrowing cheaper, resulting in more money being spent and swirling around the economy. This can be helpful when central banks want to stimulate the economy.
To determine the costs and benefits of a repurchase agreement, a buyer or seller should make three different calculations:
1. Cash paid in the initial security sale
2. Cash to be paid for the repurchase of the security
3. Implied interest rate
The cash paid for the initial security sale and the money paid for the repurchase will depend on the value and type of security involved in the repo. In the case of a bond, for instance, both will derive from the clean price and the value of the accrued interest for the bond.
A crucial calculation for any repo agreement is the implied rate of interest. If the interest rate is unfavorable, a repo agreement may not be the most efficient way to access short-term cash. A formula that can be used to calculate the real rate of interest is below:
Interest rate = [(future value/present value) – 1] x year/number of days between consecutive legs
Once the real interest rate has been calculated, comparing the rate against other funding sources should reveal whether the repurchase agreement is a good deal. Generally, as a secured form of lending, repurchase agreements offer better terms than money market cash lending agreements. From the perspective of a reverse repo participant, the agreement can also produce extra income on excess cash reserves.
## Risks of Repo
Repurchase agreements are generally seen as low risk. The largest risk in a repo is that the seller may fail to repurchase the securities at the maturity date. When this happens, the security buyer may liquidate the security to recover the cash it paid.
This still constitutes a risk since the security value may decline after the initial sale, and the buyer may have few options other than to hold onto the security, which it never wanted for this purpose, or sell it for a loss. The borrower also faces some risk: if the security value rises above the agreed-upon terms, the creditor may not return the security.
There are ways to mitigate these risks in repurchase agreements. For instance, many repos are over-collateralized. In these cases, if the collateral falls in value, a margin call will require the borrower to amend the securities offered. If it seems likely that the security value may rise and the creditor may not sell it back to the borrower, under-collateralization can be utilized to mitigate this risk.
Generally, [credit risk](https://www.investopedia.com/terms/c/creditrisk.asp) for repurchase agreements depends on many factors, including the terms of the transaction, the liquidity of the security, and the needs of the counterparties involved.
## The Financial Crisis and the Repo Market
After the 2008 financial crisis, investors focused on a particular type of repo known as repo 105. There was speculation that these repos played a part in Lehman Brothers’ attempts at hiding its declining financial health leading up to the crisis. During this time, the repo market in the U.S. and abroad shrunk significantly, though it has since recovered and continues to grow.
The crisis revealed problems with the repo market in general. Since then, the Federal Reserve has stepped in to analyze and mitigate systemic risk. The Fed identified at least three areas of concern:
1. The tri-party repo market’s reliance on the intraday credit that the clearing banks provide
2. A lack of effective plans to help liquidate collateral when a dealer defaults
3. A shortage of viable risk management practices
Starting in late 2008, the Fed and other regulators established new rules to address these and other concerns. The new regulations increased pressure on banks to maintain their safest assets, such as Treasurys, giving them incentives not to lend them through repos.
Despite these and other regulatory changes over the last decade, there are still systemic risks within the repo space. The Fed continues to worry that a default by a major repo dealer could inspire a fire sale among money funds, which would then negatively affect the broader market. The future of the repo space may involve continuing regulations that limit the actions of these transactors, or it may involve a shift toward a centralized clearinghouse system. For the time being, though, repurchase agreements remain an important means of facilitating short-term borrowing.
## Recent Changes in the Repo Market
The results from the Fed's post-2008 actions were significant: up through late 2008, the estimated value of global securities lent this way was close to $4 trillion. That figure hovered near $2 trillion for much of the next decade. By the 2020s, the Fed was progressively entering into repurchase (or reverse repurchase) agreements to offset temporary swings in bank reserves. The major jump comes from 2021 to 2023, when there was a major boost in the estimated value of repos traded, peaking at about $4.7 trillion in June 2023 before settling back under $4.0 trillion by the end of that year. Until 2021, the Fed was a relatively minor player in repo transactions when its role expanded considerably, with Overnight Reverse Repurchase (ON RRP ) agreements growing just above $1 trillion in the spring of 2021 to $2.7 trillion in assets by December 2022 for its part of the overall repo market. By 2023, the repo market was about three times larger than at the beginning of 2021, with the Fed serving as the critical counterparty for most of these transactions.
The significant rise in repo volumes can be attributed to several prominent changes within the market and the broader economy. The pandemic set off a rush for safe assets, driven by the period's extensive economic uncertainties. In July 2021, the Federal Open Market Committee (FOMC) established the Standing Repo Facility (SRF) as a backstop in the money markets. The SRF was intended to smooth liquidity in the repo market further and provide a dependable source of cash in exchange for safe investments like government bonds. It soon became a crucial part of how major financial institutions across the U.S. managed their short-term liquidity needs. Under the SRF, eligible institutions could borrow money overnight from the Federal Reserve, using securities such as Treasury bonds as collateral. The interest rate on these loans, known as the repo rate, is set by the FOMC and is generally above the market rate, ensuring the SRF is used as a backstop rather than a primary funding source. Concurrently, the Fed's increase in bond holdings, a measure to improve market liquidity, was part of its broader monetary policy to stabilize and support the economy.
However, from mid-2022 through 2023, the Fed was winding down these holdings under a policy known as "[quantitative tightening](https://www.investopedia.com/quantitative-tightening-6361478)," marking a shift from its earlier expansionary monetary stance. Pulling back its efforts to support the economy (by this time, inflation was becoming a critical worry), the Fed sought to decrease the size of its balance sheet. Reducing the Fed's balance sheet mainly involves cuts in three crucial areas of Federal Reserve liabilities: deposits of the U.S. Treasury at the Fed, deposits of banks at the Fed (known as reserves), and deposits of money market funds at the Fed through the ON RRP. The size of its part in the repo market would be easier to cut, given that the Fed has less control over the other two.
As the Fed sought to decrease its balance sheet, ON RRP made the most sense to pull back. Although bank reserves were to play a key role in future cuts to the Fed's balance sheet, scaling back the ON RRP is generally regarded as less disruptive to the monetary system than cuts to bank reserves. Changes in the ON RRP should cause a move away from the Fed as a primary counterparty toward the private sector. However, the capacity of the private repo market to handle much higher volumes is in some doubt. The Fed's active participation has significantly increased the repo market's size, and it's unknown if the private sector could adjust to step in for the Fed's increased part in the repo market.
## Who Benefits in a Repurchase Agreement?
In theory, all parties benefit. The seller gets the cash injection it needs, while the buyer gets to make money from lending capital.
## Who Buys Repurchase Agreements?
The sellers of repo agreements can be banks, hedge funds, insurance companies, money market mutual funds, and any other entity in need of a short-term infusion of cash. On the other side of the trade, the buyers are commercial banks, central banks, asset managers with temporary cash surpluses, and so on.
## Which Types of Securities Are Used in a Repo Agreement?
High-quality debt instruments with little risk of default are most commonly used, such as government bonds, corporate bonds, or [mortgage-backed securities](https://www.investopedia.com/terms/m/mbs.asp). The collateral needs to have a predictable value, reflect the value of the loan, and be easy to sell in the event the loan isn't repaid on time. The collateral doesn't need to be debt. Other assets can be used, including, for example, equity market indexes.
## The Bottom Line
A repurchase agreement, or repo, is a short-term lending instrument that involves a bank selling securities, usually government bonds or other debt instruments with steady values, to an investor and then repurchasing them a short time later at a slightly higher price. Repos essentially act as short-term, collateral-backed, interest-bearing loans, with the buyer playing the role of lender, the seller as the borrower, and the security as the collateral.
| A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. For a repo, a dealer sells government securities to an investor, usually overnight, and buys them back the following day at a slightly higher price. The small price difference is an implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also commonly used in central bank open market operations. During the early 2020s, the Federal Reserve instituted changes that massively increased the volume of repos traded, a trend it began to unwind in 2023.
Key Takeaways
A repurchase agreement (repo) is a short-term agreement to sell securities and repurchase them later at a slightly higher price.The party selling the repo is effectively borrowing whatever is traded for the securities, and the implicit interest paid is the difference in price from the initial sale to repurchase.Repos and reverse repos are used for short-term borrowing and lending, often from overnight to 48 hours.The implicit interest rate on these agreements is known as the repo rate.
Those involved in the agreement are in different stances: the party selling the security and agreeing to repurchase it later is involved in a repo. Meanwhile, the party buying the security and agreeing to sell it back is engaged in a reverse repurchase agreement.
Investopedia / Katie Kerpel
Understanding Repurchase Agreements
Repurchase agreements are generally safe investments because the securities involved, typically Treasury bonds, serve as collateral. Classified as a money market instrument, a repo is thus a short-term, collateral-backed, interest-bearing loan. The buyer acts as a short-term lender, while the seller is a short-term borrower. The securities sold are the collateral.
Repurchase agreements are made between a variety of parties. The Federal Reserve uses repos to regulate the money supply and bank reserves. Individuals typically use them to finance the purchase of debt securities or other investments. Repurchase agreements are strictly short-term investments, and their maturity period is called the "rate," the "term," or the "tenor."
Despite the similarities with collateralized loans, repos count as purchases. However, because the buyer only temporarily owns the security, these agreements are usually treated as loans for tax and accounting purposes. When there's a bankruptcy, repo investors can generally sell their collateral. This distinguishes repos and collateralized loans; for most collateralized loans, bankrupt investors would be subject to an automatic stay.
Repurchase Agreement Example
Suppose a bank needs a quick cash injection. It agrees with an investor, who offers to give it the money it needs so long as it pays it back quickly with interest. In the meantime, the bank also provides collateral for peace of mind.
At issue in the agreement are Treasury bonds. The bank sells them to the investor with a deal that it will repurchase them very soon at a slight premium. The Treasury bonds serve as collateral: the bank temporarily relinquishes control of the bonds for the cash it needs. Then, at a predetermined time in the near future, the bank receives them back by paying back the money it received for them plus a little extra.
Term vs. Open Repurchase Agreements
The major difference between a term and an open repo lies in the time between the sale and the repurchase of the securities.
Repos with a specified maturity date (usually the following day, though it can be up to a week) are term repurchase agreements. A dealer sells securities to a counterparty who agrees to repurchase them at a higher price on a given date. Under the agreement, the counterparty gets the securities for the transaction term and earns interest through the difference between the initial sale price and the buyback price. The interest rate is fixed and is paid at maturity by the dealer. A term repo is used to invest cash or finance assets when the parties know how long they need to do so.
An open repurchase agreement or "on-demand repo" works the same way as a term repo, except that the dealer and the counterparty agree to the transaction without setting the maturity date. Instead, either party can end the trade by giving notice to the other before an agreed-upon deadline that arises daily. If an open repo is not closed, it automatically rolls over into the next day. Interest is paid monthly, and the interest rate is periodically re-priced by mutual agreement.
The interest rate on an open repo is generally close to the federal funds rate. An open repo is used to invest cash or finance assets when the parties do not know how long they will need to do so. But almost all open agreements conclude within one to two years.
The Significance of the Tenor
Repos with longer tenors are usually considered higher risk. A longer tenor means that more can happen that affects the repurchaser's ability to do so. Also, interest rate fluctuations are more likely to influence the value of the repurchased asset.
It's like the factors that affect bond interest rates. Under normal credit market conditions, a longer-duration bond yields higher interest. Investors buy long-term bonds as part of a wager that interest rates will not rise substantially during its term. A tail event is more likely to drive interest rates above forecast ranges when there's a longer duration. If there is a period of high inflation, the interest paid on bonds preceding that period will be worth less in real terms.
The same principles apply to repos. The longer the term of the repo, the more likely the collateral securities' value will fluctuate before the repurchase, and business activities can affect the repurchaser's ability to complete the contract. Counterparty credit risk is primary in repos.
As with any loan, the creditor bears the risk that the debtor will be unable to repay the principal. Repos function as collateralized debt, which reduces the total risk. And because the repo price exceeds the collateral's value, these agreements mutually benefit buyers and sellers.
Types of Repurchase Agreements
There are three main types of repurchase agreements:
Third-party repos
Also known as a tri-party repo, this is the most common. In this arrangement involving three entities, a clearing agent or bank conducts the transactions between the buyer and seller and protects the interests of each. It holds the securities and ensures that the seller receives cash at the onset, that the buyer transfers funds for the benefit of the seller, and that the securities are delivered at maturity. Clearing banks for tri-party repos in the U.S. have included JPMorgan Chase & Co. and Bank of New York Mellon.
In addition to taking custody of the securities involved, clearing agents also value the securities and ensure that a set margin is applied. They settle the transaction on their books and help dealers with collateral. However, clearing banks don't act as matchmakers: they don't find dealers for cash investors or vice versa, and they do not act as brokers.
Typically, clearing banks begin to settle repos early in the day, although they're not technically settled until the end of the day. This delay usually means that billions of dollars of intraday credit are extended to dealers daily. These agreements constitute about 80% of the repurchase agreement market, which was approximately $3.65 trillion in January 2024.
Specialized delivery repo
Specialized repos have a bond guarantee at the beginning of the agreement and at maturity, along with the collateral. This type of agreement is uncommon.
Held-in-custody repo
In this kind of agreement, the seller gets cash for the security but holds it in a custodial account for the buyer. This type is even less common than specialized delivery repos because there is a risk that the seller may become insolvent and the borrower may not have access to the collateral.
Near and Far Legs
Like many parts of the financial world, repurchase agreements involve terminology not common elsewhere. One common term in the repo space is the “leg.” For instance, the part of the repurchase agreement in which the security is initially sold is sometimes called the “start leg,” while the repurchase that follows is the “close leg.”
These terms are also sometimes exchanged for “near leg” and “far leg,” respectively. In the near leg of a repo transaction, the security is sold. In the far leg, it is repurchased.
Significance of the Repo Rate
When central banks repurchase securities from private banks, they do so at a discounted rate, known as the repo rate. Like prime rates, repo rates are set by central banks. The repo rate system allows governments to control the money supply by increasing or decreasing available funds.
An increase in repo rates means banks pay more for the money they borrow from the central bank. This squeezes lenders' profits and increases interest rates on loans made to the public. This generally discourages people and businesses from taking out loans, which can cut consumer spending, business investment, and the amount of money circulating in the economy. This might be necessary if the central bank is attempting to tackle inflation.
A decrease in the repo rates has the opposite effect. It makes borrowing cheaper, resulting in more money being spent and swirling around the economy. This can be helpful when central banks want to stimulate the economy.
To determine the costs and benefits of a repurchase agreement, a buyer or seller should make three different calculations:
Cash paid in the initial security saleCash to be paid for the repurchase of the securityImplied interest rate
The cash paid for the initial security sale and the money paid for the repurchase will depend on the value and type of security involved in the repo. In the case of a bond, for instance, both will derive from the clean price and the value of the accrued interest for the bond.
A crucial calculation for any repo agreement is the implied rate of interest. If the interest rate is unfavorable, a repo agreement may not be the most efficient way to access short-term cash. A formula that can be used to calculate the real rate of interest is below:
Interest rate = [(future value/present value) – 1] x year/number of days between consecutive legs
Once the real interest rate has been calculated, comparing the rate against other funding sources should reveal whether the repurchase agreement is a good deal. Generally, as a secured form of lending, repurchase agreements offer better terms than money market cash lending agreements. From the perspective of a reverse repo participant, the agreement can also produce extra income on excess cash reserves.
Risks of Repo
Repurchase agreements are generally seen as low risk. The largest risk in a repo is that the seller may fail to repurchase the securities at the maturity date. When this happens, the security buyer may liquidate the security to recover the cash it paid.
This still constitutes a risk since the security value may decline after the initial sale, and the buyer may have few options other than to hold onto the security, which it never wanted for this purpose, or sell it for a loss. The borrower also faces some risk: if the security value rises above the agreed-upon terms, the creditor may not return the security.
There are ways to mitigate these risks in repurchase agreements. For instance, many repos are over-collateralized. In these cases, if the collateral falls in value, a margin call will require the borrower to amend the securities offered. If it seems likely that the security value may rise and the creditor may not sell it back to the borrower, under-collateralization can be utilized to mitigate this risk.
Generally, credit risk for repurchase agreements depends on many factors, including the terms of the transaction, the liquidity of the security, and the needs of the counterparties involved.
The Financial Crisis and the Repo Market
After the 2008 financial crisis, investors focused on a particular type of repo known as repo 105. There was speculation that these repos played a part in Lehman Brothers’ attempts at hiding its declining financial health leading up to the crisis. During this time, the repo market in the U.S. and abroad shrunk significantly, though it has since recovered and continues to grow.
The crisis revealed problems with the repo market in general. Since then, the Federal Reserve has stepped in to analyze and mitigate systemic risk. The Fed identified at least three areas of concern:
The tri-party repo market’s reliance on the intraday credit that the clearing banks provideA lack of effective plans to help liquidate collateral when a dealer defaultsA shortage of viable risk management practices
Starting in late 2008, the Fed and other regulators established new rules to address these and other concerns. The new regulations increased pressure on banks to maintain their safest assets, such as Treasurys, giving them incentives not to lend them through repos.
Despite these and other regulatory changes over the last decade, there are still systemic risks within the repo space. The Fed continues to worry that a default by a major repo dealer could inspire a fire sale among money funds, which would then negatively affect the broader market. The future of the repo space may involve continuing regulations that limit the actions of these transactors, or it may involve a shift toward a centralized clearinghouse system. For the time being, though, repurchase agreements remain an important means of facilitating short-term borrowing.
Recent Changes in the Repo Market
The results from the Fed's post-2008 actions were significant: up through late 2008, the estimated value of global securities lent this way was close to $4 trillion. That figure hovered near $2 trillion for much of the next decade. By the 2020s, the Fed was progressively entering into repurchase (or reverse repurchase) agreements to offset temporary swings in bank reserves. The major jump comes from 2021 to 2023, when there was a major boost in the estimated value of repos traded, peaking at about $4.7 trillion in June 2023 before settling back under $4.0 trillion by the end of that year. Until 2021, the Fed was a relatively minor player in repo transactions when its role expanded considerably, with Overnight Reverse Repurchase (ON RRP ) agreements growing just above $1 trillion in the spring of 2021 to $2.7 trillion in assets by December 2022 for its part of the overall repo market. By 2023, the repo market was about three times larger than at the beginning of 2021, with the Fed serving as the critical counterparty for most of these transactions.
The significant rise in repo volumes can be attributed to several prominent changes within the market and the broader economy. The pandemic set off a rush for safe assets, driven by the period's extensive economic uncertainties. In July 2021, the Federal Open Market Committee (FOMC) established the Standing Repo Facility (SRF) as a backstop in the money markets. The SRF was intended to smooth liquidity in the repo market further and provide a dependable source of cash in exchange for safe investments like government bonds. It soon became a crucial part of how major financial institutions across the U.S. managed their short-term liquidity needs. Under the SRF, eligible institutions could borrow money overnight from the Federal Reserve, using securities such as Treasury bonds as collateral. The interest rate on these loans, known as the repo rate, is set by the FOMC and is generally above the market rate, ensuring the SRF is used as a backstop rather than a primary funding source. Concurrently, the Fed's increase in bond holdings, a measure to improve market liquidity, was part of its broader monetary policy to stabilize and support the economy.
However, from mid-2022 through 2023, the Fed was winding down these holdings under a policy known as "quantitative tightening," marking a shift from its earlier expansionary monetary stance. Pulling back its efforts to support the economy (by this time, inflation was becoming a critical worry), the Fed sought to decrease the size of its balance sheet. Reducing the Fed's balance sheet mainly involves cuts in three crucial areas of Federal Reserve liabilities: deposits of the U.S. Treasury at the Fed, deposits of banks at the Fed (known as reserves), and deposits of money market funds at the Fed through the ON RRP. The size of its part in the repo market would be easier to cut, given that the Fed has less control over the other two.
As the Fed sought to decrease its balance sheet, ON RRP made the most sense to pull back. Although bank reserves were to play a key role in future cuts to the Fed's balance sheet, scaling back the ON RRP is generally regarded as less disruptive to the monetary system than cuts to bank reserves. Changes in the ON RRP should cause a move away from the Fed as a primary counterparty toward the private sector. However, the capacity of the private repo market to handle much higher volumes is in some doubt. The Fed's active participation has significantly increased the repo market's size, and it's unknown if the private sector could adjust to step in for the Fed's increased part in the repo market.
Who Benefits in a Repurchase Agreement?
In theory, all parties benefit. The seller gets the cash injection it needs, while the buyer gets to make money from lending capital.
Who Buys Repurchase Agreements?
The sellers of repo agreements can be banks, hedge funds, insurance companies, money market mutual funds, and any other entity in need of a short-term infusion of cash. On the other side of the trade, the buyers are commercial banks, central banks, asset managers with temporary cash surpluses, and so on.
Which Types of Securities Are Used in a Repo Agreement?
High-quality debt instruments with little risk of default are most commonly used, such as government bonds, corporate bonds, or mortgage-backed securities. The collateral needs to have a predictable value, reflect the value of the loan, and be easy to sell in the event the loan isn't repaid on time. The collateral doesn't need to be debt. Other assets can be used, including, for example, equity market indexes.
The Bottom Line
A repurchase agreement, or repo, is a short-term lending instrument that involves a bank selling securities, usually government bonds or other debt instruments with steady values, to an investor and then repurchasing them a short time later at a slightly higher price. Repos essentially act as short-term, collateral-backed, interest-bearing loans, with the buyer playing the role of lender, the seller as the borrower, and the security as the collateral.
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https://www.investopedia.com/irs-raises-401-k-contribution-limit-to-usd23-000-8385873 | IRS Raises 401(k) Contribution Limit To $23,000 | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 Internal Revenue Service (IRS) raised the amount you can contribute to 401(k) retirement plans by $500.</li><li>The agency also raised the limits on contributions to Individual Retirement Accounts (IRAs) by $500.</li><li>This adjustment reflects the cost of living, which has tamed over the past year, resulting in a smaller increase to the limits. </li><li>Because of the limit increases, you can stash more money away into your retirement accounts.</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"> Here’s an upside to inflation: You can contribute more to your retirement plan.
</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 IRS raised the contribution limit on 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) retirement plans</a> in 2024 to $23,000 from $22,500, and boosted contribution limits to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">Individual Retirement Accounts</a> (IRAs) to $7,000 from $6,500. Some limits, including for catch-up contributions for workers over 50, and the federal government’s Thrift Savings Plan, remained unchanged.
</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"> Retirement plan contribution limits are among several values that the agency, by law, has to adjust every year to account for changes in the cost of living. Inflation is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cpi-inflation-data-september-8351194">much tamer this year</a> than in 2022, so the boost to contribution limits is much less than the $2,000 401(k) contribution limit increase that retirement savers got last year.
</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 addition to raising the retirement contribution limits, the agency raised several related limits, such as the income levels determining eligibility for claiming tax deductions on IRA and Roth IRA contributions.
</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 Internal Revenue Service (IRS) raised the amount you can contribute to 401(k) retirement plans by $500.
* The agency also raised the limits on contributions to Individual Retirement Accounts (IRAs) by $500.
* This adjustment reflects the cost of living, which has tamed over the past year, resulting in a smaller increase to the limits.
* Because of the limit increases, you can stash more money away into your retirement accounts.
Here’s an upside to inflation: You can contribute more to your retirement plan.
The IRS raised the contribution limit on employer-sponsored [401(k) retirement plans](https://www.investopedia.com/terms/1/401kplan.asp) in 2024 to $23,000 from $22,500, and boosted contribution limits to [Individual Retirement Accounts](https://www.investopedia.com/terms/i/ira.asp) (IRAs) to $7,000 from $6,500. Some limits, including for catch-up contributions for workers over 50, and the federal government’s Thrift Savings Plan, remained unchanged.
Retirement plan contribution limits are among several values that the agency, by law, has to adjust every year to account for changes in the cost of living. Inflation is [much tamer this year](https://www.investopedia.com/cpi-inflation-data-september-8351194) than in 2022, so the boost to contribution limits is much less than the $2,000 401(k) contribution limit increase that retirement savers got last year.
In addition to raising the retirement contribution limits, the agency raised several related limits, such as the income levels determining eligibility for claiming tax deductions on IRA and Roth IRA contributions.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected]) | Key Takeaways
The Internal Revenue Service (IRS) raised the amount you can contribute to 401(k) retirement plans by $500.The agency also raised the limits on contributions to Individual Retirement Accounts (IRAs) by $500.This adjustment reflects the cost of living, which has tamed over the past year, resulting in a smaller increase to the limits. Because of the limit increases, you can stash more money away into your retirement accounts.
Here’s an upside to inflation: You can contribute more to your retirement plan.
The IRS raised the contribution limit on employer-sponsored 401(k) retirement plans in 2024 to $23,000 from $22,500, and boosted contribution limits to Individual Retirement Accounts (IRAs) to $7,000 from $6,500. Some limits, including for catch-up contributions for workers over 50, and the federal government’s Thrift Savings Plan, remained unchanged.
Retirement plan contribution limits are among several values that the agency, by law, has to adjust every year to account for changes in the cost of living. Inflation is much tamer this year than in 2022, so the boost to contribution limits is much less than the $2,000 401(k) contribution limit increase that retirement savers got last year.
In addition to raising the retirement contribution limits, the agency raised several related limits, such as the income levels determining eligibility for claiming tax deductions on IRA and Roth IRA contributions.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected] | [
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https://www.investopedia.com/terms/w/white-collar-crime.asp | What Is White-Collar Crime? Meaning, Types, and Examples | <div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-white-collar-crime"></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 White-Collar Crime? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> White-collar crime is a nonviolent crime often characterized by deceit or concealment to obtain or avoid losing money or property, or to gain a personal or business advantage.
</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"> Examples of white-collar crimes include securities fraud, embezzlement, corporate fraud, and money laundering. Entities that investigate white-collar crime include the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Bureau of Investigation (FBI), and state authorities.<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>White-collar crime is a nonviolent crime of deceit or concealment to obtain or avoid losing money or to gain a personal or business advantage.</li><li>Securities fraud, embezzlement, corporate fraud, and money laundering are white-collar crimes.</li><li>The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Bureau of Investigation (FBI), and state authorities investigate white-collar crime.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-white-collar-crime"></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 White-Collar Crime </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> "White-collar crime" is a term first coined by sociologist Edwin Sutherland in 1939 who defined it as a crime committed by a person of respectability and high social status during his occupation. White-collar workers historically held non-laboring office positions while blue-collar workers traditionally wore blue shirts and worked in plants, mills, and factories.<span class="ql-inline-citation" data-cite="8"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> High-profile individuals convicted of white-collar crimes include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ivan-boesky.asp">Ivan Boesky</a>, Bernard Ebbers, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/michaelmilken.asp">Michael Milken</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bernard-madoff.asp">Bernie Madoff</a>. Their crimes have included insider trading, accounting scandals, securities fraud, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/ponzischeme.asp">Ponzi schemes</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Rampant new white-collar crimes facilitated by the Internet include so-called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nigerianscam.asp">Nigerian scams</a>, in which fraudulent emails request help in forwarding a substantial amount of money to a criminal ring. Other common white-collar crimes include <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tunneling.asp">tunneling</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance-fraud.asp">insurance fraud</a>, and identity theft.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">$3.7 Billion</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The Madoff Victim Fund (MVF) distributed over $3.7 billion to nearly 40,000 victims worldwide in connection with the Bernard L. Madoff Investment Securities LLC (BLMIS) fraud scheme.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div>
<span class="heading-toc" id="toc-corporate-fraud"></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"> Corporate Fraud </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Large-scale corporate fraud that occurs in corporate or government institutions incurs a significant financial loss to investors and can damage the U.S. economy and investor confidence.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ultra-vires-acts.asp">Corporate fraud</a> gathers the widest group of partners for investigations, including the FBI, the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority, the Internal Revenue Service, the Department of Labor, Federal Energy Regulatory Commission, and the U.S. Postal Inspection Service.<span class="ql-inline-citation" data-cite="1"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div>
<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"> Falsification of Financial Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The majority of corporate fraud cases involve accounting schemes that are conceived to deceive investors, auditors, and analysts about the true financial condition of a corporation or business by manipulating financial data, share price, or other measurements to inflate the financial performance of the business.
</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 2014, Credit Suisse pleaded guilty to helping U.S. citizens avoid taxes by hiding income from the Internal Revenue Service and paid penalties of $2.6 billion. Bank of America sold billions 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</a> (MBS) tied to properties with inflated values without proper collateral and agreed to pay $16.65 billion in damages.<span class="ql-inline-citation" data-cite="6"></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_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"> Self-Dealing </span> </h3>
<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/s/self-dealing.asp">Self-dealing</a> occurs when a fiduciary acts in their own best interest rather than in the best interest of their clients. Considered a conflict of interest, this illegal activity can lead to litigation, penalties, and termination of employment for those who commit it.
</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"> Self-dealing includes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/frontrunning.asp">front-running</a>, when a broker enters into a trade with the foreknowledge of a non-publicized transaction that will influence the price of the asset, resulting in a financial gain for the broker. It also occurs when a broker or analyst buys or sells shares for their account ahead of their firm's buy or sell recommendation to its clients.
</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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insidertrading.asp">Insider trading</a> occurs when individuals act upon or divulge to others information that is not yet public and is likely to affect share price and company valuations once it is known. Insider trading provides an unfair advantage for individuals to profit and does not matter how the material nonpublic information was received or if the person is employed by the company.
</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-money-laundering"></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"> Money Laundering </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneylaundering.asp">Money laundering</a> is accepting cash earned from illicit activities, such as drug trafficking, and making the cash appear as earnings from legal business activity. Criminals often filter money from crimes such as human and narcotics trafficking, public corruption, and terrorism in a three-step process:
</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>Placement is the initial entry of a criminal’s financial proceeds into the financial system.</li>
<li>Layering separates the criminal’s financial proceeds from their source and creates a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/probable-cause.asp">deliberately complex audit trail</a> through a series of financial transactions.</li>
<li>Integration occurs when the criminal’s financial proceeds are returned to the criminal after "laundering" from what appear to be legitimate sources.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> A cash-based business, such as a restaurant that is owned by a criminal organization, is a common tool for laundering illegal money. Daily cash receipts may be inflated to funnel illegal cash through the restaurant and into the bank for distribution to the owners.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_41-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_42-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fincen.gov/anti-money-laundering-act-2020">Anti-Money Laundering Act of 2020</a> assists financial institutions in their efforts to meet their obligations under laws and regulations designed to combat money laundering by targeting foreign and domestic terrorist financing, transnational criminal organizations, drug trafficking organization activity, human trafficking, and human smuggling, and proliferation financing.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span></p></div></div></div>
<span class="heading-toc" id="toc-securities-and-commodities-fraud"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> Securities and Commodities Fraud </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sir-allan-stanford.asp">perpetrator of a securities fraud</a> can be an individual, such as a stockbroker, or an organization, such as a brokerage firm, corporation, or investment bank, and includes crimes such as:
</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><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/12/four-unknown-massive-frauds.asp">High-yield investment fraud</a> involves promises of high rates of return coupled with claims of little or no risk in investments like commodities, securities, and real estate.</li>
<li>Ponzi and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insights/what-is-a-pyramid-scheme/">pyramid schemes</a> are fraudulent investment scams that generate returns for earlier investors with money taken from later investors.</li>
<li>Advance fee schemes involve fraudsters convincing their targets to advance small amounts of money with a promise to deliver greater returns.</li>
<li>Broker <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/embezzlement.asp">embezzlement</a> schemes involve illicit and unauthorized actions by brokers to steal directly from their clients, usually with a myriad of false documents.</li>
<li>“<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pumpanddump.asp">Pump and dump</a>” schemes artificially inflate the price of lower-volume stocks on small over-the-counter markets. The "pump" involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings. Once the target price is achieved, the perpetrators “dump” their shares at a huge profit and leave innocent investors to foot the bill.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/latedaytrading.asp">Late-day trading</a> is the illegal practice of recording trades that are executed after hours as having occurred before a mutual fund calculated its daily net asset value (NAV). Late-day trading can dilute the value of a mutual fund's shares and harm long-term investors.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-what-are-well-known-securities-fraud-cases-investigated-by-the-fbi"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Well-Known Securities Fraud Cases Investigated by the FBI?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Examples of cases of securities fraud are the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/enron.asp">Enron</a>, Tyco, Adelphia, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/worldcom.asp">WorldCom</a> scandals.</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-what-are-the-penalties-for-white-collar-crime"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Penalties for White-Collar Crime?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If convicted, an individual may be sentenced to time in county jail, state prison, or federal prison, depending on the severity of the crime. Additionally, fines may be imposed as well as required restitution to the victim.</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-who-investigates-securities-fraud"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Investigates Securities Fraud?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Allegations of securities fraud are investigated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), often in concert with the FBI.</p><p>State authorities can also investigate investment scams. In a unique attempt to protect its citizens, the state of Utah established the nation’s first online registry for white-collar criminals where photos of individuals who are convicted of a fraud-related felony rated as second-degree or higher are featured on the registry.<span class="ql-inline-citation" data-cite="14"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-what-are-anti-money-laundering-rules-used-in-banking"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Anti-Money Laundering Rules Used in Banking?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Many companies, especially those involved in finance and banking, have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aml.asp">anti-money laundering</a> (AML) rules in place to detect and prevent money laundering. For banks, compliance starts with verifying the identity of new clients, a process sometimes called <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/knowyourclient.asp">Know Your Client</a> (KYC) and customer due diligence detects money laundering strategies like breaking up large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.</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-what-is-intellectual-property-theft"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Intellectual Property Theft?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Intellectual property theft is a white-collar crime that robs people or companies of their ideas, inventions, and creative expressions, known as intellectual property, and may include trade secrets and proprietary products or movies, music, and software.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div>
<span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Securities fraud, embezzlement, corporate fraud, and money laundering are considered white-collar crimes, perpetrated traditionally by those in corporate or office settings. The SEC, NASD, the FBI, and state authorities work in concert to investigate white-collar crimes which are often prosecuted at the federal level. Penalties for committing a white-collar crime include prison, fines, and restitution.
</p></div> | ## What Is White-Collar Crime?
White-collar crime is a nonviolent crime often characterized by deceit or concealment to obtain or avoid losing money or property, or to gain a personal or business advantage.
Examples of white-collar crimes include securities fraud, embezzlement, corporate fraud, and money laundering. Entities that investigate white-collar crime include the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Bureau of Investigation (FBI), and state authorities.
### Key Takeaways
* White-collar crime is a nonviolent crime of deceit or concealment to obtain or avoid losing money or to gain a personal or business advantage.
* Securities fraud, embezzlement, corporate fraud, and money laundering are white-collar crimes.
* The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Bureau of Investigation (FBI), and state authorities investigate white-collar crime.
## Understanding White-Collar Crime
"White-collar crime" is a term first coined by sociologist Edwin Sutherland in 1939 who defined it as a crime committed by a person of respectability and high social status during his occupation. White-collar workers historically held non-laboring office positions while blue-collar workers traditionally wore blue shirts and worked in plants, mills, and factories.
High-profile individuals convicted of white-collar crimes include [Ivan Boesky](https://www.investopedia.com/terms/i/ivan-boesky.asp), Bernard Ebbers, [Michael Milken](https://www.investopedia.com/terms/m/michaelmilken.asp), and [Bernie Madoff](https://www.investopedia.com/terms/b/bernard-madoff.asp). Their crimes have included insider trading, accounting scandals, securities fraud, and [Ponzi schemes](https://www.investopedia.com/terms/p/ponzischeme.asp).
Rampant new white-collar crimes facilitated by the Internet include so-called [Nigerian scams](https://www.investopedia.com/terms/n/nigerianscam.asp), in which fraudulent emails request help in forwarding a substantial amount of money to a criminal ring. Other common white-collar crimes include [tunneling](https://www.investopedia.com/terms/t/tunneling.asp), [insurance fraud](https://www.investopedia.com/terms/i/insurance-fraud.asp), and identity theft.
### $3.7 Billion
The Madoff Victim Fund (MVF) distributed over $3.7 billion to nearly 40,000 victims worldwide in connection with the Bernard L. Madoff Investment Securities LLC (BLMIS) fraud scheme.
## Corporate Fraud
Large-scale corporate fraud that occurs in corporate or government institutions incurs a significant financial loss to investors and can damage the U.S. economy and investor confidence.
[Corporate fraud](https://www.investopedia.com/terms/u/ultra-vires-acts.asp) gathers the widest group of partners for investigations, including the FBI, the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority, the Internal Revenue Service, the Department of Labor, Federal Energy Regulatory Commission, and the U.S. Postal Inspection Service.
### Falsification of Financial Information
The majority of corporate fraud cases involve accounting schemes that are conceived to deceive investors, auditors, and analysts about the true financial condition of a corporation or business by manipulating financial data, share price, or other measurements to inflate the financial performance of the business.
In 2014, Credit Suisse pleaded guilty to helping U.S. citizens avoid taxes by hiding income from the Internal Revenue Service and paid penalties of $2.6 billion. Bank of America sold billions in [mortgage-backed securities](https://www.investopedia.com/terms/m/mbs.asp) (MBS) tied to properties with inflated values without proper collateral and agreed to pay $16.65 billion in damages.
### Self-Dealing
[Self-dealing](https://www.investopedia.com/terms/s/self-dealing.asp) occurs when a fiduciary acts in their own best interest rather than in the best interest of their clients. Considered a conflict of interest, this illegal activity can lead to litigation, penalties, and termination of employment for those who commit it.
Self-dealing includes [front-running](https://www.investopedia.com/terms/f/frontrunning.asp), when a broker enters into a trade with the foreknowledge of a non-publicized transaction that will influence the price of the asset, resulting in a financial gain for the broker. It also occurs when a broker or analyst buys or sells shares for their account ahead of their firm's buy or sell recommendation to its clients.
[Insider trading](https://www.investopedia.com/terms/i/insidertrading.asp) occurs when individuals act upon or divulge to others information that is not yet public and is likely to affect share price and company valuations once it is known. Insider trading provides an unfair advantage for individuals to profit and does not matter how the material nonpublic information was received or if the person is employed by the company.
## Money Laundering
[Money laundering](https://www.investopedia.com/terms/m/moneylaundering.asp) is accepting cash earned from illicit activities, such as drug trafficking, and making the cash appear as earnings from legal business activity. Criminals often filter money from crimes such as human and narcotics trafficking, public corruption, and terrorism in a three-step process:
* Placement is the initial entry of a criminal’s financial proceeds into the financial system.
* Layering separates the criminal’s financial proceeds from their source and creates a [deliberately complex audit trail](https://www.investopedia.com/terms/p/probable-cause.asp) through a series of financial transactions.
* Integration occurs when the criminal’s financial proceeds are returned to the criminal after "laundering" from what appear to be legitimate sources.
A cash-based business, such as a restaurant that is owned by a criminal organization, is a common tool for laundering illegal money. Daily cash receipts may be inflated to funnel illegal cash through the restaurant and into the bank for distribution to the owners.
### Note
The [Anti-Money Laundering Act of 2020](https://www.fincen.gov/anti-money-laundering-act-2020) assists financial institutions in their efforts to meet their obligations under laws and regulations designed to combat money laundering by targeting foreign and domestic terrorist financing, transnational criminal organizations, drug trafficking organization activity, human trafficking, and human smuggling, and proliferation financing.
## Securities and Commodities Fraud
The [perpetrator of a securities fraud](https://www.investopedia.com/terms/s/sir-allan-stanford.asp) can be an individual, such as a stockbroker, or an organization, such as a brokerage firm, corporation, or investment bank, and includes crimes such as:
* [High-yield investment fraud](https://www.investopedia.com/articles/economics/12/four-unknown-massive-frauds.asp) involves promises of high rates of return coupled with claims of little or no risk in investments like commodities, securities, and real estate.
* Ponzi and [pyramid schemes](https://www.investopedia.com/insights/what-is-a-pyramid-scheme/) are fraudulent investment scams that generate returns for earlier investors with money taken from later investors.
* Advance fee schemes involve fraudsters convincing their targets to advance small amounts of money with a promise to deliver greater returns.
* Broker [embezzlement](https://www.investopedia.com/terms/e/embezzlement.asp) schemes involve illicit and unauthorized actions by brokers to steal directly from their clients, usually with a myriad of false documents.
* “[Pump and dump](https://www.investopedia.com/terms/p/pumpanddump.asp)” schemes artificially inflate the price of lower-volume stocks on small over-the-counter markets. The "pump" involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings. Once the target price is achieved, the perpetrators “dump” their shares at a huge profit and leave innocent investors to foot the bill.
* [Late-day trading](https://www.investopedia.com/terms/l/latedaytrading.asp) is the illegal practice of recording trades that are executed after hours as having occurred before a mutual fund calculated its daily net asset value (NAV). Late-day trading can dilute the value of a mutual fund's shares and harm long-term investors.
## What Are Well-Known Securities Fraud Cases Investigated by the FBI?
Examples of cases of securities fraud are the [Enron](https://www.investopedia.com/terms/e/enron.asp), Tyco, Adelphia, and [WorldCom](https://www.investopedia.com/terms/w/worldcom.asp) scandals.
## What Are the Penalties for White-Collar Crime?
If convicted, an individual may be sentenced to time in county jail, state prison, or federal prison, depending on the severity of the crime. Additionally, fines may be imposed as well as required restitution to the victim.
## Who Investigates Securities Fraud?
Allegations of securities fraud are investigated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), often in concert with the FBI.
State authorities can also investigate investment scams. In a unique attempt to protect its citizens, the state of Utah established the nation’s first online registry for white-collar criminals where photos of individuals who are convicted of a fraud-related felony rated as second-degree or higher are featured on the registry.
## What Are Anti-Money Laundering Rules Used in Banking?
Many companies, especially those involved in finance and banking, have [anti-money laundering](https://www.investopedia.com/terms/a/aml.asp) (AML) rules in place to detect and prevent money laundering. For banks, compliance starts with verifying the identity of new clients, a process sometimes called [Know Your Client](https://www.investopedia.com/terms/k/knowyourclient.asp) (KYC) and customer due diligence detects money laundering strategies like breaking up large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.
## What Is Intellectual Property Theft?
Intellectual property theft is a white-collar crime that robs people or companies of their ideas, inventions, and creative expressions, known as intellectual property, and may include trade secrets and proprietary products or movies, music, and software.
## The Bottom Line
Securities fraud, embezzlement, corporate fraud, and money laundering are considered white-collar crimes, perpetrated traditionally by those in corporate or office settings. The SEC, NASD, the FBI, and state authorities work in concert to investigate white-collar crimes which are often prosecuted at the federal level. Penalties for committing a white-collar crime include prison, fines, and restitution.
| What Is White-Collar Crime?
White-collar crime is a nonviolent crime often characterized by deceit or concealment to obtain or avoid losing money or property, or to gain a personal or business advantage.
Examples of white-collar crimes include securities fraud, embezzlement, corporate fraud, and money laundering. Entities that investigate white-collar crime include the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Bureau of Investigation (FBI), and state authorities.
Key Takeaways
White-collar crime is a nonviolent crime of deceit or concealment to obtain or avoid losing money or to gain a personal or business advantage.Securities fraud, embezzlement, corporate fraud, and money laundering are white-collar crimes.The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Federal Bureau of Investigation (FBI), and state authorities investigate white-collar crime.
Understanding White-Collar Crime
"White-collar crime" is a term first coined by sociologist Edwin Sutherland in 1939 who defined it as a crime committed by a person of respectability and high social status during his occupation. White-collar workers historically held non-laboring office positions while blue-collar workers traditionally wore blue shirts and worked in plants, mills, and factories.
High-profile individuals convicted of white-collar crimes include Ivan Boesky, Bernard Ebbers, Michael Milken, and Bernie Madoff. Their crimes have included insider trading, accounting scandals, securities fraud, and Ponzi schemes.
Rampant new white-collar crimes facilitated by the Internet include so-called Nigerian scams, in which fraudulent emails request help in forwarding a substantial amount of money to a criminal ring. Other common white-collar crimes include tunneling, insurance fraud, and identity theft.
$3.7 Billion
The Madoff Victim Fund (MVF) distributed over $3.7 billion to nearly 40,000 victims worldwide in connection with the Bernard L. Madoff Investment Securities LLC (BLMIS) fraud scheme.
Corporate Fraud
Large-scale corporate fraud that occurs in corporate or government institutions incurs a significant financial loss to investors and can damage the U.S. economy and investor confidence.
Corporate fraud gathers the widest group of partners for investigations, including the FBI, the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority, the Internal Revenue Service, the Department of Labor, Federal Energy Regulatory Commission, and the U.S. Postal Inspection Service.
Falsification of Financial Information
The majority of corporate fraud cases involve accounting schemes that are conceived to deceive investors, auditors, and analysts about the true financial condition of a corporation or business by manipulating financial data, share price, or other measurements to inflate the financial performance of the business.
In 2014, Credit Suisse pleaded guilty to helping U.S. citizens avoid taxes by hiding income from the Internal Revenue Service and paid penalties of $2.6 billion. Bank of America sold billions in mortgage-backed securities (MBS) tied to properties with inflated values without proper collateral and agreed to pay $16.65 billion in damages.
Self-Dealing
Self-dealing occurs when a fiduciary acts in their own best interest rather than in the best interest of their clients. Considered a conflict of interest, this illegal activity can lead to litigation, penalties, and termination of employment for those who commit it.
Self-dealing includes front-running, when a broker enters into a trade with the foreknowledge of a non-publicized transaction that will influence the price of the asset, resulting in a financial gain for the broker. It also occurs when a broker or analyst buys or sells shares for their account ahead of their firm's buy or sell recommendation to its clients.
Insider trading occurs when individuals act upon or divulge to others information that is not yet public and is likely to affect share price and company valuations once it is known. Insider trading provides an unfair advantage for individuals to profit and does not matter how the material nonpublic information was received or if the person is employed by the company.
Money Laundering
Money laundering is accepting cash earned from illicit activities, such as drug trafficking, and making the cash appear as earnings from legal business activity. Criminals often filter money from crimes such as human and narcotics trafficking, public corruption, and terrorism in a three-step process:
Placement is the initial entry of a criminal’s financial proceeds into the financial system.
Layering separates the criminal’s financial proceeds from their source and creates a deliberately complex audit trail through a series of financial transactions.
Integration occurs when the criminal’s financial proceeds are returned to the criminal after "laundering" from what appear to be legitimate sources.
A cash-based business, such as a restaurant that is owned by a criminal organization, is a common tool for laundering illegal money. Daily cash receipts may be inflated to funnel illegal cash through the restaurant and into the bank for distribution to the owners.
Note
The Anti-Money Laundering Act of 2020 assists financial institutions in their efforts to meet their obligations under laws and regulations designed to combat money laundering by targeting foreign and domestic terrorist financing, transnational criminal organizations, drug trafficking organization activity, human trafficking, and human smuggling, and proliferation financing.
Securities and Commodities Fraud
The perpetrator of a securities fraud can be an individual, such as a stockbroker, or an organization, such as a brokerage firm, corporation, or investment bank, and includes crimes such as:
High-yield investment fraud involves promises of high rates of return coupled with claims of little or no risk in investments like commodities, securities, and real estate.
Ponzi and pyramid schemes are fraudulent investment scams that generate returns for earlier investors with money taken from later investors.
Advance fee schemes involve fraudsters convincing their targets to advance small amounts of money with a promise to deliver greater returns.
Broker embezzlement schemes involve illicit and unauthorized actions by brokers to steal directly from their clients, usually with a myriad of false documents.
“Pump and dump” schemes artificially inflate the price of lower-volume stocks on small over-the-counter markets. The "pump" involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings. Once the target price is achieved, the perpetrators “dump” their shares at a huge profit and leave innocent investors to foot the bill.
Late-day trading is the illegal practice of recording trades that are executed after hours as having occurred before a mutual fund calculated its daily net asset value (NAV). Late-day trading can dilute the value of a mutual fund's shares and harm long-term investors.
What Are Well-Known Securities Fraud Cases Investigated by the FBI?
Examples of cases of securities fraud are the Enron, Tyco, Adelphia, and WorldCom scandals.
What Are the Penalties for White-Collar Crime?
If convicted, an individual may be sentenced to time in county jail, state prison, or federal prison, depending on the severity of the crime. Additionally, fines may be imposed as well as required restitution to the victim.
Who Investigates Securities Fraud?
Allegations of securities fraud are investigated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), often in concert with the FBI.State authorities can also investigate investment scams. In a unique attempt to protect its citizens, the state of Utah established the nation’s first online registry for white-collar criminals where photos of individuals who are convicted of a fraud-related felony rated as second-degree or higher are featured on the registry.
What Are Anti-Money Laundering Rules Used in Banking?
Many companies, especially those involved in finance and banking, have anti-money laundering (AML) rules in place to detect and prevent money laundering. For banks, compliance starts with verifying the identity of new clients, a process sometimes called Know Your Client (KYC) and customer due diligence detects money laundering strategies like breaking up large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.
What Is Intellectual Property Theft?
Intellectual property theft is a white-collar crime that robs people or companies of their ideas, inventions, and creative expressions, known as intellectual property, and may include trade secrets and proprietary products or movies, music, and software.
The Bottom Line
Securities fraud, embezzlement, corporate fraud, and money laundering are considered white-collar crimes, perpetrated traditionally by those in corporate or office settings. The SEC, NASD, the FBI, and state authorities work in concert to investigate white-collar crimes which are often prosecuted at the federal level. Penalties for committing a white-collar crime include prison, fines, and restitution.
| [
[
"Ivan Boesky",
"https://www.investopedia.com/terms/i/ivan-boesky.asp"
],
[
"Michael Milken",
"https://www.investopedia.com/terms/m/michaelmilken.asp"
],
[
"Bernie Madoff",
"https://www.investopedia.com/terms/b/bernard-madoff.asp"
],
[
"Ponzi schemes",
"https://www.investopedia.com/terms/p/ponzischeme.asp"
],
[
"Nigerian scams",
"https://www.investopedia.com/terms/n/nigerianscam.asp"
],
[
"tunneling",
"https://www.investopedia.com/terms/t/tunneling.asp"
],
[
"insurance fraud",
"https://www.investopedia.com/terms/i/insurance-fraud.asp"
],
[
"Corporate fraud",
"https://www.investopedia.com/terms/u/ultra-vires-acts.asp"
],
[
"mortgage-backed securities",
"https://www.investopedia.com/terms/m/mbs.asp"
],
[
"Self-dealing",
"https://www.investopedia.com/terms/s/self-dealing.asp"
],
[
"front-running",
"https://www.investopedia.com/terms/f/frontrunning.asp"
],
[
"Insider trading",
"https://www.investopedia.com/terms/i/insidertrading.asp"
],
[
"Money laundering",
"https://www.investopedia.com/terms/m/moneylaundering.asp"
],
[
"deliberately complex audit trail",
"https://www.investopedia.com/terms/p/probable-cause.asp"
],
[
"Anti-Money Laundering Act of 2020",
"https://www.fincen.gov/anti-money-laundering-act-2020"
],
[
"perpetrator of a securities fraud",
"https://www.investopedia.com/terms/s/sir-allan-stanford.asp"
],
[
"High-yield investment fraud",
"https://www.investopedia.com/articles/economics/12/four-unknown-massive-frauds.asp"
],
[
"pyramid schemes",
"https://www.investopedia.com/insights/what-is-a-pyramid-scheme/"
],
[
"embezzlement",
"https://www.investopedia.com/terms/e/embezzlement.asp"
],
[
"Pump and dump",
"https://www.investopedia.com/terms/p/pumpanddump.asp"
],
[
"Late-day trading",
"https://www.investopedia.com/terms/l/latedaytrading.asp"
],
[
"Enron",
"https://www.investopedia.com/terms/e/enron.asp"
],
[
"WorldCom",
"https://www.investopedia.com/terms/w/worldcom.asp"
],
[
"anti-money laundering",
"https://www.investopedia.com/terms/a/aml.asp"
],
[
"Know Your Client",
"https://www.investopedia.com/terms/k/knowyourclient.asp"
]
] |
Subsets and Splits